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Education Apr 14, 2017

A Powerful But Underutilized Tax Subsidy For U.S. Exporters

Sponsored Content provided by Robert Burrus - Dean , Cameron School of Business - University of North Carolina Wilmington

This Insights was contributed by Dr. Allison Evans, associate professor of accounting, Cameron School of Business

U.S. exporters can potentially generate large tax savings - roughly 20 percent of their original tax bill - by forming an IC-DISC (Interest-Charge Domestic International Sales Corporation). The most common type of IC-DISC acts, at least on paper, as the exporter’s sales agent. Yet, while the IC-DISC does have recordkeeping and capital requirements, it does not need to have a physical location, employ a single person or interact with any customers. In essence, it can be invisible to those who do business with the exporter, but yield a substantial reduction in the exporter’s tax bill.

Is this type of strategy a tax shelter? According to regulations issued by the U.S. Treasury Department, it is not. Congress originally created this type of entity in the tax law to help U.S. exporters, and the Treasury Department and courts continue to uphold it as a valid, legal tax-planning option.

The IC-DISC is a powerful tax subsidy because it takes advantage of a rate differential embedded in the tax laws. Once formed, an exporter essentially uses it to convert approximately half of its ordinary business income (taxed at higher statutory rates) into dividend income for its underlying owners (taxed at lower, preferential rates).  The resulting tax savings can be significant.

Though manufacturers may first come to mind as exporters, many other types of businesses can qualify, as well. Distributors of domestic products qualify, for example, as do manufacturers whose product is part of an exported good (such as car tires or seats). Other examples include: engineering or architectural service firms who consult on foreign projects; software developers; companies that rent or lease exported property; companies that provide warranty or repair services related to export property; and agricultural cooperatives.

As focus increases on U.S. import and export policies, it is important for exporters and the public to know about this existing tax subsidy. The IC-DISC strategy works best for businesses with a small number of owners. While this constraint does eliminate many exporters from the potential pool of users, there are numerous exporters that could qualify to use it but do not.
Users of another tax subsidy for companies who sell products made or grown in the U.S. - the Domestic Production Activities Deduction – can use the IC-DISC strategy, as well.

Any company interested in exploring the option of creating an IC-DISC should do so with the help of a tax professional. Several public accounting firms have teams that specialize in this area.

Robert T. Burrus, Jr., Ph.D., is the dean of the Cameron School of Business at the University of North Carolina Wilmington, named in June 2015. Burrus joined the UNCW faculty in 1998. Prior to his current position, Burrus was interim dean, associate dean of undergraduate studies and the chair of the department of economics and finance. Burrus earned a Ph.D. and a master’s degree in economics from the University of Virginia and a bachelor’s degree in mathematical economics from Wake Forest University. The Cameron School of Business has approximately 60 full-time faculty members and 20 administrative and staff members. The AACSB-accredited business school currently enrolls approximately 2,000 undergraduate students in three degree programs and 200 graduate students in four degree programs. The school also houses the prestigious Cameron Executive Network, a group of more than 200 retired and practicing executives that provide one-on-one mentoring for Cameron students. To learn more about the Cameron School of Business, please visit http://csb.uncw.edu/. Questions and comments can be sent to [email protected].


 

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