Opinion and Analysis
Tax Benefits for Internet Export Sales
By Philip M. Zukowski
Philip M. Zukowski is a tax senior manager with KPMG Peat Warwick
LLP, Miami.
In addition to the obvious reductions in operational costs that will be achieved as more U.S. companies make export sales through the Internet, there also may be some significant tax savings associated with such sales.
For instance, consider a U.S. software company that develops its products in the United States and sells them to end-users throughout the United States and in foreign countries, using the Internet to advertise its products and to transmit the software to its customers. In the pre-Internet era, such a company would probably incur additional costs in making the sales to foreign customers, as a result of the foreign sales activities and foreign presence that would be required to advertise in foreign countries, solicit the foreign customers, negotiate and conclude the foreign sales, and transport and service the product sold. As sales (of software and other products) over the Internet become more widespread, that same company could now theoretically make its sales to foreign customers without a significant increase in costs compared to its sales to domestic customers. The same would apply, to a lesser degree, to companies that export tangible products that cannot actually be transmitted electronically over the Internet, but that may be advertised or ordered by customers on the Internet.
Foreign Sales Corporation
(FSC) Tax Benefit for U.S. Exporters
In addition to the fact
that a company may not incur any additional costs in making Internet
sales to foreign customers, these sales, in many cases, should
be eligible for the federal income tax reduction for export sales
provided by the U.S. tax code for export sales (i.e., the FSC
benefit). The FSC provisions are designed to promote exports (mostly
tangible goods) by U.S. companies by providing a tax benefit for
certain products produced in the U.S.
The ability of U.S. companies to make Internet export sales at a lower tax cost than domestic sales, in many cases without incurring any additional costs, should provide U .S. companies a strong incentive to pursue international sales through the Internet, whenever its use is feasible.
On average, the FSC benefit reduces the federal corporate income tax that a U.S. corporation (in the 35 percent income tax bracket) would normally pay on a sale with a $1 million net profit from $350,000 to $297,500, effectively increasing the after-tax net margin on export sales (compared to domestic sales) by approximately 5.25 percentage points. The FSC benefit is available for sales of products that are manufactured in the United States (with no greater than 50 percent foreign content) and sold for use outside the United States Thus, as long as the exporter sells products that are manufactured or produced in the United States, its export sales will be potentially eligible for the FSC tax benefit.
A few significant issues will
arise as companies attempt to obtain FSC benefits for sales made
l. IRC section 927(a).
