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Are IC DISC Tax Breaks for U.S. Exporters on the Chopping Block?

Posted on July 15th, 2011 | Author: Robert C. Gabrielski

Will the Interest Charge Domestic International Sales Corporation (IC DISC) survive the budget and debt ceiling negotiations in Washington?  Notwithstanding that both Congress and President Obama agree that a strong manufacturing and export base is important to U.S. economic recovery, will the Internal Revenue Code (IRC) be amended to cut back or eliminate the benefits of the IC DISC as part of the budget/debt ceiling negotiations in Washington?

The IC DISC remains, at least through 2012, or sooner if its tax breaks go on the chopping block in Washington, as one of the last big tax break for U.S. companies exporting their wares.

Basically, the IC DISC provides qualifying U.S. exporters with what is, in effect, a 20% tax savings on export income. The IC DISC does that by taking advantage of the differential between the U.S. tax rates on ordinary/business income (35%) and capital gains rates on distributions/dividends for pass-through entities (15%); that benefit is also available for non-U.S. parents/stockholders of exporters.

Structurally, the qualifying U.S. exporter or its owners form a U.S. corporation that elects to be treated as an IC DISC under the IRC. The U.S. manufacturing/operating company pays a commission to the IC DISC for the sale/distribution of its products. That commission is deductible to the manufacturing/operating company, reducing its taxable income which would otherwise typically be taxed at ordinary income rates. The commission received by the IC DISC is exempt from tax under the IRC. Finally, the IC DISC can make a distribution of the commissions received to its owner (whether a parent company, pass-through entity or individual). The distribution (or “deemed distribution” by a pass-through entity not currently making a distribution) would be taxed at U.S. capital gains rates (currently 15%) or to the non-U.S. parent at the applicable withholding rate established by treaty.