Administrative pricing rules are used to determine the income of a foreign sales corporation (FSC). This type of corporation is created in order to reduce income tax on export related income. Business export activity categories that qualify for income tax exemption include solicitation, negotiation and contracting.
Up to a 15 percent reduction in income tax as well as up to a 30 percent reduction in corporate taxes is possible under administrative pricing rules. When a company sells products or services in a country outside of its original origin, it is considered to be an exporter. The taxable income generated from those sales is adjusted if the export transactions are carried out by a foreign sales corporation.
It is possible for a manufacturer to set up an FSC directly or use an export intermediary. An FSC is sometimes formed by export trading companies, which are groups that specialize in the sale and transfer of foreign goods. FSC's act on their own behalf with direct ties to a parent company or they might function independently as a commissioned agent for an outside corporation.
In order to meet the requirements of FSC formation, the incorporated entity should maintain its head office in a qualified foreign country. It should have at least one director who is not a permanent resident of the parent manufacturer's country of origin, have no more than 25 shareholders, issue only common stock and keep a separate set of accounting records at its head office.
Additional FSC requirements under the administrative pricing rules structure include the maintenance of a principal bank account that is located outside of the parent manufacturer's country of origin. All shareholders' and directors' meetings should be held outside of the country of origin. Any stock dividends, legal fees and salaries need to be paid from a foreign bank account.
Under the administrative pricing rules, export activities must meet certain requirements in order to quality for income tax exemption. While the activities occur in the foreign nation in which the goods are exported to, only one activity has to happen in order to qualify for the exemption. Any solicitation other than advertising is one of the qualifying export activity categories. Solicitation might involve press releases in one of the local newspapers or direct selling.
Other export activity categories that meet the income tax exemption qualification are negotiation and contracting. Besides participating in certain business activities, a specific percentage of the transaction costs should be foreign direct costs. As part of the administrative pricing rules, foreign direct costs are considered to be 50 percent or more of the total direct costs associated with five qualifying export activities or 85 percent of the total direct costs incurred from two export activities, such as delivery and transportation.
