CONTACT US

Increasing IC-DISC Revenue – Maximize the Export Tax Incentive

The IC-DISC Tax Benefit 

Benefit:

Qualified US exporters get a permanent 20% tax savings 

  • A US exporter sets-up a paper company; a conduit for export sales
  • US exporter pays a commission to the IC-DISC -- deduction at 35%
  • IC-DISC pays a dividend to its shareholders – taxed at 15%

Good Candidate: 

  • Exporter of US- manufactured products with > 50% US content
  • Engineers and architects with construction projects outside the US
  • US taxpayer should be profitable (i.e., tax-paying) in the US
  • S-Corps, LLCs, and privately-held C-Corps

Safe Harbor Commission IC-DISC
IRC Sec. 991 - 997

Overview: 

  • The "safe harbor" commission amount is treated as income to the IC-DISC and is tax deferred up to $10,000,000 of FTGR and taxed as a dividend when distributed to US parent or affiliate.
  • The "safe harbor" commission is calculated at 50% of combined taxable income (CTI), 4% of foreign trading gross receipts (FTGR), or marginal costing whichever method yields the greatest benefit (IRC Sec. 994(a))

Client Impact: 

  • Entirely transparent no change to client’s current business operations

Business Impact: 

  • US Parent must set up paper company with separate books and bank accounts 

CTI Transfer amount up to 50% or 4% of FTGR 

Increase the IC-DISC Benefit 

Maximize Export Gross Receipts: 

  • Related & Subsidiary Services
  • Export Promotion Expenses

Select Best Pricing Method: 

  • Transaction by Transaction Pricing
  • Marginal Costing

Add Functions & Risks: 

  • Buy / Sell IC-DISC
  • Factoring Export Receivables
  • Foreign International Sales Corporation

Maximize Export Gross Receipts 

Related & Subsidiary Services:  

  • FTGR includes R&S Services within the Controlled Group
  • Subsidiary if less than 50% of the total of Sales and Service Income
  • Including but not limited to - Warranty, Repair, Maintenance, Transportation
  • Does not include Financing and Interest

Export Promotion Expenses:  

  • Export Promotion Expenses paid by IC-DISC are reimbursed by US Exporter at cost plus 10%
  • Export Promotion Expenses are expenses incurred by IC-DISC to advance export sales, including
    • Advertising
    • General and administrative expenses
    • Freight and shipping
    • Packaging, designing and labeling, etc.
     

Select Best Pricing Method 

"T by T Approach":   

  • Commonly a 50% Increase in IC-DISC Benefit
  • Determine Benefit Under Three Possible Methods:
    • 4% Gross Receipts Method
    • 50% Full Cost CTI Method
    • 50% Marginal Costing CTI Method
     

Good Candidate:  

  • Profit Variability (Product, Customers, Time of Yr., etc.)
  • Available Sales & COGS by Transaction

Maximization Tips:  

  • 50% FC CTI if net profit is > 8%
  • 4% Gross Receipts if net profit is < 8%
  • Use Marginal Costing if Overall Profit Percentage is > FC CTI % and > 8%
  • Transactional is the most beneficial overall method
  • In addition – selective grouping is needed for maximization

Example 

  Total ET-1 ET-2 ET-3 Non-Export
Sales 925 200 100 300 325
COGS 560 50 60 250 200
Gross Profit 365 150 40 50 125
Deductions 185 100 45 40 -
TI (Full-Cost CTI) 180 50 (5) 10 125
           
OPP 19% 25% -5% 3% 38%
           
4% Gross Receipts 24 8 4 12  
50% FC-CTI (30 if TxT) 28 25 (3) 5  
           
Best Method 41 25 4 12  
           
Marginal Costing          
- MC-CTI   150 40 50  
- OPPL   39 19 58  
           
MC-Method   19 10 25  
           
Now Best Method 60 25 10 25  

 
Buy/Sell IC-DISC

IRC Sec. 994

Overview: 

  • Rather than a commission, the IC-DISC buys and sells qualified export inventory
  • Essential to meet the 95% qualified export assets test

Client Impact: 

  • Customer sees the IC-DISC as issuer of the invoice

Business Impact: 

  • IC-DISC performs Back office invoicing
  • Requires a Section 482 Transfer Pricing Study

Average CTI transfer amount 66% - 70% 

Export Invoice Factoring
Rev. Rul. 75-430, Rev. Rul. 79-362

Overview: 

  • The IC-DISC adds a new source of revenue – factoring income
  • Factoring income is derived from purchasing the invoices associated with commission income
  • The invoices are discounted at a 4%-5% rate – the discount is additional IC-DISC income

Client Impact: 

  • Customer sees the IC-DISC handling both invoicing and collections

Business Impact: 

  • IC-DISC performs Back office invoicing
  • IC-DISC takes on Account Receivable services (assumes credit risk)
  • Requires a IRC Sec. 482 Transfer Pricing study

Average CTI transfer amount – 70% to 75% 

Foreign International Sales Corporation "FISC"
IRC Sec. 993(e)(1)

Overview: 

  • IC-DISC can own 100% of a Foreign International Sales Corporation (FISC) which has to be located in a jurisdiction outside of the 50 United States and Puerto Rico (i.e. U.S. Virgin Islands, or Bermuda)
  • FISC buys the inventory from the US Exporter at a discount and than sells it to the foreign customers – the FISC earns a standard distributor return
  • FISC pays a dividend of profits to the IC-DISC

Client Impact: 

  • FISC is more visible to customers than the IC-DISC; customers deal directly with the FISC

Business Impact: 

  • FISC performs back-office invoicing and collections
  • FISC is a full-fledged foreign trading company with inventory, credit, and market risk
  • Requires a more extensive IRC Sec. 482 Transfer Pricing Study

Average CTI transfer amount – 75% to 85% 

Have Questions or Comments?

If you have any questions about this media item, we'd like to hear your opinion. Please share your thoughts with us.

Contact EisnerAmper

* Required