Many companies can benefit from our U.S. export tax services. Specifically, exporters with receipts from the sale of property and certain services (manufactured, produced, grown or extracted in the U.S.; held property primarily for sale, lease, rental use, consumption or disposition outside the U.S.; and not more than 50% of the value attributed to non-U.S. content) can generally benefit with a permanent tax savings by utilizing an Interest Charge – Domestic International Sales Corporation (“IC-DISC“). Savings are garnered by the conversion of ordinary taxable income relating to qualified foreign sales into qualified dividend income, which is subject to the capital gain rate.
About the IC-DISC Structure
The IC-DISC is a distinct corporate entity that elects to be an IC-DISC under the Internal Revenue Code. It is generally a “paper” entity with limited corporate substance; however, the IC-DISC must at all times strictly meet specific statutory requirements in order to qualify. Structural setup is extremely important—the steps include corporate setup, IC-DISC election, agreements with the exporting company and ongoing management. Any mistakes or deficiencies in the structural setup or ongoing management can be fatal with respect to tax benefits. The experienced professionals at Melton & Melton can assist you in the set up and continuous maintenance of your IC-DISC.
How it Works
Once the IC-DISC structure is in place, the exporting company pays the IC-DISC a commission (in accordance with the intercompany agreements) and obtains a tax deduction against ordinary income. The IC-DISC pays no U.S. income tax but instead acts as a conduit to its shareholders. Income earned by the IC-DISC can be paid out to shareholders as qualified dividends or retained in the IC-DISC as deferred income. Any income retained/deferred will subject the shareholders to an interest charge on the equivalent amount of tax deferred (the “interest charge”). In addition, DISC income relating to receipts in excess of $10 million per year is not eligible for the deferral of tax. However, since most taxpayers will want to take advantage of the tax rate on qualified dividends, this should not be an issue.
Generally, the income that can be earned by the IC-DISC (transfer price or commission) is the greater of 4% of the qualifying export gross receipts or 50% of the export taxable income (combined taxable income) with the 4% limited to 100% of the combined taxable income. The intercompany pricing is governed by specific rules in the Internal Revenue Code and the related regulations. These rules are very complicated but provide opportunities to maximize the amount of income paid to the DISC. Issues relating to transaction grouping, transaction-by-transaction methodology, expense allocation, marginal costing election, the no loss rule and others can be carefully navigated to significantly enhance the tax benefits.
The IC-DISC must file Form 1120-IC-DISC annually. The original due date is 8.5 months after the tax year-end with no extensions (September 15th for a calendar year entity). Along with Form 1120-IC-DISC, the shareholders must be provided a Schedule K, which shows their share of taxable distributions (dividends) and Deferred DISC income subject to the interest charge.
For more information, please contact:
Mike Gallier | firstname.lastname@example.org