484-595-0100
EXIM Reauthorized Through 2026

EXIM Reauthorized Through 2026

Exporters Can Pursue Trade Goals with Confidence

Legislation passed just before the end of 2019 has reauthorized the Export-Import Bank of the United States (EXIM) for a seven-year period, until December 31, 2026, the longest authorization in the institutions history.  EXIM reauthorization was part of the nearly $1.4 trillion federal appropriations package passed by Congress and signed by President Trump on December 20, 2019. 

In addition to the seven-year authorization extension, the legislation also includes a process that allows EXIM to continue operations in the event that the bank’s Board of Directors lacks a quorum.  (EXIM’s quorum lapsed in 2015, significantly limiting the bank’s lending operations, and was only restored in mid-2019).   

EXIM’s authorization also includes a number of key policy changes critical to bipartisan congressional support as well as support from the administration.  These include: 

1. A goal of increasing small business exporters participation in EXIM projects, with a target of increasing small business exports to 30% (from the current 25%) of total EXIM supported exports by 2021.   

2. An additional goal for EXIM to reserve 5% of its exposure authority to support renewable energy, energy efficiency, and energy storage technology exports.   

3. A new initiative, called the “Program on China and Transformational Exports” which reserves 20% of EXIM exposure authority to assist American exporters to compete directly with Chinese exports and to assist exporters in innovative technologies, such as artificial intelligence, biotechnology and biomedical sciences, wireless communications, quantum computing and high performance computing, renewable energy, energy efficiency and storagesemiconductor manufacturing, emerging financial technologies, and water treatment and sanitation.  

4. A requirement that EXIM consult with the State Department to assess risk to national interest of any proposed transaction over $25 million in which the end user, obligor, or lender is controlled by, or a business entity of the Chinese government.  

 EXIM Shipping Containers Miami Port

With an extended period of authorization and full financing capacity, US exporters and their overseas clients can more confidently access and utilize EXIM’s services.  EXIM Chair Kimberly Reed noted, ““This legislation ensures EXIM’s authority to support jobs and keep America strong through exports for a long time to come.”  In addition to the initiatives noted above, the EXIM Bank helps support US exports through a range of programs, including guaranteeing loans to foreign buyers, credit insurance and some direct lending to foreign companies. To learn more about the range of products offered by the EXIM Bank, click here. 

As a active EXIM broker, Securitas has years of experience working with ExIm’s various trade credit insurance policies to ensure U.S. companies generate export-driven growth.  In 2015, Securitas was named EXIM Broker of The Year. 

Securitas is ready to help companies, particularly small businesses interested in pursuing an export strategy, learn how to access EXIM’s services. 

Let’s Get in Touch

Office

900 West Valley Road
Suite 701, Wayne, PA 19087

Call Us

484-595-0100

What the Recent Trade Deals Mean for Exporters

What the Recent Trade Deals Mean for Exporters

Trade Policy Actions Offer Possibilities for Exporters

In the previous week, two trade policy announcements signaled movement on key trade priorities of the Trump Administration.  Both the renegotiation of the North American Free Trade Agreement (NAFTA), now called the US-Mexico-Canada Agreement or USMCA, and the tentative “Phase One” trade agreement between the US and China came closer to finality last week.  Both have the potential to bring about changes in 2020 that could benefit US exporters.

First, on Tuesday, December 10, after months of re-negotiation, the USMCA cleared the last hurdle to US ratification with Congressional negotiators signaling support for a revised draft.

The new draft revises the agreement originally signed by leaders of the three countries in November 2018 and notably includes stronger enforcement measures for worker rights and environmental protections, as well revisions to patent protections for certain pharmaceuticals.

Only a few days later on Friday, December 13, US Trade Representative (USTR) Robert Lighthizer announced completion of negotiations with Chinese counterparts on an “enforceable” first-stage trade agreement with China, mainly covering key areas of agriculture, technology, intellectual property, and financial services.  The agreement stalls an anticipated round of new tariffs on Chinese goods that were set to go into effect on December 15.

