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.
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.
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)
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.
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.
Trade Credit Insurance, sometimes called Accounts Receivable Insurance, is a method of protecting a company’s accounts receivable against the risk that one or more key customers will fail to pay for goods and services. This type of insurance covers the risk of unpaid invoices that may arise as a result of protracted default, insolvency, or bankruptcy of a customer (also known as a buyer). Trade credit insurance protects your cash flow and covers your business with your customers so that when they fail to pay you or go under, your company still gets paid.
What are the Reasons to Invest in Trade Credit Insurance?
A credit insurance policy can do more for a company than just protecting accounts receivable.
Large companies, and especially multinational entities, invest in trade credit, business credit, or export credit insurance for a variety of reasons, including:
1. Increased Sales and Expansion: When a company’s receivables are insured, they can safely sell more to existing customers, as well as expand into areas that would otherwise be too risky.
2. Improve Cash Flow: a credit insurance policy can improve your cash flow by reducing the number of days a sale can be outstanding. It also allows for the outsourcing of debt collection services at no extra cost.
3. Better Financing Rates from Your Lender: Lenders look favorably on companies that have taken the added measure of protection that trade credit insurance offers. They will typically lend more capital for insured receivables and may reduce the cost of funds.
4. Reduce Reserves of Bad-Debt: Insuring a company’s accounts receivable can free up capital that would have originally been set aside in case the customer failed to pay. This means more liquid cash flow available for business initiatives.
5. The Protection Pays Off: Credit insurance policies may offset its own cost due to the way in which it allows a company to increase sales and profits without additional risk. In addition, credit insurance premiums are tax deductible.
The credit insurance premium is calculated by using a percentage of your turnover combined with level of risk. In other words, the number depends on who you are selling to, how much coverage your company needs for each customer, customer ratings, loss history, and the business sector.
On average, a trade credit insurance premium will be a fraction of one percent of company sales. The rate can be lower or higher depending on the variables listed above.
What Do I Need to Know About Policy Coverage?
Policies are written on an annual basis and can cover risks that are commercial or political. Once the policy is set, the credit insurer will assign the policyholder’s insured customers a specific credit limit, which is the amount covered if a buyer fails to pay.
Unlike other types of insurance, a trade credit insurance policy does not get filed away for renewal next year, it is a dynamic relationship. This type of policy can continue to change over the course of the year and the credit manager will play an active role in this process.
New buyers and additional coverage can be requested if needed. In this case, the insurance company will determine whether to approve the coverage by investigating the risk.
The insurer will continue to monitor your buyers and their creditworthiness. Companies we work with such as Atradius, Euler Hermes, and Coface will gather information about your customers by a variety of methods such as public records, receipt of financial statements, and information that is obtained through other policyholders that sell to the same buyer. This will be of great value to your company because the information you can access through the insurers database will help you make smarter business decisions.
Should you need to file a claim, our team of claims professionals will guide you through the process.
In a way, your credit insurer becomes an extension of your team. For example, if the records in the insurance carrier’s database suggest that your buyer is experiencing financial trouble, all policyholders that sell to that particular buyer will be alerted so that a plan can be set in place to avoid any losses before a claim is even filed.
How Do I Know Which Insurance Carrier to Choose?
There are many insurance carriers that offer trade credit insurance and each of them may differ in the amount that they decide to cover for your buyers, as well as their terms and conditions. Having a deep understanding of each of these differences will help you decide the best option for your company.
A trade credit insurance broker is invaluable in this process. Kirk Elken and Peter Seneca have over 35 years in the area of trade credit insurance. At Securitas Global Risk Solutions, we work for your company’s business interests, not the insurance carrier’s.
First, we work to understand your business needs and financial goals, key buyers, and credit exposures. Then, we send your policy application to multiple insurance carriers for quotes, which include buyer coverage commitments and proposed terms and conditions.
Next, we schedule a meeting to review the results. Using our knowledge of the insurance carriers, we can advise you on which policy will be best suited for you in terms of premium price, coverage, and advantages or disadvantages of working with each carrier.
After working together to elect the best policy at the most competitive price, we continue to work with and negotiate with the insurance carriers as your needs evolve.
Does it Cost More to Use a Trade Credit Insurance Broker?
There is no additional cost to you for using a trade credit insurance broker. This means that on a given insurance policy, your rate will be the same whether you decide to undertake the process alone by going directly to an insurance carrier or work with a trade credit insurance broker.
In fact, you are likely going to pay less on your premium because you have your choice of multiple carriers, rather than being locked into one.
