By Kenneth H. Bridges, CPA, PFS March 2012
Over the years, the U.S. has offered a number of tax incentives for exporters. Some of these (e.g. the foreign sales corporation and extra-territorial income exclusion) have been repealed after being found by the World Trade Organization to be an illegal export subsidy under our agreements with our trading partners. The Interest-Charge Domestic International Sales Corporation (IC-DISC), however, has survived.
An IC-DISC is a corporation formed for the purpose of receiving commissions from a related U.S. company with respect to export sales. The IC-DISC is permitted to defer taxation on up to $10,000,000 of qualified export receipts each year, with the shareholders of the IC-DISC paying an interest charge on this deferral. The greater (and more permanent) savings from the IC-DISC, however, can come from the significant current spread between the highest ordinary Federal rate (35%) and the rate on qualified dividends (15%). This differential arises because the payment of the commission by the related operating company provides an ordinary deduction, while the dividend from the IC-DISC (which itself is tax-exempt) is taxed at the more favorable qualified dividends rate.
The IC-DISC transfer pricing rules generally permit it to have profit of up to 4% of the gross receipts from exports or 50% of the profit from such, whichever is expected to be higher, plus in each case an amount equal to 10% of the export promotion expenses.
Kenneth H. Bridges, CPA, PFS is a partner with Bridges & Dunn-Rankin, LLP an Atlanta-based CPA firm.
This article is presented for educational and informational purposes only, and is not intended to constitute legal, tax or accounting advice. The article provides only a very general summary of complex rules. For advice on how these rules may apply to your specific situation, contact a professional tax advisor.