USMCA Seeks Stability, Fairness

Efforts to press Mexico for enforceable actions on worker rights and wages, underscore negotiators efforts to create a more level playing field for US manufacturing.  Critics of the 1994 NAFTA agreement claimed it incentivized manufacturing offshoring to Mexico, and failed to improve Mexican incomes and buying power.

In auto manufacturing specifically, the new deal will mandate an increase in the percentage of a vehicle’s value that must be sourced in North American (75%, up from 62.5%), the amount of North American steel and aluminum that must be used (70%), and the percentage of a vehicle’s value must be made by workers making at least $16 an hour.

Despite the new regulations, the American Automotive Policy Council, which represents the Big Three automakers, praised the deal, noting that it “will incentivize a $23 billion increase in US annual parts sales alone.”

As Canada and Mexico are the largest export markets for US agricultural goods, the agreement offers some stability for the sector.  With many Canadian and Mexican tariffs set to end in the new agreement, American producers, specifically in the pork and dairy sectors, are set to benefit.

The agreement ends a period of trade discord between the three countries.  With recent tit-for-tat tariffs set to end and an agreement likely ratified, the USMCA will offer US businesses greater policy stability and a favorable environment for increasing trade flows in 2020.

Overall, a US International Trade Commission report completed earlier this year estimated that the USMCA would increase US exports to Canada by 19.1 billion or 5.9% and to Mexico by $14.2 billion or 6.7%.

Automotive Manufacturers in the Trade Deal

China Agreement a First Step

The US-China agreement comes after nearly two years of disagreement over trade, and is being hailed by the US side as an initial step toward an overall effort to reach final comprehensive trade agreement in the future.  For its part, the US agreed to lower tariffs on an estimated $360 billion in goods from China, and cancelled tariffs on roughly $160 billion worth of consumer goods that were set to go into effect last weekend.

China agreed in return to cancel planned retaliatory tariffs on over 3,000 American products while agreeing to several concessions, such as a promise to stop requiring US companies to hand over proprietary technology to enter the Chinese market.  China has also agreed to buy $50 billion in agricultural products in 2020 and agreed to an additional increase in overall US exports of $200 billion over the next two years.  For example, in 2018, China purchased $9.3 billion in US agricultural products, and an overall total of $120.3 billion in US goods and services.

The US will keep 25% tariffs on a separate list of Chinese goods in place to be discussed in future follow-on negotiations.

US importers, particularly in the computer and retail industries will immediately benefit from the halting of expected new tariffs, which were set to hit Chinese-made electronics, toys, and garments.  For US exporters, the details of China’s pledge to increase purchases of US products remains to be worked out with initial language from the USTR noting broadly that increases will include “manufactured goods, food, agricultural and seafood products, energy products, and services.”

US soybean and pork sales are expected to increase, while US auto parts manufacturers will not be impacted by planned retaliatory tariffs that have now been called off by China.  Leading US exports to China include soybeans, integrated electronic circuits, automobiles, and aircraft.  Importantly, China also has agreed in general to a number of provisions to improve the overall environment of doing business in the country, including improved respect for intellectual property and removal of many existing barriers to its financial services sector.

While these promises are worth noting, China’s record on maintaining its economic commitments are questionable, at best.  USTR has noted that new agreement will be “totally enforceable,” details will become more available as the final text is worked out between the two countries.

Exporting to Mexico, Canada, China:  Tools for Exporters

Both trade agreements will hopefully introduce more certainty into cross-border trade and lead to increasing opportunities for US exporters.

The International Trade Administration (ITA), the U.S. Department of Commerce’s export promotion agency (www.export.gov) offers a range of services from general information about trade, to more detailed market and product data, to seminars and promotional events highlighting U.S. products. The US Commercial Service (USCS) can further provide companies with more tailored and detailed counseling and services – particularly small and medium-sized enterprises.  The USCS can be accessed at www.export.gov/locations while its Philadelphia office is at https://2016.export.gov/pennsylvania/philadelphia/.

