May 2012

If your business sells goods and/or services outside the U.S., you may be able to reduce your federal tax liability in more than half through the use of an interest charge-domestic international sales corporation (IC-DISC). This may be the case even if export sales represent a fraction of your company’s overall sales.

Sound too good to be true?

The IC-DISC is not an exotic strategy designed to “game” the system; it expressly sanctioned by Congress as means of promoting export sales of U.S. goods and services. IC-DISCs were actually introduced back in 1971 and were originally intended to be a tax deferral mechanism. They were used — as my old tax professor used to say, “a tax deferred is money in your pocket” — but never quite caught on. That all change in 2004 when amendments to the Internal Revenue Code caused dividends from qualified corporations, including IC-DISCs, to be taxed at capital gains rates of 15%. Informed exporters stampeded to take advantage of IC-DISCs, which allowed taxation of export profits to be permanently reduced from an effective rate of approximately 35% to the reduced capital gains rate for qualifying dividends.

While government statistics show that IC-DISCs remain underutilized, informed exporters continue to take advantage of the arbitrage tax savings of 20% offered by the structure; if your company is eligible, you should as well.

Candidates for an IC-DISC

• Manufacturers or distributers of products manufactured, produced, grown or extracted in the U.S. that sell or lease such products outside the […]