In Summary
Trade credit insurance is different than traditional insurance. It covers accounts receivable so that you can protect your company against buyer insolvency, slow-pay, and bad debt. In addition, a trade credit insurance policy is a partnership with the insurance carrier that can provide their database information and knowledge to improve your trade decisions. Companies can also benefit from trade credit insurance through its ability to affect your sales expansion to new and existing buyers.
Navigating the world of credit insurance and the insurance claims process can be complicated and challenging. Using a broker like Securitas Global Risk Solutions gives the balance of power back to the client in the form of our knowledge of the industry, our understanding of your company, and our ability to provide you the carrier that offers the best coverage at the lowest rate.
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.
Assessing country or regional risk is a crucial part of a trade risk strategy and is necessary for conducting international trade. Understanding laws, customs, and regulations of any country are paramount but it’s also prudent to anticipate how external factors such as your buyer’s creditworthiness, conflict, violence, or other political/economic uncertainty can impact trade or cross-border investments.
Risk insurance provides US exporters with protection against buyer non-payment as well as cross-border investments against political risk such as confiscation, expropriation, nationalization, forced abandonment or political violence. Trade credit and political risk insurance is a specialty risk transfer solution that helps US companies on many levels when trading and operating in the global economy.
For companies seeking to begin or expand their overseas operations, exporting remains a great opportunity to generate growth, but there are always risks. Right now, here are five major risk areas/issues that impact global trade:
1. China
The ongoing trade dispute between the U.S. and China has garnered the attention of world markets and taken a sort of on-again, off-again nature. After over a year of negotiations, a trade deal between the two countries seemed to be closer to reality after a meeting between President Trump and Chinese Premier Xi Jinping in December 2018 (in which a 90-day deadline for an agreement was agreed upon). While that deadline has come and gone, the trade war has again ratcheted up along with raised concerns of overall global trade risk. The Trump Administration announced an intention to place a new set of tariffs on August 2, 2019 which again roiled global markets but also led to China retaliating by devaluing its currency on August 5. In the most recent salvo, the U.S. has labeled China a currency manipulator. It remains unclear whether this new round of back-and-forth will delay the anticipated trade agreement, which is likely to include language as well as specific targets for increased U.S. exports to China.
While a recent economic report appears to show that China is weathering the impact of the trade war, second quarter numbers from China showed that overall growth slowed, the slowest rate of growth since 1992. While the trade war has notably hurt a number of U.S. exporters, such as soybean producers, slowing domestic demand in China also presents a concern for potential U.S. exporters.
Added uncertainty in China relates to growing protests in Hong Kong. Initial protests over a bill to allow suspects in Hong Kong to be tried in courts in mainland China have now spiraled into their fourth month with protests growing larger, more aggressive, and taking on a more broadly pro-democracy tone. While worries of a heavy-handed crackdown are present, it remains unclear how or when the protests will end in what is a vital trade and business hub for the Chinese economy.
2. Brexit
While the UK’s referendum on leaving the European Union was over three years ago, the details of translating the narrow victory of “Leave” voters into a workable political and economic agreement has been agonizing. While new Prime Minister Boris Johnson has pledged that the UK will leave the EU “do or die” on the new deadline of October 31, 2019, his narrow one-vote majority in the British Commons leaves him, like his predecessor Theresa May, little room to maneuver.
Significant concerns over the economic and social impact of Brexit, as well as its impact on the hard-won peace in Northern Ireland has UK politics split 3-ways with no consensus – between those who want to an immediate or “hard” Brexit regardless of consequences, those who want to remain in the EU, and those who want a negotiated, gradual exit from the EU that avoids a hard border between Ireland and Northern Ireland. These divisions internally divide both UK’s two main parties, Labour and Conservative, with only the smaller Liberal Democrats being fully committed to remaining in the EU.
U.S. and UK trade negotiators have met to discuss a possible post Brexit free trade agreement that could hold a number of opportunities and risks for U.S. exporters.
3. The Middle East
While hardening battle fronts and shifting alliances have the Syrian civil war in a current stalemate, the rivalry between Iran and Saudi Arabia is center stage, with the two in proxy conflict both in Syria and in the ongoing civil war in Yemen. U.S. – Iran tensions have again raised tensions in the Persian Gulf with Iran taking a more aggressive stance toward U.S. and British economic interests. The United States’ NATO ally Turkey adds another element to the overall regional turmoil, with the two countries at odds over Turkey’s purchase of military hardware from Russia and its antipathy to U.S.-backed Kurds in both Syria and Iraq.
In North Africa, Egypt’s economic growth is notable (5.6% annual GDP growth in July 2019). The country enacted several IMF-backed economic reforms in recently years and labelled itself a “global investment destination” as part of the effort in 2018. However, there is uncertainty as to the long-term sustainability of the reforms, with a recent report noting that poverty actually increased since 2015. The country’s ability to help extend economic growth more broadly is key to reducing uncertainly among investors.
