In many introductory discussions with potential IC-DISC clients, a common topic is whether indirect export sales qualify. In many cases, companies do not directly export products themselves; instead they may use a distributor, freight forwarder or another type of U.S. company as a method to export. When using an indirect method of exporting, it is important to know the rules to determine whether a company’s export sales qualify for use by the IC-DISC.
The key in determining a qualified indirect export sale is to ascertain whether the product undergoes further manufacturing before leaving the United States. Code § 1.993-3(d)(2)(iii) states “In no event is the destination test… satisfied with respect to property which is subject to any use, manufacture, assembly, or other processing by any person between the time of the sale or lease by such seller or lessor and the delivery or ultimate delivery outside the United States.” Therefore, if a client manufactures a product in the U.S. and then uses a distributor or freight forwarder to simply ship or sell that exact same product to another country, this type of transaction would qualify as an export sale. On the other hand, more analysis is needed if a client manufactures a product and it is sent to another U.S. company to be incorporated into a subsequent product.
This “further manufacturing” issue is addressed by the General Electric Co. v. Commissioner, T.C. Memo. 1995-306 in which, General Electric was initially prohibited from claiming an IC-DISC benefit by stating that: “Prior to being exported, these products [the jet engines] were installed on the airplane sold by U.S. airframe manufacturers to foreign airlines. The installation process was performed in the U.S. The process involved 110 to 160 hours of constructing a build-up consisting of over 2,000 parts from 40 different vendors and then using four bolts to attach the engine to the plane.”
However, on appeal General Electric received a favorable ruling as the Second Circuit described the activities as: “when [the airframe manufacturers] installed the engines on the airframes, [they] were not moving the engines along toward completion or substantially changing them.” Pointedly, the Second Circuit further reasoned that the engines were, in fact, distinct from the airframes “physically (i.e., routine removal and replacement); legally (i.e., under FAA regulations and Government determinations); and commercially (i.e., separate marketing and negotiation between the component-maker and the end user of the final product).”
Therefore, when addressing whether indirect export sales qualify in early conversations with a potential IC-DISC client, it is important to discuss what happens to their export product before it leaves the States. Although this case gives us guidelines in determining qualified indirect export sales, each client has unique products and as such, the interpretation of the rules and regulations should be applied individually.
If you have clients that export products or services, a discussion about McGuire Sponsel’s IC-DISC services may prove valuable. Contact us today, to learn how you can be maximizing your IC-DISC commissions.