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FEATURED ARTICLESISSUE 30 | JUNE 6, 2013IC-DISC: Still Viable ForFlow-Through Entitiesby George Koutouras, Partner, and LindseyMoore, Manager, Moss Adams LLPThe interest charge domestic international salescorporation (IC-DISC) structure has gainedpopularity in recent years for tax planning becauseof the income tax savings attained by eligiblecompanies. However, it's not a new concept– the domestic international sales corporation(DISC) and its corresponding export tax incentiveswas first introduced in 1971, 1 while theIC-DISC has existed in its current form withsimilar incentives to those in existence prior tothis amendment since the Jobs and Growth TaxRelief Reconciliation Act of 2003 2 was signedinto law. The Jobs Act was the legislation thatalso first lowered the taxation of qualified dividends(including IC-DISC dividends) from theordinary income tax rate to the much lower capitalgains tax rate 3 .Th e IC-DISC's policy aim remains the same asthe DISC's: to motivate US manufacturers tomake products domestically and stimulate USexports. However, since the 1970s the changingbusiness environment has led to an increasedmobility of resources and expansion to new markets– even for smaller US companies that mayhave historically limited their market to domesticcustomer sales – potentially undermining theIC-DISC's efforts. 4Basic Mechanics Of The IC-DISCTypically, a flow-through entity forms an IC-DISCas a domestic subsidiary corporation through whichall foreign sales of US goods and services are made.The tax benefits of the IC-DISC structure are generatedby the tax rate differential between ordinaryincome and dividend income for individuals. As aresult of the structure, export income is subject toan effective tax rate of up to 23.8 percent 5 insteadof the ordinary individual income tax rate of upto 39.6 percent. 6 Effectively, the operating corporationreceives a tax deduction for the commissionpayment to the IC-DISC, but the IC-DISC itselfdoes not pay tax on the commission income. Thenthe IC-DISC distributes its earnings to its shareholders,which are typically either individuals or aflow-through entity owned by individuals. The distributionis treated as a qualified dividend and, assuch, taxed at capital gains rates.In its basic form, an IC-DISC is a domestic, taxexempt7 corporation whose entity structure can becharacterized as a "paper" corporation; that is, it's notrequired to perform services, have employees, have24
office space, or own tangible assets. 8 With certainexceptions noted below, the benefit of an IC-DISCstructure has been essentially eliminated for taxablecorporations. It has, however, remained a viable taxplanning tool for nontaxable entities or flow-throughentities ( i.e., partnerships, LLCs taxed as partnerships,or corporations subject to Subchapter S) 9 .Key Characteristics To MateriallyBenefit From The IC-DISC StructureThe IC-DISC must be directly owned by a flowthroughcompany.A significant amount of production must be performeddomestically (with less than 50 percentof product components from foreign sources).A meaningful amount of gross receipts must befrom export sales.If the IC-DISC can directly 10 pay foreign SG&A 11expenses, the benefit is increased.If the product exporter can factor its receivablesto the IC-DISC, additional export revenue maybe generated 12 .Requirements For Forming An IC-DISCOn the compliance front, a corporation must elect,using Form 4876-A, to be taxed under the IC-DISCrules 13 . There are also the following qualitative andquantitative requirements a corporation must satisfyto be considered an IC-DISC and receive beneficialtax treatment: 14The corporation must be a domestic US entity,meaning it's incorporated in one of the 50 USstates or the District of Columbia.An IC-DISC must maintain a minimum capitalization(par value for its stock) of at leastUSD2,500 every day of the year for which it seeksIC-DISC treatment.The IC-DISC may only have one class of stock(the par value of which, in the aggregate, mustmeet the capitalization minimum requirementstated above).Th e qualified export receipts and qualified exportassets tests must be met 15 to ensure thatthe IRS's objective in benefiting and encouragingUS-sourced exports is served. The qualifiedexport receipts test is satisfied if at least 95 percentof the IC-DISC's annual receipts are fromqualified export receipts (revenues from the saleor lease of qualified export property and certainrelated services). 16Qualified export property is manufactured inthe United States by someone other than an IC-DISC, with not more than 50 percent foreigncontent, and ultimately delivered outside theUnited States within a year from the sale andnot further manufactured or processed. 17 Th equalified export assets test requires that at least95 percent of the assets held by the IC-DISCat year-end are qualified export assets (assetsheld in connection with exporting activities:the sale, lease, rental, storage, servicing, etc. ofexport property). 18Th e IC-DISC must meet other administrativerequirements, such as maintaining its own set ofbooks and records (it's a best practice that it alsohas a separate bank account).25
Page 1 and 2: GLOBAL TAX WEEKLYa closer lookISSUE
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Page 17 and 18: Th e Government pointed out in part
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Page 21 and 22: through which they can clamber in o
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Page 27 and 28: extended for 2 years in December 20
Page 29 and 30: Financial transactions ( e.g. inter
Page 31 and 32: OECD Section E - Redraft On Safe Ha
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Page 37 and 38: State Interest And IntangibleExpens
Page 39 and 40: States generally define "intangible
Page 41 and 42: Code Sec. 1563(controlledgroup)Stat
Page 43 and 44: ConnecticutGeorgiaIllinoisIndianaRe
Page 45 and 46: Rhode IslandTennesseeVirginiaWest V
Page 47 and 48: Table 4. Comprehensive Income Tax T
Page 49 and 50: include federal interest income, st
Page 51 and 52: Recurring IssuesRestructuring of th
Page 53 and 54: M&A. Nick has extensive experience
Page 55 and 56: and consumers." As Germany and Chin
Page 57 and 58: on many levels. The panel found tha
Page 59 and 60: equirements placed on the states, i
Page 61 and 62: NEWS ROUND-UP: COUNTRY FOCUS - ITAL
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Page 65 and 66: ates - such that, in 2014, the 4 pe
Page 67 and 68: NEWS ROUND-UP: FTTISSUE 30 | JUNE 6
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Page 71 and 72: Finally, the Federal Council veheme
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TAX TREATY ROUND-UPISSUE 30 | JUNE
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CONFERENCE CALENDARISSUE 30 | JUNE
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Key speakers: John Capasso (Alvarez
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Key speakers: TBA6/27/2013 - 6/27/2
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6/14/2013 - 6/14/2013http://www.con
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THE CYPRUS BAIL-OUT ANDFOREIGN CLIE
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Chair: Jonathan Levy (Partner, Reyn
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IN THE COURTSISSUE 30 | JUNE 6, 201
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deduct VAT as a result of incomplet
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where the taxpayer had somehow offs
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