RECOVERY OF EXTRATERRITORIAL INCOME EXCLUSION (ETI) BENEFITS

EXPORT ASSIST CONTINUES TO PROVIDE ETI COMPLIANCE SERVICES TO HELP QUALIFIED U.S. EXPORTERS MAXIMIZE THEIR ETI BENEFITS FOR OPEN TAX YEARS 2005 and 2006. THIRD PARTY (E.G., EXPORT ASSIST) VERIFICATION OF COMPLIANCE HAS NEVER BEEN CONTESTED BY THE IRS.

Although ETI was repealed in 2006, exporters might be able to recover ETI benefits for open tax years 2005 and 2006 as long as they did not have an active IC-DISC in those years. This could be of interest to the majority of U.S. exporters who never applied for ETI benefits because they didn’t know they existed and to those who only applied for the minimum ETI benefit because they didn’t know how to perform foreign economic processing (FEP).

Those exporters with $5,000,000 or less in annual export sales who never benefited from ETI can file IRS Form 8873 in order to recover ETI benefits with no FEP requirement.

Those exporters with annual export sales in excess of $5,000,000 who want to maximize their ETI benefits must show proof of foreign economic processing by meeting each of the following tests:

• sales activities test, including solicitation, negotiation or making of a contract
• direct cost test, including advertising and sales promotion; processing customer orders and arranging for delivery; transportation; determination and transmittal of a final invoice or statement of account and/or receipt of payment; and assumption of credit risk.  This test is met if 50% of all export-related direct costs are foreign direct costs in all categories or if 85% of export-related direct costs are foreign direct costs in each of the two chosen direct cost categories.

Although the sales activities and direct cost tests are to be done on a transaction-by-transaction basis, the grouping of transactions is allowed. There are four ways that transactions can be grouped to accomplish these tests: by product, by customer, by contract, or by product or product line with a customer or contract group.

In order to help ensure FEP compliance, Export Assist, for an hourly fee, will work with your tax professional to analyze the exporter’s financial information and retrieve all export-related activities for each applicable year. The results of this analysis will offer guidance regarding how the exporter can meet the FEP tests and how it can prepare records to verify the performance of FEP activities. The exporter must take further action to ensure proper FEP documentation in order to constitute proof of compliance and it must file or amend IRS Form 8873 in order to claim ETI benefits.

For more information about ETI or our other export tax benefit programs, please contact Ms. Tamara Crews, Vice President – Professional Markets, directly at 800-894-8366 or tcrews@exportassist.com.