[IMGCAP(1)][IMGCAP(2)]The United States trade balance is out of whack. Once again, the U.S. is losing big in the world trade arena.
The U.S. Census Bureau reports that in June 2016, the most recent data we have, the U.S. trade deficit was a loss of $44.5 billion. That’s half a trillion dollars for the year. The U.S. has been running trade deficits for 40 years, and our cumulative trade deficit is costing tens of millions in jobs each and every year. The U.S. offers one paltry remedy to increase our trade balance, the interest charge domestic international sales corporation (IC-DISC) export incentive, but many U.S. companies fail to utilize this important tax break.
Here are some examples of U.S. companies that can—and do—benefit from having an IC-DISC:
• Boat manufacturers, wholesalers, sellers and repair facilities;
• Phone manufacturers, distributors and sellers;
• Growers and grain facility operators;
• Distributors and sellers of electronic equipment;
• Chemical wholesalers and distributors.
The IC-DISC provides eligible companies with a plethora of tax benefits. It reduces the current tax rate from 34 to 20 percent, but the presidential candidates might change these rates after the election. In virtually all cases, the enterprise also gets the section 199 domestic production deduction (DPD) production incentive benefits. More benefits are available for those companies that segregate —or group—export transactions into categories. Double benefits are usually available for those who venture overseas. Gift and estate tax benefits are available in some cases too.
Here are some additional examples of U.S. companies that can—and do—benefit from having an IC-DISC:
• Companies that refurbish used equipment;
• Architects and engineers;
• Some internet enterprises;
• Cruise industry providers.
Examples Illustrating U.S. Export Benefits
Consider the following examples that illustrate IC-DISC benefits:
1. Manufacturer X is located inland, in the heart of the United States. This company has no foreign involvement—it has no foreign subsidiaries, and has no foreign sales. Instead, the company sells its goods to unrelated companies. These unrelated companies sell X’s products overseas. X, the inland manufacturer, and its unrelated sellers can both qualify for IC-DISC tax benefits. Where possible, the parties should coordinate efforts to demonstrate that the manufacturer’s goods go overseas.
2. Company Y does not manufacture anything. Instead, Company Y purchases products from companies located in the United States and sells the products to a U.S.-located international transshipment company. All three parties—the U.S. manufacturer, Y, the domestic intermediary, and the international transshipment company—can receive IC-DISC tax benefits. Where possible, the three parties should coordinate efforts to demonstrate that the manufacturer’s goods go overseas.
3. Company Z is a recycling company, recycling both U.S.-made and foreign-made products. Company Z adds to the productive process, refurbishing the items that reflect Company Z’s efforts. Company Z then sells its recycled products overseas. Company Z qualifies for IC-DISC export tax benefits. Company Z is well advised to account for its costs to demonstrate that its activities constitute refurbishment.
4. Company W is a consolidator and does not manufacture anything. Company W is located on the docks, buying the products for future transshipment. W can demonstrate it purchases U.S. products. W can qualify for IC-DISC benefits.
5. Company U begins its operations by purchasing foreign-made products. Company U expends considerable effort and costs, creating entirely new usable products, and then sells its products overseas. Company U can qualify for IC-DISC export benefits.
6. Company V has never gone overseas to promote its wares. Company V sells U.S.-made food, fuel and supplies to oceangoing cruise lines. Company V can qualify for IC-DISC export tax benefits, even if no company employee ever sets foot offshore.
7. Company S sells U.S. products overseas, and for that reason is entitled to receive IC-DISC export tax benefits, but Company S has no direct foreign involvement. Company S now decides to establish a tax haven enterprise to promote U.S. export sales in third countries. Company S can double up on IC-DISC export benefits through having a foreign international sales corporation, a FISC. The law specifically authorizes companies to double up on these tax benefits.
Meeting IC-DISC Requirements
A company seeking to obtain IC-DISC requirements must meet initial requirements and ongoing requirements. These rules are complex, so companies need to be careful. The IC-DISC must meet initial requirements such as setting up a capitalized amount of $2,500 or more and filing an IC-DISC election with the IRS. The IC-DISC’s shareholders must set up an eligible corporation in any state and then consent to the election. The IC-DISC must meet two ongoing requirements, a gross receipts test requirement and an assets test requirement. The IRS imposes timing constraints as well.
The IC-DISC receives tax benefits from having a relationship with a related party, termed a “franchise agreement.” As businesses differ from one another, the IC-DISC’s franchise agreement must reflect realities on the ground. You’d be wise to have a combined buy-sell/commission arrangement to keep maximum flexibility to remedy errors that can occur.
Many potential IC-DISC owners erroneously think the statute limits benefits to the profits earned on $10 million each year. In fact, the statute provides that the IC-DISC shareholders receive any excess profits.
Watch out for IC-DISC scams and scammers. Avoid using “packaged” or “canned” IC-DISC programs. Each IC-DISC is unique and special, and using someone else’s IC-DISC is like using another’s medical records when you go to the doctor. In particular, avoid the Roth IRA scam. The IRS knocked out that scheme in Summa Holdings, T.C. 2015-119. Be certain to avoid schemes that would have businesses set up an IC-DISC before they set up this corporation.
The U.S.’s trade balance is receiving special attention during this presidential election cycle. It appears both major party candidates would favor keeping the IC-DISC program. The candidates differ as to the importance of job creation and reversing 40 years of economic decline caused by the trade imbalance.
Robert Feinschreiber and Margaret Kent are attorneys and counselors with TransferPricingConsortium.com.
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