 

For More Analysis of Both Agreements See the Following Sources:

USMCA

USTR Fact Sheet on USMCA; and USTR Industry Specific Fact Sheets

Wall Street Journal, “From Farms to Silicon Valley, U.S. Businesses Stand to Gain From USMCA,” December 10, 2019

Washington Post, “The USMCA is finally done. Here’s what is in it.” December 10, 2019

US – China “Phase One” Agreement

USTR Fact Sheet

Wall Street Journal, “U.S., China Agree to Limited Deal to Halt Trade War,” December 14, 2019

Reuters, “Factbox: What is actually in the U.S.-China ‘Phase One’ trade deal?,” December 16, 2019

 

About Securitas

Securitas Global Risk Solutions aids current and potential exporters through political risk and trade credit insurance, as well as a range of financial solutions to help clients protect their foreign sales, increase cash flows, and access global markets more securely and aggressively.

Based in the Philadelphia area, the team at Securitas is prepared to work with clients to understand their export goals and structure affordable risk solutions.  Securitas Global Risk Solutions is located at 900 West Valley Road, Suite 701, Wayne, PA 19087, by phone at 484-595-010, and at www.securitasglobal.com

Let’s Get in Touch

Office

900 West Valley Road
Suite 701, Wayne, PA 19087

Call Us

484-595-0100

Guide to Political Risk Insurance

Guide to Political Risk Insurance

New and emerging markets offer incredible opportunities for investors and corporations – however, not without risk. Political and economic instability in these markets can pose a significant threat to businesses and can lead to catastrophic losses for investors and lenders.

What Is Political Risk?

Political Risk, also known as “geopolitical risk,” is the risk of loss of assets, income, or property suffered by corporations, lenders, or investors as a result of political changes or instability in a country.  Political risk is present with physical assets located in a host country and when trading with a foreign buyer or a sovereign owned enterprise. 

Political risks can drastically impact a company’s investment in a host country.  Foreign government intervention or political violence can render a company unable to operate or withdraw their capital from a host country.

What are the Common Types of Political Risk?

The most common types of political risk are government confiscation, expropriation, nationalization (CEN); currency inconvertibility (CI) and political violence (PV). 

1. Government Confiscation, Expropriation or Nationalization (CEN): Foreign government action involving seizure or confiscation of assets, forced divestiture or forced transfer of ownership of assets, or policies (such as regulatory requirements or tax laws) enacted to hinder a firm’s business operations in such a way as to have the effect of expropriation, all fall under this heading. Often done by governments to shore up domestic political popularity, increase government revenue, or exert control over a critical economic sector, expropriation usually contravenes international agreements and causes a firm to lose its ability to operate its overseas investments or assets.

2. Currency Inconvertibility: This includes the imposition of restrictions on conversion of local currency revenues to major currencies (such as US Dollars or Euros), or capital controls, which prevent remission of earnings from an affected country. Currency controls are enacted by foreign governments or their central banks often in response to a rapidly accelerating currency crisis or a sudden change in government or economic policy and have the effect of forcing a firm to limit or end its overseas operations.

3. Political Violence: Civil strife such as rioting, violent protests, terrorism, and war are all forms of politically-motivated violence that can either cause the physical destruction of a firm’s assets or the creation of a situation in which business operations are curtailed or impossible.

How to Protect Against Political Risk

Staying engaged and aware of political events and trends in a country or region is important when doing business internationally.  Working with trusted sources of information both domestically and internationally is important to assessing risk and developing strong procedures well before a crisis develops.  Professional risk analysts as well as local sources of information such as business partners can be valuable sources of information. 

Other suggestions to prepare for political risk include:

1. Understand Your Supply Chain: Supply chains are complex and a firm’s international operations and those of business suppliers can be impacted by political crises in nearby countries or even locations far beyond a specific place of business. Think about possible bottlenecks.  Having backup or contingency plans in the case of supply chain disruptions can help mitigate losses or disruptions due to unforeseen events.

