Tax Benefits of IC-DISC for U.S. Exporters
The major tax benefits of the IC-DISC (Interest-Charge Domestic International Sales Corporation) tax regime to U.S. exporters are deferral of U.S. tax on up to $10,000,000 of annual commission income and on additional export-related services. This deferral can be indefinite and is only minimally taxed as an interest charge (presently 0.15%) to the U.S. shareholder on the deferred tax liability. In addition to deferral, distributions from the IC-DISC are currently taxable under favorable 20% dividend rates to individual shareholders – while providing the operating company a tax deduction. The steps required to obtain these significant benefits are straightforward: domestic entity set-up, IC-DISC election and annual monitoring of Income and Asset levels. The IC-DISC regime's substantial tax benefits and modest administrative costs warrant its consideration by all U.S. exporters.
Basic IC-DISC benefits are easily accessed by forming a domestic C-Corporation, filing an IC-DISC election and periodically monitoring asset and income levels for compliance with export activity requirements. U.S. exporters wanting to increase the IC-DISC deferral (and dividend) benefits above the $10,000,000 level have an option of adding factoring and export outsourcing service functions to their IC-DISC.
The IC-DISC tax benefit comes by way of a commission payment from the exporter to the IC-DISC. The commission payment is an actual payment from the U.S. Exporter to the IC-DISC and is determined as either 4% of the U.S. exporter's qualified export receipts or 50% of the exporter's taxable income (whichever is greater). The commission payment to the IC-DISC is fully deductible for the U.S. exporter and is only minimally taxable on either a deferral basis or at favorable dividend rates.
Generally, shareholders may defer up to $10,000,000 of annual commission income in the IC-DISC. If the IC-DISC defers this income, there is a shareholder level tax on the deferred tax. The tax is the interest charge—hence the term "Interest-Charge DISC"—on the deferred tax liability at the base period T-bill rate (the annual rate of interest equivalent to the average investment yield of U.S. Treasury bills with annual maturities; the rate is about 0.15% as of March 2013). Again, this tax is not assessed to the IC-DISC but is rather born at the shareholder level.
The American Taxpayer Relief Act of 2013 set the maximum qualified dividend tax rate to 20% for married taxpayers with taxable income greater than 450,000. Taxpayers with incomes lower than 450,000 would have a rate of 15%.
In addition to commission income, the IC-DISC may earn other types of export-related income to increase deferral above the $10,000,000 limit. For example, U.S. exporters with up to $300,000 of export sales may sell receivables to the IC-DISC at a discount and allow the IC-DISC to earn factoring income that is deferred from U.S. tax. Similarly, the IC-DISC may perform promotion activities for the U.S. exporter and earn revenue on a cost-plus 10% basis that is also eligible for U.S. tax deferral. In addition to deferral benefits, these other types of income can be distributed back to qualified shareholders at the reduced dividend rates.