Tunisia, the lone success story of the Arab Spring, recently lost its 92-year-old President Beji Caid Essebsi after a long illness. Caid Essebsi, elected president in 2014 after fall of the Ben Ali dictatorship, was the country’s first directly elected head of state. His willingness to broker compromise played a central role in guiding Tunisia’s democratic transition and the country’s ability to democratically replace the deceased leader will again test the strength of its political institutions. The long-time president of neighboring Algeria, Abdelaziz Bouteflika resigned on April 2, 2019 after a wave of protests. While the country’s military has taken over the role of stewarding the country’s government, the end of Bouteflika’s notably corrupt 20 year rule has raised expectations among Algerians for possible political and economic reform.
4. Latin America
The issue of migration and its impact on relations between the United States, Mexico, and the countries of Central America has come to dominate political dialogue and rhetoric. For the U.S. and Mexico, the border issues have somewhat obscured progress toward a new continental free trade agreement called the United States Mexico Canada Agreement or USMCA. Mexico, which has become the United States’ largest trading partner, ratified the new deal in June 2019. A more difficult ratification fight is expected in the United States Congress. (For more information about the USMCA, see here.)
South America’s large economies, Brazil and Argentina continue to be mired in decline. Brazil’s downturn, which began in 2016, has not improved under a new government. Economists anticipate positive economic growth not until 2020 at the earliest. In Argentina, a mid-2018 currency slide, economic recession and high inflation continues and is likely to result in the country electing a new, more populist government. At stake are a number of difficult economic policies seen as necessary to pull Argentina out of “perennial volatility.”
Venezuela’s economy continues to bump along the bottom in a what one analyst calls a “perverse equilibrium,” with no resolution in sight for the country’s political impasse. In the meantime, a growing humanitarian crisis has led to a boom in outward migration, as many Venezuelans seek to flee what appears to be an unending cycle of hardship.
5. Russia
U.S. – Russia relations are at a low point, with the two countries in protracted disagreement over Ukraine and Turkey (see Middle East above) to say nothing of proven Russia’s efforts to disrupt U.S. elections or both countries recent exit from the 1987 Intermediate-Range Nuclear Forces (INF) Treaty. Sabre rattling and regular efforts at deflection from the Russia government draw attention away from the fact that Russia’s economy is stalled with 0.4% economic growth between 2014 and 2018. Rising political protests in the country have drawn notice and speculation about the rising impact of economic stagnation on the seemingly air-tight political regime of Vladimir Putin.
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.
The Export-Import Bank of the United States (EXIM Bank) yesterday announced the appointment of Securitas Partner Matthew Stewart to its 2019 Sub-Saharan Advisory Committee. Stewart joins 10 other appointees on the committee, which is tasked with advising the EXIM Board of Directors “on the development and implementation of policies and programs designed to promote EXIM engagement in Sub-Saharan Africa.” The committee was appointed by the EXIM Board of Directors at the conclusion of yesterday’s EXIM board meeting.
“My fellow EXIM board members and I congratulate the new members of the EXIM Sub-Saharan Africa Advisory Committee. These advisory committee members bring important perspectives and expertise as we focus on increasing U.S. exports to the region.”
EXIM President and Chair Kimberley A. Reed
The EXIM Bank is an independent federal agency that promotes and supports U.S. exports by providing competitive and necessary export credit to overseas purchasers of U.S. goods and services. As EXIM works to boost U.S. trade and investment in Sub-Saharan Africa, Stewart brings valuable experience and expertise to the advisory committee. A Securitas partner since 2011 Stewart has lead Securitas’ trade support expansion in Africa and the Middle East, with experience in the areas of debt financing, political risk insurance, as well as logistics, negotiation, and regulatory analysis for exporters and buyers.
Prior to joining Securitas, Matt worked over 15 years in commercial banking and has extensive experience in executing due diligence and underwriting credit for middle market clients. Stewart is a graduate of Baylor University with a bachelor’s degree in Business Administration and a double major in Accounting and Economics. He received the Omicron Delta Epsilon honor for Economics in 1996.
See also: EXIM announces Members of the 2019 Africa Advisory Committee
Since 2004, Securitas Global Risk Solutions (“Securitas”) has helped clients across the United States develop solutions to mitigate credit risk to achieve their financial goals. As a specialty insurance broker focused on developing trade credit and political risk insurance programs, Securitas is focused on finding coverage for difficult credits to protect businesses from unexpected credit losses. See our Website at https://www.securitasglobal.com/. for more information, or contact us at:
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