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IC-DISC - an easily implemented export incentive

USA
1 Aug 2013

In this day and age most, if not all, can agree that the Internal Revenue Code has grown complicated and unwieldy. The Code's complexity is such that taxpayers forgo many of the credits and incentives in it. Taxand USA discusses IC-DISC - an export incentive that taxpayers can implement with ease.

IC-DISCs are US corporations that are not subject to income taxes. Generally, IC-DISC shareholders are subject to tax on dividends actually received from the IC-DISC. An interest charge applies to earnings that are not actually or deemed distributed. Recent developments, such as a robust treaty network among the US and many EU members providing favourable withholding rates on dividends and the extension of the Bush tax cuts with regard to qualified dividends, have created new planning opportunities for IC-DISCs. Under the revised treaties, withholding rates on dividends can range from 0 to 15%, even at the high end, withholding is much lower than the 30% rate applicable under US domestic tax laws.

Various requirements must be met in order to benefit from the IC-DISC regime. For example, an IC-DISC must be an eligible corporation organised under the laws of any state or the District of Columbia with a single class of stock having a minimum par value of $2,500. In addition, the corporation must elect to be an IC-DISC via the filing of Form 4876-A. While existing corporations may make the election at any time during the 90-day period that immediately precedes the beginning of the taxable year, new corporations must make the election within 90 days after the beginning of the taxable year. The IC-DISC must also comply with the following rules:

  • Gross Receipts Test - 95% of its gross receipts must be "qualified export receipts." Qualified export receipts include, but are not limited to, sales or leases of "export property" or commissions related thereto, services related to export sales/leases, interest on qualified investments (eg, producer's loan) and receipts from engineering or architectural services related to construction projects located outside the United States. Export property is property:
    • Manufactured, produced, grown or extracted in the US by a person other than the IC-DSIC, held primarily for sale, lease or rental for direct use, consumption or disposition outside the US
    • With not more than 50% of the fair market value attributable to articles imported into the US
  • Asset Test - 95% of the adjusted basis of its assets must be "qualified export assets" on the last day of the taxable year. Qualified export assets include, but are not limited to, (a) export property (ie, inventory), (b) cash not in excess of working capital needs, (c) export property assets, (d) accounts receivable and (e) producer loans. To the extent cash in excess of capital needs is accumulated in the IC-DISC in order to benefit from cumulative deferral, this test will be harder to satisfy.

Your Taxand contact for further queries is:
Ernesto Perez
T. +1 305 704 6720
E. eperez@alvarezandmarsal.com

Taxand's Take

The benefits that an IC-DISC using a commission agreement structure can afford taxpayers make any potential challenges in implementing an IC-DISC (ie, how does a taxpayer ensure component parts purchased from third parties meet the content requirement, potential for an IC-DISC commission to disrupt partnership allocations within a partnership that has US and foreign partners etc) pale in comparison. Taxpayers should carefully review their business operations with an eye to potential sales that could qualify as qualified export receipts. Given the ease of implementation, taxpayers with even a low volume of relatively profitable export sales may obtain significant benefits. 

Taxand's Take Author