Export Tax Savings - IC-DISC Planning
The Interest Charge Domestic International Sales Corporation, or IC-DISC, provides a tax savings for qualifying U.S. exporters. An IC-DISC is a domestic corporation that has "qualified export receipts," generally at the dividend tax rate when the income is distributed. IC-DISC planning allows a portion of an operating company's export income to be shifted to the IC-DISC, which would have otherwise be taxed in the operating company at its federal income tax rate.
Here’s a snapshot on how it works:
- Owner of export company forms a tax-exempt IC-DISC in conformity with Internal Revenue Code provisions.
- Export company pays 50% tax-deductible commission to the IC-DISC (or)
- The operating company pays a tax-deductible commission to the IC-DISC equal to at least the greater of 4% of operating company’s gross receipts from qualified exports.
- Commission is expensed by exporting company (the operating entity), reducing ordinary income.
- IC-DISC is tax exempt and is not taxed on the commission income.
- IC-DISC pays dividends to owner, who is taxed at preferred rates upon distribution of dividend.
Under economic pressure from the World Trade Organization ("WTO"), Congress has repealed various trade incentives over the years. However, the IC-DISC, added to the Internal Revenue Code in 1984, has never been challenged by the WTO. The IC-DISC was revamped in 2004 under the Jobs and Growth Tax Relief Reconciliation Act, stipulating that dividends paid by it were eligible for a favorable tax rate.
Political and business pressure on the U.S. to encourage exports has historically led to the continuation of The Interest Charge Domestic International Sales Corporation (IC-DISC). Capstone has been active in the turnkey design and implementation of IC-DISCs since 2007, leading to millions of dollars of savings by our clients.
Capstone’s IC-DISC Turnkey Services, via Export Assurance
Capstone provides turnkey solutions to take advantage of the beneficial export tax provisions provided by an IC-DISC. Our package includes:
1. Retaining at our expense tax, legal, accounting, and specialized administrative services for your exporting activities. Export Assurance designs, structures, forms, and operates your IC-DISC to address the structuring of the IC-DISC arrangement, and advising on:
(i) IRS required transfer pricing requirements and/or commissions with respect to the IC-DISC operations;
(ii) the calculation of income from your exporting activities, after allocating selling, general and administrative expenses and utilizing "Marginal Costing Rules", as set forth in the regulations in a manner designed to achieve the desired tax results of the planning and the timely payment of the computed commission to the IC-DISC;
(iii) the calculation of your "Export Promotion Expenses" under the regulations;
(iv) whether the IC-DISC should pay dividends on the portion of its earned commissions not "deemed" to be a dividend, or defer payment of the dividend, which then requires the timely payment of interest to the IRS (adjusted annually to reflect the "base period T-bill rate") based upon the deferred tax calculated at ordinary income tax rates;
(v) "Producer's Loan" issues, including computation of an arm's length interest charge under §482 in the case where dividends are deferred and the IC-DISC retained earnings are loaned back to your export company, allowing the untaxed monies in the IC-DISC to be utilized by your company for its operations, and drafting and administering a conforming secured loan facility on behalf of the IC-DISC; and
(vi) state and local tax issues to minimize such taxes on the IC-DISC.
2. Designing, forming and organizing the IC-DISC under appropriate state law, along with its corporate minute book including by-laws, articles of incorporation, minutes, issuance of stock certificates, etc. in an appropriate and agreed to jurisdiction and maintaining a registered office in such location.
3. Drafting and maintaining the documentation related to the IC-DISC planning, including: (i) the commission or sales agreements in support of your export activities and its relationship to the IC-DISC; and (ii) Producer's Loans agreements.
4. Retaining at our expense and overseeing the CPA selected, as discussed above, who will draft the appropriate IC-DISC federal and state tax returns, as required, for review and revision and ultimate completion, signature, and filing.
For more information, please contact us at 713.800.0550 or fill out the form.