2. Know the Decision-Makers: Having partners with a strong economic profile in host country of foreign operations and hiring local employees may reduce your exposure to political risk.  A relationship with local bank or an international or regional bank with local operations may help to hedge against political risk.  Local banking may facilitate foreign exchange conversions and transfers.  Additionally, local banks may be familiar with options to shield some of your assets in the case of a crisis or alert you to political trends in the financial sector that could impact your investment and business operations.

3. Understand Your Credit Risk: An important consideration is that a country’s political and economic difficulties may have implications on credit.  Often political crisis can cause spark a series of events leading to a steep and protracted currency devaluation which leads to buyer payment default. Having a credit risk contingency plan, including a trade credit insurance policy, is another aspect of overall political risk planning to consider.

4. Consider Political Risk Insurance: Political risk insurance is an important part of any risk protection strategy.  Protection against risks noted above such as expropriation, violent conflict, political unrest, and currency controls protects your business, investors, and other stakeholders and allows your company to more confidently conduct international business.  With a strong political risk policy in place, companies can be more focused on their growth strategies in specific countries and in the short-to-long term, particularly in emerging markets or developing economies. 

Protest on the Streets Aerial ViewPhoto by Oscar Chan from Pexels

What Does Political Risk Insurance Cover?

There are many political factors that are outside the control for a foreign investor which could cause a loss.  A political risk policy typically includes but is not limited to:

1. War and Political Violence or (“PV”)

2. Confiscation, Expropriation and Nationalization or (CEN)

3. Deprivation of Capital

4. Embargo

5. License Cancellations

6. Currency inconvertibility / Non-Transfer

7. Forced Divestiture

8. Contract Frustration / Non-Honoring

9. Unfair and Fair Calling of Bonds

Who Uses Political Risk Insurance?

Corporations, lenders, and investors with physical (fixed/mobile) assets, contracts, investments and international operations in emerging markets. Some typical clients include:

1. Corporations and corporate investors with ownership of overseas financial assets, or international business operations such as joint ventures or subsidiaries that are exposed to financial risk from government policies.

2. Corporations or investors that own overseas physical assets that are exposed to property damage from political violence.

3. Financial Institutions that finance trade transactions, international projects, or other international exposure that is potentially threatened by political risks.

4. Importers and Exporters that have agreements with either private companies, foreign governments, or state-owned enterprises and are exposed to risks to trade flows from political factors.

5. Contractors, developers, and other service providers that do business with foreign governments or state-owned enterprises.

6. Companies in sectors such as mining, engineering, construction, and other services, where both contractual obligations may be threatened by political risks or actual physical assets are at risk of being damaged, expropriated, or become inaccessible due to political factors

How Do I Get Political Risk Insurance?

A political risk insurance broker can assist in developing a policy that meets the specific needs of your business and addresses a country’s political risk in a comprehensive way.  A broker can assist in explaining many of the definitions and details of a political risk insurance policy and help you to identify areas of risk you may not have previously considered.

Why Use Securitas Global Risk Solutions?

Since 2004, Securitas Global Risk Solutions (“Securitas”) has helped clients across the United States develop credit and political risk transfer solutions that provides value on several levels.  As a specialty independent trade credit and political risk insurance broker, Securitas is focused on developing comprehensive solutions that meet the needs of their clients, ensures complete understanding of policy wording and delivers responsive excellent customer service.

Let’s Get in Touch

Office

900 West Valley Road
Suite 701, Wayne, PA 19087

Call Us

484-595-0100

U.S. House Approves EXIM Reauthorization; Senate Approval Is the Next Step

U.S. House Approves EXIM Reauthorization; Senate Approval Is the Next Step

EXIM Bank Reauthorization on the Horizon

On Friday, November 15, the U.S. House of Representatives voted to reauthorize the Export-Import Bank of the United States (EXIM) for a 10-year period through 2029.  The House successfully passed H.R. 4863 United States Export Finance Agency Act of 2019 with a vote of 235-184.  In addition to a 10-year reauthorization of the EXIM’s operations and funding, the bill renames EXIM, the “United States Export Finance Agency,” and increases its lending authority from $135 billion to $175 billion over a seven-year period.

