Author:
Paul Ferreira, CPA
President of Export Tax Management
E: [email protected]
Edited by:
Grant Gilmour, B.SC., MBA, CPA BC, CA, CPA AZ
Integra Tax World Newsletter Editor
E: [email protected]
The IC-DISC is the most effective tax planning strategy for your clients who deliver their products for use outside of the United States. In 2017, the U.S. Congress enacted the Tax Cuts and Jobs Act of 2017. This landmark legislation provides permanence for the IC-DISC in 2018 and beyond. Many privately held companies that have products delivered to customers outside of the United States, including Canada and Mexico, are significantly reducing their US federal income taxes related to their export sales. The growing demand for U.S. products in emerging foreign markets has driven the demand for U.S. products to an all-time high, and every exporter needs to have an IC-DISC in place. If your exporting clients do not have an IC-DISC, you miss a tremendous opportunity to reduce your client’s federal income tax burden.
The IC-DISC was introduced by the Nixon administration in 1971. The primary legislative purpose was to encourage U.S. companies to remain in the United States and export their products abroad and to discourage U.S. companies from relocating overseas where labor was available at a much lower cost. This same federal tax benefit exists today for all privately-held exporters. Although much controversy has erupted over export subsidies in the past, the World Trade Organization, the European Union, and other trade organizations have never challenged the IC-DISC. Moreover, the current administration favors the IC-DISC, and this substantial tax savings incentive may last a long time. As the current administration is working to keep as many jobs in the United States and avoid a further mass exodus to foreign markets, they recognize the IC-DISC as the predominant vehicle to allow privately-held companies to be competitive in foreign markets while remaining in the United States and employing U.S. workers today and in the years to come. The current administration is working diligently to create and keep jobs in the United States, and legislation has proven that the administration truly recognizes the IC-DISC as the most powerful federal tax incentive to meet these needs.
The IC-DISC is a separate corporation from the exporting company; however, the IC-DISC does not pay any federal income tax. It is a domestic corporation that elects to be an IC-DISC and is not taxed on its income. The shareholders of the IC-DISC are taxed when the income is distributed as a qualified dividend. The exporting company pays a commission to the IC-DISC that will result in a 30% to 37% deduction for the exporting company. The IC-DISC then pays qualified dividends to the shareholders that are taxable at 23.8%. The net result is a tax rate reduction of 6.2% to 13.2%. Although the IC-DISC is a separate company, it receives a commission and pays dividends. The IC-DISC performs no other function and will never interrupt the normal course of business for your exporting clients.
The commission that the exporting company pays to the IC-DISC is determined by the Intercompany Pricing Rules set forth under IRC §994. Basically, the commission is 4% of export sales or 50% of the net taxable income from export sales. However, there is a further tax savings opportunity available to exporters. The Internal Revenue Code allows an exporting company to calculate the commission paid to their IC-DISC at the transaction or invoice level. For example, a scrap metal exporter may have some export transactions with very low margins, such as scrap iron and higher margin export sales, such as zinc or copper, in the same year. The greatest commission for these low-margin transactions are realized by employing the 4% of export sales method. In addition, the high margin export sales such as zinc or copper would yield the greatest commission by utilizing the 50% of net taxable income method
The Internal Revenue Code allows the exporter to choose the method for each transaction that produces the greatest tax savings overall. A transaction optimization can significantly increase the commission paid to the IC-DISC. Many exporters have thousands of export transactions, and a combination of international tax expertise and sophisticated IC-DISC transaction optimization software can realize the most optimal federal tax savings. In almost every case, the cost is minimal compared to the federal tax savings generated by thorough transaction optimization.
One consideration to remember is that the IC-DISC must be incorporated before any tax savings can be realized. Once the IC-DISC is incorporated, your client can realize the tax savings from that day forward. There are many filing requirements and additional and complex methods to compute the commission paid to the IC-DISC and maximize the overall tax savings. Still, an experienced international tax professional with expertise in this onerous area of taxation and the necessary resources can assist you in realizing the most federal tax savings from an IC-DISC. Without exception, the implementation, maintenance, and transaction optimization cost of an IC-DISC is minimal compared to the tremendous federal tax savings available to your exporting clients. This is the one boat your clients cannot afford to miss.
About the Author:
Paul Ferreira is a Certified Public Accountant and president of Export Tax Management, Inc. in Charleston, South Carolina. Export Tax Management specializes in IC-DISC implementation, maintenance, and transaction optimizations for IC-DISCs throughout the United States and ensures that every client realizes the most federal tax savings allowable under the Internal Revenue Code.
Integra Member Profile:
https://www.integra-international.net/find-an-integra-firm/find-firm-profile/name/paul-ferreira/
Firm Website:
https://www.exporttaxmanagement.com/
