ETI tax benefit for domestic sales.

• Author: Kernek, Kay Ann
• Position: Extraterritorial income

The extraterritorial income (ETI) tax regime, which recently replaced the foreign sales corporation (FSC) regime, provides valuable income tax benefits to many U.S. taxpayers who export U.S.-manufactured property. Taxpayers, however, often forget that certain sales of property manufactured within the U.S. could qualify for ETI tax benefits if the property were subsequently resold or transferred outside the U.S. This, combined with the extension of export benefits to individuals, partnerships and S corporations under the ETI tax regime, should dramatically increase the number of U.S. taxpayers that can take advantage of Federal tax benefits associated with export benefits. Thus, taxpayers who think the ETI tax regime does not apply to their circumstances should reexamine sales revenue to determine whether they do indeed qualify.

In general, both the ETI tax regime and its predecessor provide a 15%-or-greater reduction in taxable income from the sale or lease of export property. To be "qualifying foreign-trade property," property must generally be produced in the U.S. and held by a taxpayer for sale, lease or rental, in the ordinary course of business, for direct use, consumption or disposition outside the U.S.

Qualifying Transactions

The typical beneficiary of the ETI tax provisions is a U.S. taxpayer receiving an ETI tax benefit for the direct export of U.S.-manufactured or-produced property to persons who use the property overseas. However, ETI tax benefits are also available to U.S. taxpayers who sell or lease such goods to U.S. buyers, as long as the U.S. buyer exports or leases the goods for use or consumption outside the U.S. within a year. For instance, if a U.S. farmer grows oranges and sells them to a local wholesaler, and the wholesaler sells the oranges in Europe, both the farmer and the wholesaler would be entitled to ETI tax benefits.

For U.S. taxpayers to receive ETI tax benefits for U.S. sales that are eventually exported, they must meet certain requirements. First, they must be able to verify that the products sold are actually exported, a practice that is often difficult. For example, a U.S. wholesaler selling U.S.-manufactured goods outside the U.S. may not be able to identify for the manufacturer the product type or quantity (or both) specifically sold.

Second, taxpayers receiving ETI tax benefits must satisfy foreign-economic-process (FEP) criteria, which generally require certain transactions to take place outside the...