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HOME > EXPORT TAX BENEFITS > IC-DISC
 
INTEREST CHARGE DOMESTIC INTERNATIONAL SALES CORPORATION (IC-DISC)

THE IC-DISC ENCOURAGES EXPORT ACTIVITY AND GROWTH BY ALLOWING TAX DEFERRAL WITHIN THE IC-DISC OR TAX SAVINGS, INCLUDING THE 15% DIVIDEND RATE FOR INDIVIDUAL SHAREHOLDERS.

For a reasonable flat fee, Export Assist will incorporate your basic IC-DISC within 24 to 48 hours at which time your export tax benefits begin, and we will perform all implementation, annual management and general accounting services to help ensure compliance.

IC-DISC Tax Benefits

The IC-DISC offers exporters the following tax and treasury benefits using dividend and deferral.

  • Increased cash paid as dividends taxed at the 15% rate for individual shareholders
  • Deferral of IC-DISC income from current taxation (up to $10 million annual revenue limit)
  • Increased cash flow for exporter
  • Low-cost working capital for export growth and R&D (R&D tax credits applicable) using a producer’s loan or accounts receivable financing
  • Lower effective tax rate
  • Reduced taxable base at exporter level
  • Elimination of double taxation in C corporations
  • Protection of IRC safe harbor commission provisions.

To instantly calculate your IC-DISC dividend benefits, use our Quick Calculator. For a more detailed analysis of your dividend and deferral benefits, please complete our IC-DISC Inquiry Form and we will prepare a confidential, FREE IC-DISC Tax Benefit Report for you within 2 to 3 days. There is no cost or obligation. For more information, please contact Ms. Tamara Crews, Vice President - Professional Markets, at 800-894-8366 or tcrews@exportassist.com.

Background
The Domestic International Sales Corporation (DISC) was enacted into law with the Revenue Act of 1971 for eligible exports beginning on or after January 1, 1972. In 1984, it was changed to an Interest Charge Domestic International Sales Corporation (IC-DISC) (IRC Sections 992, 993, 994, 995) in response to a ruling from the World Trade Organization (WTO). The 1984 legislation also put an annual revenue 'cap' of $10,000,000 on its use. When qualified export receipts exceed this cap in a taxable year, the income attributable to $10,000,000 in export revenue can be deferred and any remaining income distributed as dividends to the shareholders of the IC-DISC. The Jobs and Growth Tax Relief Reconciliation Act of 2003 lowered the dividend tax rate to 15%.

Structure and Compliance
The IC-DISC is a domestic corporation that has a single class of stock with a minimum par value of $2,500. An IC-DISC election must have been made and not terminated, and it must meet the following requirements:

  • 95% Qualified Gross Receipts Test
    • sales or leasing of certain qualified export property
    • qualified dividends
    • interest on any obligation that is a qualified export asset
    • engineering or architectural services
  • 95% Qualified Export Asset Test
    • accounts receivable
    • funds for investment
    • obligations of Ex-Im Bank and PEFCO
    • reasonable working capital
    • obligations arising from producer's loans
    • stock certificates of related foreign export corporations, such as a Foreign International Sales Corporation (FISC).

In order to qualify for an IC-DISC, the U.S. exporter must have export property that:

  • is manufactured, produced, grown or extracted in the United States by a person other than an IC-DISC
  • is held primarily for sale, lease or rental for direct use, consumption or disposition outside the United States, and
  • contains a minimum of 50% U.S. content.

Determination of Commission Income
The commission income of the IC-DISC is based on the income and expenses related to the export sales of the exporter and is computed using one of the following two methods, whichever is greater (IRC Section 994(a)):

  • THE “4-PERCENT” GROSS RECEIPTS METHOD
    The commission that the IC-DISC may earn on the export transactions of the U.S. exporter will not exceed 4% of the qualified export receipts of the IC-DISC and the U.S. exporter.
  • THE “50-50” COMBINED TAXABLE INCOME METHOD
    Under this method, the IC-DISC commission earned on export transactions of the U.S. exporter will not exceed 50% of the combined taxable income of the IC-DISC and the U.S. exporter.

The maximum commission the IC-DISC may charge is the sum of the amount of income computed under 1) or 2) above plus the expenses that the IC-DISC incurs. This commission is a qualified export receipt and deductible by the U.S. exporter under IRC Section 993(a)(1)(A). When the U.S. exporter is a privately-held C corporation, since the commission paid to the IC-DISC cannot exceed the combined taxable income of the exporter and the IC-DISC, it cannot cause a loss to the exporter on export sales but may cause an acceptable domestic loss upon consolidation.

