IC-DISC
The Last of the Export Incentives
In the wake of changes to the Extraterritorial Income Exclusion (EIE) created by the American Jobs Creation Act of 2004, the EIE has been repealed from the Internal Revenue Code beginning in 2005. The phase-out period lasted for 2 years (2005 – 2006) and the EIE officially disappeared after 2006. Unfortunately, the EIE has gone the way of other export incentives for U.S. companies due to the imposition of economic sanctions by the World Trade Organization (WTO).
However, there is one export incentive that remains intact and is now more attractive than ever due to the lowered rate of tax dividends created by the Job and Growth Tax Relief Reconciliation Act of 2003. The Interest-Charge Domestic International Sales Corporation (IC-DISC) has survived the repeals of U.S. export incentives since 1984 and has never been targeted by the WTO.
Deriving tax benefits through an IC-DISC is slightly more complicated than the EIE because the latter simply requires the completion of Form 8873 to calculate the exclusion. By contrast, an IC-DISC is a separate domestic corporation that must formally elect to be treated as an IC-DISC and is required to maintain a separate bank account and set of accounting books. The IC-DISC must also file an annual U.S. income tax return even though it pays no U.S. income taxes.
Who Qualifies for the IC-DISC?
Exporters that are good candidates for the IC-DISC include, but are not limited to, the following:
- Manufacturers that directly export their products
- Manufacturers that sell products that are destined for use overseas
- Architectural and engineering firms who work on projects that will be constructed abroad (even though the work is performed in the United States.)
- Pass-through entities and privately held corporations
Why an IC-DISC Now?
The benefits available under the IC-DISC regime are effective on a go forward basis, rather than being available for all prior operating tax periods (as was the case with the Extraterritorial Income Exclusion “EIE”). Because of this, the longer a taxpayer waits to form an IC-DISC, the less their available benefits will be. In addition, with the repeal of the EIE, the IC-DISC is the last export incentive available to U.S. companies.
alliantgroup IC-DISC Services
What are the benefits of an IC-DISC?
Under an IC-DISC strategy, the exporter pays commissions to the IC-DISC. The commissions are deductible to the exporter, and the deemed or actual dividend payment of the commission income in the IC-DISC is taxed to the exporter’s shareholders or partners at a favorable 20% rate. Thus, on one hand, the exporter receives a deduction of 35% on the commission payments made to the IC-DISC, and on the other hand, only pays a 20% tax rate on the income repatriated from the IC-DISC. This results in a permanent tax saving for U.S. exporters and their shareholders of 10% or higher of net export income.
alliantgroup provides customized services to meet the needs of each individual client. Services provided range from an initial benefit assessment to a full-scale IC-DISC implementation and outsourcing service.
Benefit Assessment and Feasibility Study
alliantgroup offers a basic assessment of the potential benefits of using an IC-DISC with readily available data from the client. alliantgroup also provides a feasibility study given the company’s available data and circumstances.
Data Analysis and Documentation
alliantgroup analyzes the company’s self-prepared data and identifies the grouping and intercompany pricing rules that will maximize tax savings.
Full-Scale IC-DISC Outsourcing Service
For companies wishing to outsource the implementation and preparation of the IC-DISC calculations and supporting documentation, alliantgroup and its associated counsel will work with the company’s accounting and information systems personnel to develop each requisite piece of information including the final transactional database. Once the transactional database and supporting schedules have been prepared, alliantgroup will perform the same steps outlined above for the data analysis and documentation. With renewed emphasis on internal controls and documentation under Sec. 404 of Sarbanes-Oxley, companies may benefit from alliantgroup’s full-scale outsourcing service that, along with the company’s CPA, documents all the necessary procedures, schedules, and final reconciliations required by the IRS for IC-DISC tax benefits.
Tax Benefit Illustration
Company Without an IC-DISC | |
|---|---|
Foreign Trading Gross Receipts | $10,000,000 |
Cost of Goods Sold | $6,000,000 |
Selling, General and Administrative | $3,000,000 |
Export Net Income | $1,000,000 |
Tax Rate | 35% |
Tax Paid | $350,000 |
Company With an IC-DISC | |||
|---|---|---|---|
Foreign Trading Gross Receipts | $10,000,000 | ||
Cost of Goods Sold | $6,000,000 | ||
Selling, General and Administrative | $3,000,000 | ||
Export Net Income | $1,000,000 | $1,000,000 | |
IC-DISC Commission Deduction | ($500,000) | $500,000 | |
Tax Base After IC-DISC Commission | $500,000 | $500,000 | |
Tax Rate | 35% | 15% | |
Tax Paid | $175,000 | $75,000 | |
IC-DISC Net Tax Savings $350,000 – ($175,000 + $75,000) = $100,000 |