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Calculating The AllowableIC-DISC CommissionThe allowable IC-DISC reportable commission incomeis the greater of: a transfer price computed underthe rules of IRC §482 (provided there is a contemporaneousdocumentation study), 4 percent of the IC-DISC's qualified export receipts on reselling the property,or 50 percent of the combined taxable incomefrom export sales of the exporter and the IC-DISC– plus 10 percent of export promotion expenses. 19Let's take a look at a hypothetical company to seehow this plays out. We'll limit our calculation toa comparison of the second and third methodsmentioned above. The first method requires that atransfer pricing study be conducted, which is beyondthe scope of this article.Illustration: S-corporation that domesticallymanufactures product for exportHypothetical company financials:Foreign trading gross receipts: USD5,000,000Cost of goods sold: ( USD4,000,000 )Gross margin: USD1,000,000Sales, general, and administration expenses:( USD700,000 ), includes USD300,000 of "exportpromotion expenses"Export sales net income: USD300,000In this case, we'd take the greater of either:4 percent of export gross receipts: USD5,000,000× 0.04 = USD200,00050 percent of export net income: USD300,000× 0.5 = USD150,000Because the export gross receipts figure is larger, ataxpayer would take USD200,000 (4 percent ofexports) and add USD30,000 (10 percent of theUSD300,000 export promotion expenses) to get anallowable IC-DISC commission of USD230,000.Although it has been stated previously that theIC-DISC incentive is limited to materially benefitflow-through entities, owners of C corporationshave implemented IC-DISCs by creatingor using 20 a related flow-through entity, whichwould directly own the IC-DISC. The flowthroughentity would need to be owned by individualswhom the exporting company wishesto benefit from the IC-DISC income taxationbreak. For example, the owners of a US C corporationcould set up a brother-sister corporationas an IC-DISC that's owned in the same proportionby a US LLC. 21The calculation of commission income in this scenariowould be the same as the one above, assumingthe companies have the same financial performance.In order for the taxpayer shareholders ofa C corporation to benefit from the intended taxsavings, the IC-DISC would need to be owned bya separate pass through entity and the additionalstructuring would likely be required.E NDNOTES12The original DISC law was codified in IRC §§ 501 -507,Revenue Act of 1971, Public Law No. 92-178, 85 Stat.535 (1971).The Jobs Act provision where under qualifieddividends are taxed at the capital gains rate was26
extended for 2 years in December 2010. The IC-DISCDISC rules. A detailed discussion of the considerationsconstruct also gained popularity following the Jobsof such structures is outside the scope of this article.Act because the Jobs Act eliminated the extraterrito-10Expenses may qualify to increase the commissionrial income regime, which, in turn, had replaced thein certain cases where they are treated as incurredforeign sales corporation.by the IC-DISC but are not actually incurred by the3In all cases, the capital gains rate is lower than theIC-DISC.corresponding income tax rate.11"SG&A" refers to sales general and administrative4The World Trade Organization has imposed econom-expenses.ic sanctions on certain export incentive predecessors12The discounted price the IC-DISC pays for the receiv-of the IC-DISC, including Extraterritorial Incomeable less the cash collections is qualified as additionalExclusion, created by the American Jobs Creationexport revenue.Act of 2004, which has since been repealed from13See IRC §992(a)(1)(D) .the code and phased out after 2006. The IC-DISC14See IRC §992 .structure has never been sanctioned or challenged15If these tests are not met, certain additional require-by the WTO or courts.ments may be instead used, with respect to a defi-5Starting in 2013, qualified dividends are taxed at 0-20ciency distribution under Treas. Reg. §1.992-3 .percent, depending on the individual's federal income16An IC-DISC will meet this requirement as its commis-tax bracket. Additionally, these dividends may besion income is wholly derived from export sales.subject to the 3.8 percent Medicare surtax.17See IRC §§ 924 , 993(c) .6Starting in 2013, federal income tax rates range from18See IRC §993(b) .10-39.6 percent, depending on the individual's federal19IRC §994(c) . "Export promotion expenses" refers toincome level.those expenses incurred by or on behalf of the IC-7Although exempt for federal income taxation pur-DISC to advance the distribution or sale of exportposes, state tax law may differ.property for use, consumption or distribution outside8This relaxed standard for IC-DISC entities constitutesthe United States, excluding income taxes, a portiona reduced level of corporate substance as comparedof SG&A.to other entity types. Treas. Reg. §1.992-1(a) explains20A new entity need not be created; an existing flow-that these rules are specifically intended to relax thethrough entity will suffice for this planning methodordinary rules of corporate substance.if given ownership of the IC-DISC.9It should be noted that closely held C corporations21To the extent that the ownership is disproportionate,may, in certain circumstances, use related companiesthen taxpayers should consider the implications ofto route foreign sales through and benefit from the IC-estate and gift taxes that may be deemed to apply.27
Page 1 and 2: GLOBAL TAX WEEKLYa closer lookISSUE
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Page 51 and 52: Recurring IssuesRestructuring of th
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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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