The bill is unlikely to be considered in the Senate, as both Senate Majority Leader Mitch McConnell and President Trump have indicated their opposition to the bill.  EXIM appears likely to continue its operations under another temporary budget continuing resolution (CR) to be considered before the current CR ends on November 21, 2019.

Despite broad support for EXIM reauthorization from both political parties, the White House, and a range of economic interests including the U.S. Chamber of Commerce and the AFL-CIO, differences over details of the House bill has divided support for the current reauthorization bill along partisan lines.  A June 2019 compromise draft authored by House Financial Services Committee Chairwoman Maxine Waters (D-California) and Ranking Member Patrick McHenry (R-North Carolina) fell apart in committee with some Republican committee members wanting greater constraints on EXIM financing for projects involving Chinese state-owned corporations, and some Democrat members seeking greater restrictions on financing for fossil-fuel related projects.

The House bill approved on Friday sought to address these concerns but only cleared committee on a partisan 30 – 27 vote, with McHenry and all Republican committee members withdrawing support because of concerns that the bill’s restrictions on China-related financing were not strong enough.  In the final House vote on H.R. 4863, only four Democrats voted no with only 13 Republicans voting yes with the majority.

A bipartisan bill to reauthorize EXIM (S. 2293) has also been introduced in the Senate but has yet to be considered by the Senate Banking Committee.

EXIM resumed full financing capacity in May 2019, when the U.S. Senate confirmed three Trump administration nominees to the EXIM board of directors, and re-established a lapsed quorum that had limited EXIM’s operations since 2015.

 

About EXIM Bank:

EXIM is an independent federal agency that promotes and supports American jobs by providing competitive and necessary export credit to overseas purchasers of U.S. goods and services. A robust EXIM can level the global playing field for U.S. exporters when they compete against foreign companies that receive support from their governments. EXIM also contributes to U.S. economic growth by helping to create and sustain hundreds of thousands of jobs in exporting businesses and their supply chains across the United States. In recent years, 90 percent of the total number of the bank’s authorizations has directly supported small businesses. Since 2000, EXIM has provided $14.8 billion to the U.S. Treasury after paying for all of its administrative and program expenses.

About Securitas:

As a certified EXIM broker, Securitas has decades of experience working with U.S. companies seeking to implement and understand EXIM’s guarantees and insurance policies to mitigate risk, finance international trade and achieve export-driven growth.  Because of the firm’s work in helping US companies increase exports and create jobs, Securitas was named EXIM Broker of The Year in 2015.

Securitas is ready to help businesses, particularly SMEs interested in pursuing an export strategy, learn how to access EXIM’s services.

 

 

 

 

Cover to the Guide to IC-DISCGet Your Money-Saving Guide For Exporters

The Tax Break Exporters Need to Know About

The Tax Break Exporters Need to Know About

Utilizing An IC-DISC to Unlock Greater Export Revenue

Firms exporting overseas may be unaware of an incentive in the U.S. tax code that can noticeably reduce tax liability and free up more revenue.  An Interest Charge-Domestic International Sales Corporation (IC-DISC) is a provision that allows some or all of taxable income relative to export sales to be taxed at a lower rate.  Since the early 1970s, U.S. tax law has allowed DISCs to exist in some form as an incentive for U.S. companies export products overseas or expand their export operations. 

Our Guide to IC-DISC is a free resource that explains everything you need to know about using an IC-DISC to improve your cash flow.

How Does an IC-DISC Work?

An IC-DISC works by reducing an exporters tax liability by allowing some or all taxable export income to be taxed at a lower rate as a qualified dividend, rather than as ordinary income. 

While a company carries out all of its export operations as usual, an IC-DISC is an intermediary company    that serves as a sales commission agent for the exporter.  An IC-DISC is a separate legal entity, and firms seeking to create an IC-DISC must obtain approval from the IRS and must also maintain separate financial operations for the IC-DISC such as bank accounts, accounting structures, and tax reporting.

An IC-DISC is particularly attractive for small-to-medium sized U.S. based exporters, who struggle with tight margins and a highly competitive overseas environment.  The extra cash flow generated by an IC-DISC can be a valuable tool to increase profits and improve overall business operations.

