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FortisTCS provides a complete management and compliance service that identifies and obtains tax benefits that are achieved through the use of an Interest Charge – Domestic International Sales Corporation (“IC-DISC”).
With the repeal of the Extraterritorial Income Exclusion (“ETI”) having taken place and ETI benefits eliminated after 2006, the only option available for exporters to obtain tax benefits is through the Interest Charge-Domestic International Sales Corporation (“IC-DISC”). These benefits more powerful than those available via the ETI and are based on the availability of realizing qualified export income in the form of qualified dividends rather than ordinary income.
Originally enacted in 1971 an IC-DISC is a domestic corporation, authorized by the Internal Revenue Code. In its general function an IC-DISC earns a commission based on the export sales of its related supplier, as detailed in a commission agreement between the exporting company and IC-DISC, and the related supplier receives a tax deduction for this commission. Due to the rules established by the Internal Revenue Code, the IC-DISC does not pay federal income tax on commissions rather it can either distribute the earnings as a taxable dividend to its shareholders, or retain the earnings, deferring the taxation until the earnings are distributed.
As a result of the repeal of the ETI regime, taxpayers are can revert back to a means to achieve significant export tax benefits through the tax policies as originally set under the IC-DISC regime in conjunction with the enacted Jobs and Growth Tax Relief Reconciliation Act of 2003 which lowered the dividend tax rate to 15%.
The dividends paid by the IC-DISC to its U.S. individual shareholders are taxable at a maximum rate of 15% rather than the maximum tax rate of 35%. The other benefit of the IC-DISC comes from the fact that the commission paid to the IC-DISC is an expense that is deductible at the marginal tax rates paid by the operating company.
An IC-DISC is essentially a domestic “paper” entity utilized as a tax savings vehicle. Because it is a “paper” entity, it does not require any specific substance, form, employees, tangible assets, or office space.
The basis for how an IC-DISC functions is the following:
- FortisTCS creates a tax-exempt IC-DISC for an owner-managed (non-publicly traded) company with exporting activities.
- Based on calculations and financial analysis completed by FortisTCS, the operating company, continuing to operate as it always has, pays the IC-DISC a commission.
- The operating company deducts the IC-DISC commission from ordinary income which is taxed at 34%-35%.
- The IC-DISC pays no tax on the commission and distributes it in the form of dividends to shareholders that are taxed at the capital gains rate of 15%.
- The resulting tax savings is 20% +.
The benefits available under the IC-DISC regime are effective on a going forward basis, rather than being available to all prior open tax periods. Because of this, the longer a taxpayer waits to form an IC-DISC, the less their available benefits will be. Due to some of the flexibilities and the effectiveness afforded by the IC-DISC regime, there are a multitude of benefits that can be realized, including:
- Lower effective tax rate and permanent tax savings on exports
- Reduced taxable base of the U.S. taxpaying operating company
- Elimination of double taxation in C Corporations
- Increased cash paid as qualified dividends to shareholders
- Increased cash flow for operating company
- Deferral of IC-DISC income from current taxation and reduction of the cost of working capital for export growth
- Ability to facilitate estate, retirement, and succession planning
- Means to leverage the cost of capital
- Protection of IRC safe harbor commission provisions
The qualification requirements under the IC-DISC regime are very similar to those under the ETI regime. Any type of company that is involved in exporting is potentially eligible to obtain IC-DISC benefits for federal income tax purposes for income derived from goods that are:
- Manufactured, produced, grown, or extracted within or outside the United States
- Held primarily for sale, lease, or rental, in the ordinary course of trade or business for direct use, consumption, or disposition outside the United States
- Not more than 50% of the fair market value of these goods are attributable to: articles manufactured, produced, grown, or extracted outside the United States; or direct costs for labor performed outside the United States
Additionally, companies that lease, rent, or conduct services related to such property; perform engineering or architectural services for construction projects outside the United States; or perform managerial services related to the furtherance of exports, also may qualify for obtaining IC-DISC.
Based on the principles and requirements pertaining to an IC-DISC, our approach at FortisTCS has helped hundreds of eligible companies realize and look forward to maximizing and obtaining significant tax savings for years to come. In fact, a large portion of those companies’ that FortiTCS helps in the IC-DISC area also receive significant tax refunds through our ETI Recovery Services, amplifying their tax savings.
The first phase of FortisTCS’ IC-DISC services is to conduct a Feasibility Study/Assessment (estimate benefit/cost to obtain tax savings). Once it is determined an IC-DISC makes sense for your company move forward with the following steps:
- Establishment of IC-DISC
- Analyze ownership of operating company and determine most effective means to establish IC-DISC ownership, taking into consideration of specific estate planning strategies that may reduce long-term tax burdens
- Prepare incorporation documents, agreements, and required tax documents to establish the IC-DISC
- Management of IC-DISC
- Develop and implement procedures and methodologies to maximize benefits available under the IC-DISC taking into consideration specific export considerations, operating company cash flow and expense strategies, and adhering to strict IC-DISC requirements established by the IRS
- Prepare all tax compliance and return documents
- Manage and support exams, appeals and litigation
Included in our approach are the following underlying services in the evaluation, establishment, and management of the IC-DISC:
- FAS109 Valuation of IC-DISC Utilization
Get the financial statement benefit of your IC-DSIC benefits by determining the extent to which you can recognize them. Our valuation review includes identifying audit risks and additional opportunities and recommendations on how to overcome the former and capitalize on the latter.
- Eligibility Review
Our professionals have reviewed numerous companies and examined tax law to determine that certain companies previously told by their existing CPA, including big accounting firms, that they are not eligible to establish an IC-DISC actually are eligible to do so. These errors are a result of law changes, the mistaken use of previous regime requirements, utilizing incorrect calculation methods, etc. As a result of our Eligibility Review, these companies have been able to generate companies hundreds of thousands of dollars in tax savings.
- Transaction-by-Transaction Review
Profits on individual transactions may vary or not be achieved, and fixed costs related to export sales may not be the same as domestic sales. Because of this, using our unique transaction-by-transaction review and analysis, we have increased the profitability related to companies’ export sales resulting in significant additional IC-DISC benefits.
- Proactive Future Planning and Review of Systems & Methodologies
We've helped companies develop and implement procedures and methodologies to identify, document, and calculate future export tax benefits as a result of their developing new markets and establishing new operating entities, typical of ongoing operational entities, that are available under the IC-DISC regime, efficiently and effectively.
- Exam, Appeals and Litigation Support
We have supported hundreds of million of dollars in IC-DISC benefits.
Your Business may be entitled to substantial IC-DISC tax benefits. Our proprietary methodology and expertise can identify, manage, and maximize these government export tax benefits and capture these immediately going forward.
Contact your FortisTCS consultant today to learn how FortisTCS can help you capture and recover government sponsored Extraterritorial Income Exclusions for your business.
Request a NO-OBLIGATION, NO-COST Feasibility Study that will give you valuable information, specifically the amount of export tax benefits we can recover for your company as a cash refund for prior years and the potential of significant future tax savings for your export activities.
If you have not already connected with a FortisTCS consultant, please call Santosh Varughese, Managing Director, at (713) 830-7638 ext. 320, or via email at  , or click here to contact us via the web.
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