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to the Extraterritorial Income Exclusion (EIE) created by the American Jobs Creation Act of 2004, the EIE has been repealed from the Internal Revenue Code beginning in 2005.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 required the completion of Form 8873 to calculate the exclusion. By contrast, an IC-DISC is a separate domestic corporation which 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.