Understanding the IC-DISC Infographic

Case Study: COMPANY X Easily Creates an IC-DISC to Improve Business

Company X, a small professional services firm delivering services both domestically and overseas, set up and IC-DISC in 2014.  Working with a certified public accountant, Company X determined which of its 2013 export revenues would qualify as export gross receipts under Internal Revenue Code 199.  

Structured with an S Corporation shareholder, Company X and its CPA confirmed its qualifications and its tax benefit calculations – which rest on the difference between the qualified dividend tax rate on the annual dividend versus the ordinary tax rate of the shareholder on the annual commission payment.       

Company X formed the new corporate entity in Delaware to act as its registered agent and the new company elected to be treated as an IC-DISC under IRS 4876-A (Election To Be Treated as an Interest Charge DISC.)  The new IC-DISC opened a bank account with $2,500 and established a legal Commissions Agreement between it and Company X.  Set-up costs incurred were under $1,500.

Annually, Company X determines which sales qualify as export sales and uses a simplified 4% method to calculate income.  The IC-DISC exists using journal entries with its own set of accounting records and files an annual federal tax return and a Delaware franchise tax return.  Annual costs incurred are under $1000.  Company X finds that the process to set up and maintain an IC-DISC are not complicated or burdensome for a small business.

What Are the Benefits of an IC-DISC?

For example, if an S corporation company similar to Company X above earns $2 million in net taxable international income and pays a commission of 50% or $1 million of that amount to an IC-DISC, it reduces its reported taxable income by that amount. 

The company’s shareholders report this income (now reduced to $1 million from $2 million) on their individual tax returns.  Assuming the shareholders are in the top tax bracket – and taxed at 29.6% (the top rate of 37% multiplied by 80%*) – the commission to the IC-DISC resulted in a total federal tax reduction of $296,000 for the shareholders.

The $1 million commission paid to the IC-DISC is taxed to the IC-DISC’s owners – when paid or deemed paid – as a qualified dividend at the 23.8% rate, resulting in a tax of $238,000.  The difference between paying ordinary income tax rate (29.6% noted above) on $1 million and the qualified dividend rate for the IC-DISC results in a tax savings of $58,000.

*This 80% assumes the full benefit for pass-through entities of the newly enacted 20% Qualified Business Income Tax deduction (see Internal Revenue Code Section 199A)

How to Start Using an IC-DISC

Nearly any firm that exports overseas may qualify for an IC-DISC.  Manufactured products as well as agricultural and horticultural products qualify.  Software and professional services such as engineering and architectural designs are also covered.  A firm that manufactures a good that is included in a product that is subsequently exported can also qualify.

As with any tax incentive, a number of legal details have to be considered.  Eligibility requirements mainly include (but are not limited to): companies must be privately owned; exported products must contain at least 50 percent U.S. content (based on total market value); and a company must directly or indirectly export more than $3 million annually. 

To determine if your company is eligible and for more details on utilizing an IC-DISC, a number of sources exist.  The EXIM Bank has resources such as briefing pages and Webinars, and can provide lists of experts than can help a company get the ball rolling on an IC-DISC strategy.  

Tax regulations and registration requirements are subject to change, so a consultation with a CPA or tax attorney with experience in IC-DISCs is strongly suggested.  Securitas works with business advisors such as the teams at Kreischer Miller and Baker Tilly, who can provide clients with more detailed information on IC-DISCs and their benefits.

In addition to offering comprehensive export credit insurance solutions, the team at Securitas can also put new clients in touch with current and former clients who have utilized an IC-DISC to their advantage. 

Cover to the Guide to IC-DISCGet Your Money-Saving Guide to the IC-Disc

Why Securitas?

As an insurance broker rather than an insurance agent, Securitas Global Risk Solutions is able to apply to multiple carriers to find the best contract, with the most coverage, for the least cost. A carrier’s agent can only advise you as to that carrier’s specific contract. We have a team of experts who are available to you 24/7 to answer any questions or concerns. Additionally, our service comes at no charge to you.