Q:   What is the amount of qualified income for purposes of computing the ETI exclusion?  

A:  Only qualifying foreign trade income (QFTI) under new Secs. 941-943 of the Code is eligible for the ETI exclusion.  QFTI is excludible gross income derived from foreign trading gross receipts (FTGR) and consists of two components: foreign taxable income (FTI) and excludible expenses.  Thus, the amount of QFTI is the same as the ETI exclusion amount under Sec. 114.  Foreign trade income (FTI) is the net or taxable income derived from FTGR.  Excludible expenses are computed based on the ratio of excluded to total FTI multiplied by the total amount of expenses properly apportioned to the transaction or group of transactions.

The term “QFTI” refers to the amount, or percentage of gross income derived from FTGR and is computed using one of three apportionment methods, as prescribed under Sec. 941.  These methods include:

1)     30% of the foreign sale and leasing income (FSLI);

2)     1.2% of the FTGR; and

3)     15% of the foreign trade (net) income

The statute also contains rules for applying marginal costing and limiting profits (no-loss) under the FTGR method to 30% of the net income or FTI (200% x 15% FTI) in certain low profit transactions.  The first pricing method is a modified arm’s-length pricing method under Sec. 482 and requires an allocation of profits based on the actual activities conducted by the taxpayer outside the United States.  Like the FSC regime, this method will be reserved for transactions where the taxpayer is buying and selling or leasing goods to unrelated parties.