Q:  Which sales by my company will qualify for the ETI exclusion?

A:  Only sales or services generating foreign trading gross receipts are eligible for the ETI exclusion.  The statute imposes qualitative and quantitative requirements in order to qualify transactions as FTGR.  In addition, FTGR do not include excluded receipts.

First, gross receipts from the sale, lease, rental or other disposition of goods are eligible only if the goods qualify as foreign trade property.  (See Question #5.)  In general, these goods must be sold or leased for use outside the United States.  Related and subsidiary services, such as packing, installation or testing of products for a customer, also qualify as FTGR, if they are conducted as part of the underlying sale or lease of goods.  In addition, architectural and engineering services rendered in connection with construction projects in Mexico, Canada and other countries overseas can qualify as FTGR, whether or not the services are actually performed outside the United States.

Second, in order to qualify as FTGR, the taxpayer must satisfy special foreign economic process (FEP) requirements with respect to eligible sales, lease, rental or service transactions.  The FEP requirements include the foreign sales activities test and the foreign direct costs test. (See Question #6.)  These rules contain quantitative guidelines for identifying specific activities that must be performed by the taxpayer, or another person on its behalf, outside the United States.  Companies should consider consulting with an offshore management company for outsourcing the FEP activities and costs.

The FEP requirements are relaxed, however, for small business companies with $5 million or less in FTGR.  This limitation applies per entity and per member, shareholder or partner.  Small and medium-sized multinational companies also can consider joining in a newly-implemented “shared partnership” arrangement for sharing some of the FEP costs under Sec. 943(f).

Finally, FTGR cannot consist of excluded receipts under Sec. 942(a)(2).  Excluded receipts include sales of goods intended for use in the United States or use by the U.S. government, where the government is required to purchase such goods from a U.S. company.  In addition, excluded receipts include sales of goods that are subsidized by the government of the country of manufacture, production, growth or extraction.  Note that a taxpayer can elect to exclude specific transactions, too.

The ETI benefits apply to 100% of the income from sales of military products intended for use by customers outside the United States.  For an in-depth discussion of the types of sales and services eligible for ETI benefits, attend FDTA’s Annual Conference in November.