Does an IC-DISC make sense?
MANUFACTURING INSIGHTS |
The United States provides incentives to boost exports of some domestic goods produced by U.S. manufacturers. A U.S. manufacturer may, for example, exclude from taxable income commissions paid to a domestic international sales corporation, or IC-DISC, on the sale of goods overseas. Commissions paid to the IC-DISC are not currently taxable to the IC-DISC but are instead taxable when paid to the IC-DISC’s shareholders.
If individuals own the IC-DISC, its earnings may be taxable at the 20 percent individual rate, resulting in a permanent rate benefit of almost 20 percent (compared to the maximum 39.6 percent individual rate).
Corporate shareholders cannot achieve a similar rate arbitrage (IC-DISC dividends received by corporations are taxable at the regular corporate rate of 35 percent), but they may benefit from deferring tax on IC-DISC commissions until they are actually distributed. In exchange for this deferral, an IC-DISC shareholder must pay a small interest charge (approximately 1 percent) on the tax that would otherwise be due on income of the IC-DISC that is not distributed. An IC-DISC can produce several other benefits for a manufacturer, including enhancing the company’s ability to claim foreign tax credits and improving liquidity through the use of special intercompany loans.
IC-DISCs are very simple to establish and should cause no disruption to your company’s regular business operations because an IC-DISC is largely a paper entity–that is, the IC-DISC does not require employees or its own physical facility. To take advantage of the IC-DISC regime, however, taxpayers must create a new legal entity, make a timely tax election and meet certain other tests.
In many cases, the benefits of having an IC-DISC will vastly exceed the costs. As a result, manufacturers who do not currently have an IC-DISC should assess the potential benefits of using one. Read our IC-DISC white paper.