In 1984, Congress added a provision to the Internal Revenue Code called the “IC-DISC” (Interest Charge Domestic International Sales Corporation) program in order to promote US Exports. The program, unfortunately, has been largely overlooked by most exporters. While over 6,000 small and medium businesses take advantage of the tax incentives of the IC-DISC, thousands more [...]
In 1984, Congress added a provision to the Internal Revenue Code called the “IC-DISC” (Interest Charge Domestic International Sales Corporation) program in order to promote US Exports. The program, unfortunately, has been largely overlooked by most exporters. While over 6,000 small and medium businesses take advantage of the tax incentives of the IC-DISC, thousands more that are eligible are failing to do so.
The bottom line is that the tax laws provide an opportunity for a company to use an IC-DISC to have the tax on 50% of its export income reduced by more than 50%.
Here’s how it works. The U.S. government allows U.S. exporters to form a corporation and designate it as an “IC-DISC.” Essentially, the IC-DISC is a “paper” corporation designed to receive “commissions” on export sales made by the U.S. exporter. Those commissions are deducted from the overall selling price of the goods and paid over to the IC-DISC. The IC-DISC pays no corporate tax on those commissions. The commissions are then distributed to the shareholder of the IC-DISC. This distribution is a dividend, and will be taxed at the capital gains rate, which is currently 15%. In effect, the U.S. exporter is converting a 35% corporate tax on income representing the commission, to a 15% capital gain.
The failure to take advantage of this program has resulted in substantial lost profits for U.S. exporters, not to mention the loss of a competitive advantage against foreign companies. It is not too late, however. So long as there continues to be a differential between the capital gains rates and the corporate tax rates, these benefits can still be attained.
To read more about the IC-DISC program, click here.
Source: McNees Wallace & Nurick LLC via SEDA-COG Export Development
Reducing the impact of import duties and taxes on budgets is an important consideration for most companies, especially given today’s demanding financial situation. As such, transfer pricing is a major corporate tax issue – by taking advantage of differences in taxation rates between jurisdictions, multinational enterprises (MNEs) can distribute their tax liabilities to reduce their [...]
Reducing the impact of import duties and taxes on budgets is an important consideration for most companies, especially given today’s demanding financial situation. As such, transfer pricing is a major corporate tax issue – by taking advantage of differences in taxation rates between jurisdictions, multinational enterprises (MNEs) can distribute their tax liabilities to reduce their overall tax burden and increase profitability. However, because transfer pricing impacts customs valuation (and vice versa), discrepancies between the two can also create significant trade compliance challenges for companies.
In recent years, the issues associated with using inter-company transfer prices for customs purposes have begun to receive greater attention from national tax and customs administrations around the world. As a consequence, importers are now more frequently being asked to demonstrate how their inter-company transfer prices are also acceptable customs values. This is because while the rules for transfer pricing and customs valuation share similar goals, the differences between methodologies utilized (e.g. profit allocation as opposed to product valuation) may result in a non-compliant determination of dutiable value. Simply relying on tax-related documentation is increasingly being regarded as unsatisfactory for purposes of customs valuation and MNEs that focus attention solely on transfer pricing are regularly encountering problematic customs issues as a result.
With the foregoing in mind, we will be exploring this issue in a series of articles over the next several weeks to help you better understand the various conflicts involved and more effectively manage the differences to the benefit of your overall trade compliance strategy.
