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The Interest Charge – Domestic International Sales Corporation (IC-DISC) is the last surviving export incentive for US businesses. Unlike other export incentives that have been repealed due to economic sanctions by the World Trade Organization (WTO), the IC-DISC remains in tact and is now more attractive than ever due to currently low dividend tax rates. The IC-DISC has been in existence since 1984 and has never been challenged by the WTO.
The IC-DISC provides U.S. exporters and their shareholders permanent tax savings (20% of net export income). The basic operation of an IC-DISC can be demonstrated as follows:
- A US exporter (or shareholder(s)) forms an IC-DISC corporation.
- The US exporter pays a deductible commission (at say an est. regular tax rate of 35%).
- The IC-DISC pays no U.S. income tax on the commission income.
- The commission income is accumulated and untaxed in the IC-DISC.
- The commission income is taxed when the IC-DISC decides to pay a dividend to its shareholder(s) (at the preferred qualified dividend tax rate of 15%).
- The tax benefit is a 20% tax savings (35% regular tax rate less 15% dividends tax rate).
Since Oct. 1, 2000, U.S. exporters have been allowed to exclude certain export sales from federal taxable income. The tax benefit is an exclusion of 15 to 30 percent of export sales income from U.S. taxation. This incentive was phased out in 2007; however, prior year federal tax returns can be amended in order to obtain these income tax cash refund benefits.
The EIE tax benefit is generally available to any U.S. taxpayer who exports property that is manufactured or produced within the U.S. Businesses that qualify for the benefit include U.S. manufacturers, producers, wholesalers and distributors of any goods that are either manufactured or produced with in the U.S.
Transactions that qualify for ETI benefits include sales to foreign purchasers; sales to U.S. purchasers, where the goods are destined for use in a foreign country and certain leasing transactions.
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