Permanent tax savings available through the use of an IC-DISC.

• Author: Strauss, Kyle J.
• Position: Interest charge domestic international sales corporation

The interest charge domestic international sales corporation, or IC-DISC, provides a permanent tax benefit to entities that export products that are manufactured, grown, or extracted in the United States. The idea is to provide an incentive for keeping production in the United States, as opposed to seeking cheaper costs outside the country.

This provision began as a domestic international sales corporation (DISC) only. It was enacted by Congress in 1971 and, as mentioned above, was intended to encourage domestic production and U.S. exports, thereby strengthening the economy. The original benefit was a long-term deferral of taxable income. This deferral was indefinite as long as the DISC earnings were reinvested in export operation assets and were not distributed to shareholders. The Tax Reform Act of 1984 (passed as part of the Deficit Reduction Act of 1984, RL. 98-369) terminated all DISC elections, and the rules were modified to add an interest charge on the deferred tax of the undistributed earnings. The interest charge was to be paid to the Treasury. This was the beginning of the IC-DISC.

Other interpretations of the rules were formed with the implementation of the foreign sales corporation and the extraterritorial income exclusion, but these laws have since been repealed because they were ruled illegal subsidies by the World Trade Organization. The IC-DISC, however, grew more popular after the Jobs and Growth Tax Relief Reconciliation Act of 2003, RL. 108-27, which lowered the capital gains tax rates to 0%-15% and included similar rate reductions on qualified dividends. While interest on any undistributed earnings is due to Treasury, the long-term tax deferral has evolved into a permanent tax savings vehicle that is, in general, underused.

To take advantage of these benefits, an exporting organization must form a new C corporation and elect IC-DISC status. In general, an IC-DISC is exempt from federal tax on all earnings. The IC-DISC is essentially a paper entity that has no separate operations. There are two types of IC-DISCs: (1) a commission IC-DISC, discussed below, which acts as a commission agent for an exporting entity and (2) the less commonly used "buy/sell" IC-DISC, which takes title to the goods and resells them abroad.

For a commission IC-DISC, an agreement is required between the IC-DISC and the exporting entity that establishes a commission to be paid on qualifying sales. The commission is income to the IC-DISC, which is...