Situs: Outside the U.S. customs zone from where the sales material is sent.

Example: Mailing a brochure or a new price list to customers who represent 50% of last year's FTGR every 12 months is a popular way to meet this test. If an exporter uses wholesalers or a distributor and, hence, has very few customers in number, it may send to all of them. This is the test usually chosen to meet the sales activities category.

Caution: You cannot send the same material for both solicitation and advertising (see direct cost tests).

If your company produces many products and you group by product, this test must be done for each product line.

Situs: Outside the U.S. customs zone.

Example: This could be the actual negotiation of the terms of a contract by a sales representative calling on clients overseas. More typically, it could be a letter sent from outside the U.S. to a client regarding the terms of a contract.

Situs: Outside the U.S. customs zone.

Example: Written acceptance of an unsolicited bid or order will be considered "making the contract". Written confirmation by the exporter or its agent (i.e., Export Assist, Inc.) that confirms variable contract terms also constitutes "making the contract". An example of how this test might be met is by having copies of renewal contracts sent to the exporter’s office outside the U.S. from where the contracts are mailed to the customers for signature, returned to the foreign office where they are signed by a representative of the exporter and then copies are sent to the customer, the parent company, and a copy is kept in the exporter’s office.

 

Situs: To where the material is sent.

Examples:
Placing an advertisement in a trade journal or newspaper that has at least 85% non-U.S. readership. Sending brochures or other materials to customers outside the U.S. (Although the Regulations state that the situs is "to" where the material is sent, some tax advisors are more comfortable having the material mailed from outside the U.S.)

Caution: You cannot send the same material for both solicitation and advertising. The material must be generically different.

Costs: The costs of advertising are the costs of running the advertisement in a newspaper, magazine, or trade journal. If sales material is transmitted to customers or potential customers directly, the cost is the cost of displaying, distributing, printing and sending these materials. Any costs relating to the preparation of the ad or the sales material (i.e., artist, advertising agency) are not counted.

In instances where goods are sold through a distributor, if the exporter pays at least 20% of the distributor's advertising costs (directly or indirectly), the costs count as direct costs of advertising. The costs are considered foreign direct costs as long as the activity is directed to customers outside the U.S.

Situs: Where the trade show or customer meeting is held.

Example: Sponsoring a booth at a trade show outside the U.S. for the purpose of promoting export sales of your product.

Caution: If you have costs that would fall into the sales promotion category, they must be included under the costs recorded for this entire test, as it is a dual category test. Be aware that trade shows held in the U.S. for foreign customers will count as a domestic direct cost.

Costs: The direct costs of sales promotion would be the rent for space and other specific charges at the trade show and the cost of travel and lodging for those directly involved in the selling effort at the show, but not salaries or other compensation. If printed materials are distributed that are used for other promotional efforts, the cost of these materials is not included.

If a customer meeting is held, the costs can include travel and lodging for both company sales people and the customers attending the meeting. Also, if material has been especially produced for such a meeting, the cost of printing can be included in the direct costs.

Situs: From where the communication is initiated outside the U.S

Costs: The costs include payment to personnel located outside the U.S. who perform the work and the cost of communication: mail, telegraph, overnight service, telephone, e-mail, facsimile or in person.

Situs: From where the arranging takes place outside the U.S

Example: Since this category (which includes both parts) involves both acknowledging the order and taking the necessary steps to have the order delivered from outside the U.S., it is the least used of the direct cost tests. The information about the order and delivery would have to be transmitted outside the U.S. and then transmitted back to the related supplier, the carrier, and the customer.

Costs: The costs include payment made to personnel outside the U.S. who perform the work and the cost of communication: mail, telegraph, overnight service, telephone, e-mail, facsimile or in person.

Situs: Transportation of goods from the point where they leave the U.S. customs zone until they are delivered to customers in a foreign country.

Example: This might be met by one shipment a year if during the normal course of business all other shipments are paid for by your clients. This one shipment would have to be sent: FOB. destination, CIF. or CPT. It cannot be sent FOB. shipping point or CFR to meet this requirement.

Caution: Please note that shipping FOB destination may create foreign source income on that shipment which may not be desirable. In making shipments that go partially by land across the U.S., the U.S. part may be counted as a domestic cost. This can be avoided by handing the shipment over to an international freight forwarder at the shipping point. In this way, the entire cost can be counted as a foreign cost.

Costs: The costs for transportation are those costs incurred when shipping goods. This might include freight charges, fees charged by a freight forwarder, freight insurance premiums, or the cost of preparing documents. All of these costs must be for transportation outside the U.S.

Situs: Location is outside the U.S. where the invoice or statement of account is both assembled and forwarded.

Example: Statements are sent to the management firm to fold, place in envelopes, address envelopes, and mail from outside the U.S.

Costs: The costs here can include the costs of office supplies and equipment, payment made to personnel, and the mailing and delivery charges, if it can be established that these costs were directly related to the assembly and transmittal of the invoice or statement.

Situs: At the exporter’s bank account maintained in an approved jurisdiction outside the U.S.

Example: The parent company receives payment in its regular U.S. bank account. Within 35 days of receipt, percentages (at least 1.83%) of these payments are wired to the exporter’s bank account in a qualifying jurisdiction. The funds are then wired back to the U.S. bank account.

Costs: The costs include the expenses of maintaining the foreign bank account where payment is sent, the cost of converting funds into U.S. currency, and the bank charges for the transfer of funds in and out of this bank account. The location of the costs would be the foreign bank in which the activity occurs.

"Inactive" or Assumption Loss Method: This method requires that the exporter specifically assume the risk of loss due to a bad debt and that there is a loss during a three-year period. If there is no loss during the three years, this test can be used for the first two years of the three-year period, but not for the third year. (This assumption of loss by the exporter should be specifically mentioned in the agreement between the parent/related supplier and the exporter.)

Note: A bad debt is an amount that is not collectible or an amount taken into consideration in the determination of additions to bad debt reserves. [Reg. 1.924(e) 1(e)(2)]

"Active" or Insurance Expense Method: This includes the following activities: selling by Letters of Credit, factoring receivables, insuring against loss, and investigating the credit of customers or potential customers. One must obtain Letters of Credit for customers that represent at least 20% of the FTGR from sales run through the export company; 20% of the face amount of the receivables must be factored; 20% of the face amount of the receivables must be insured; or 20% (in dollar volume) of new or potential customers must be investigated.

Situs: The location is where the customer, whose payment is at risk, is located. However, the investigation of credit must clearly have taken place outside the U.S. to qualify.

Costs: For the four tests in the insurance-expense category, the direct costs are the fees for the Letters of Credit; the cost of factoring trade receivables; the cost of obtaining the insurance (all of which might be incurred in the U.S.); and the cost of the credit investigation.