The net income of the IC-DISC computed using one of these two methods is not subject to current taxation but may be deferred up to $10,000,000 in gross receipts with the remainder deemed distributed to its shareholders (IRC Sec. 995(b)(1)(E)). The IC-DISC is allowed to retain the income attributable to the best $10,000,000 of gross receipts to maximize this deferral. The shareholder of the IC-DISC would pay interest on the deferred tax liability at the base period T-bill rate (the annual rate of interest equivalent to the average investment yield of U.S. Treasury bills with annual maturities; the rate is 2.48% for the period ending September 30, 2008). Should the U.S. exporter decide not to defer the net income, it may be received as a dividend.

IC-DISC Ownership

Private Exporter

When the exporter is a privately-held pass-through company, such as an S corporation, LLC or partnership, it is recommended that the IC-DISC be owned by the exporter. When the exporter is a privately-held C corporation, it is recommended that the IC-DISC be owned directly by individual shareholders in order to avoid double taxation at the C corporation level. The structure of the IC-DISC owned directly by shareholders is illustrated below.


Public Exporter
When the exporter is a publicly-traded corporation, the IC-DISC should be owned directly by the exporter. The exporter could benefit most by using the IC-DISC to factor export invoices (discussed below).

ADDITIONAL IC-DISC SERVICES

IC-DISC Services to Increase Commission Income

Based upon the exporter's profit margins, export sales volumes and business structure, there could be additional financial strategies and export activities included in the IC-DISC. These IC-DISC activities managed by Export Assist can increase revenue and expand commission income beyond the basic IC-DISC safe harbor commission structure thereby creating additional after-tax benefits. They can also be used to comply with the Qualified Export Asset Test on any of the revenue being deferred.

Export Invoice Factoring (Discounting)
The IC-DISC could be structured to have two sources of revenue: the sales commissions from export transactions and the invoice discounts derived from the purchase of invoices by the IC-DISC that are connected to the commissions paid. The total income is a combination of the sales commission and the invoice discounts, thereby increasing IC-DISC profits for dividend or deferral. Exporters with up to $300,000,000 in export sales can use invoice factoring to maximize the annual export revenue cap of $10,000,000, which is deferred from taxation. Export Assist performs export invoice factoring services, including credit analysis and accounts receivable management, to support the assumption of credit risk. Factoring requires an IRC Section 482 transfer pricing study.

Foreign International Sales Corporation (FISC)
The IC-DISC can own 100% of a Foreign International Sales Corporation (FISC) that is located in a jurisdiction outside of the fifty United States and Puerto Rico. Export Assist manages these FISCs at its office in the U.S. Virgin Islands. This IC-DISC/FISC combination provides the maximum export income deferral available under the $10,000,000 annual revenue cap provision. This is accomplished by having the FISC buy and on-sell inventory to foreign customers to generate export revenue and then adding the IC-DISC commission from these export transactions. The commission paid to the IC-DISC is based on the safe harbor method. The FISC buy/sell activity is supported by an IRC Section 482 transfer pricing study. In order to provide the broadest base for the transfer pricing study, Export Assist analyzes the exporter’s export economic activities to determine which ones could be transferred to the FISC. In addition, Export Assist provides all FISC management and general accounting services.

Export Promotion Activity
Export Assist manages export promotion activities for the IC-DISC under IRC Section 994 and Treasury Regulation Section 1.994. These export promotion activities are costs incurred by the IC-DISC to promote export sales. They consist of the ordinary and necessary expenses of the IC-DISC under IRC Section 162, such as advertising, market studies, sales commissions, warehousing, other selling expenses, freight, cost of packaging, and cost of designing and labeling. The export-related expenses paid by the IC-DISC are reimbursed by the exporter plus 10%. This 10% increases IC-DISC revenue on a “cost plus” basis. Obtaining these benefits requires that the IC-DISC convert to a safe harbor, 482 or unrelated buy/sell structure.

Asset Management
If the objective of the IC-DISC is to defer income, then leading up to the last business day of the calendar or fiscal year, cash might need to be converted to other export assets or existing export assets might need to be traded. This is done to ensure that the IC-DISC meets the Qualified Export Asset Test on the last business day of each year, thereby maintaining full compliance on deferred revenue. The cost of the deferred revenue is currently an annual interest charge of 2.48% based on what you would have paid in corporate taxes on that revenue.

Qualified export assets include:

  • Loans - producerís loans and accounts receivable loans (with undivided interest) that are used to fund low-cost export working capital, international buyer financing and research and development. Producerís loans may be made to the parent company or other export companies.
  • Notes - Private Export Funding Corporation (PEFCO) notes with the full faith and credit of the U.S. government for 100% of face value.
  • Stocks - stock certificates of related export corporations.
  • Cash - funds awaiting investment (cash compliance) and reasonable working capital (buy-sell IC-DISC).

As a result of investing the IC-DISCís deferred assets, you might gain additional revenue from the interest income. Export Assist performs these asset management services beyond our monthly monitoring of the Qualified Export Asset Test (IRC Section 993(b)).

For more information, please contact Ms. Tamara Crews, Vice President - Professional Markets, at 800-894-8366 or tcrews@exportassist.com.

 
   
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