ETI and IC-DISC export tax benefits for government contractors.

• Author: Ballard, Christine
• Position: Extraterritorial income exclusion, interest-charge domestic international sales corporation

As contracts for the Middle East and tsunami-ravaged areas are being awarded, government contractors, as well as traditional commercial exporters, find themselves exporting goods and services through defense, humanitarian and developmental programs sponsored directly or indirectly by the U.S. Unfortunately, government contractors have to jump through many hoops before they can enjoy the permanent tax savings, available under the extraterritorial income exclusion (ETI) regime or the interest-charge domestic international sales corporation (IC-DISC) regime.

Limitations

The ETI and IC-DISC rules look at where goods and services are consumed and, especially when the U.S. may be concerned, who the customer is. For ETI purposes, exports are goods consumed outside the 50 states, the District of Columbia and Puerto Rico. Under the IC-DISC regime, domestic consumption includes shipments to U.S. possessions. As a result, traditional manufacturers and distributors may find that selling goods for resale on foreign military bases, for example, is the first limitation to affect them. Sales of nondurable goods to U.S. military agencies for resale abroad through post exchanges are qualified export receipts; however, sales to the U.S. Department of Defense (DOD) for resale abroad at military commissaries are not.

Beyond resale of exports at commissaries, there are three situations in which exports are not eligible for tax benefits:

1. Property for ultimate use inside the U.S.;

2. Property for use by the U.S. or an instrumentality of the U.S., if the use of the property is required by law or regulation; and

3. Transactions subsidized by the U.S. or an instrumentality of the U.S.

Opportunities for Government Contractors

Opportunity #1--a narrow definition of U.S.: The definition of the U.S. in the tax law includes the 50 states, the District of Columbia, Puerto Rico and, for IC-DISCs, possessions. Other legal, diplomatic or military definitions of the "United States" are not applicable. Goods sold to U.S. embassies, for example, may be qualified exports, even though for legal purposes an embassy is U.S. soft.

Opportunity #2--bidding circumstances: Sometimes, government agencies are required to "buy American." However, the majority of contracts ate put out to bid when the preference (but not the requirement) is for the government to purchase American-made goods, and these sales are eligible for tax benefits. Understanding when a department or agency is or is...