International tax planning for the Contract Manufacturing
A new contracting manufacturing international tax law is allowing small business to reduce taxes. If you import products into the U.S., you want to look at this new law.
Briefly, you form and control a foreign corporation where you contract your manufacturing. The corporation manufactures products for you. It sells these products, at a profit, to your U.S. business or directly to your customers.
The tax law does not tax you on the profit made by this corporation.
The tax provides that the shareholder of a foreign corporation is not taxable on the income from the sale of personal property (including inventory) manufactured by a corporation formed in the same country as the manufacturing. In other words, tax on this profit from manufacturing is not taxed.
The sale of the property takes place outside the U.S. This means title to the property occurs anywhere other than the U.S. Usually, the sale takes place when the property leaves the factory of the contract manufacturer.
You or an employee must only do one or more of these activities either via the internet or in person:
(1) Oversee and direct the activities or process which the property is manufactured, produced, or constructed or
(2) Select the materials or the vendor or
(3) Control the raw materials or the work-in-process or the finished goods or
(4) Manage the manufacturing costs or capacities or
(5) Control of manufacturing logistics or
(6) Control the quality such as overseeing the sample testing or establishing the quality control standards or
(7) Develop and direct the use or development of the product, design, and specification.
This is a fantastic tax law. Importers are reaping significant tax savings. Importer tax plans rely upon a solid IRS regulation for contract manufacturers.
I know that you are busy and I wish I could place all the tax breaks on a few paragraphs. However, to have a blog post for as many different types of businesses, this post is a few pages.
If you want to schedule a time to talk, then email me Brian Dooley, CPA, MBT at [email protected],
Here is how contract manufacturing tax avoidance works You do not pay income tax on your controlled foreign corporation income that is not classified as “subpart F income.” Subpart F is the location in the tax code that talks about the taxable income. You want your controlled foreign corporation to earn income that is not Subpart F income.
Subpart F income does not include income from the sale of personal property manufactured, produced, or constructed by a foreign corporation.
For example, Ford Motor manufacture in England. These cars are sold in the U.K. and Europe through independent dealers. None of the income is Subpart F income. The income is not taxed by the United States.
Avoiding U.S. taxes for Big Business like Ford is easy. They can afford to build a factory.
Now, small businesses have the same opportunity for tax planning. Contract manufacturing allows the small business to manufacture its products.