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With the repeal of the extra territorial income exclusion, the IRS noticed the resurgence of the domestic, international sales corporation (DISC) in the form of an interest charge DISC (IC-DISC). The relevant tax provisions for the IC-DISC are generally within IRC Sections 991 through 996, and corresponding regulations, and is commonly referred to as the last practical tax incentive for U.S. exporters. If certain requirements are met under the IRC and the regulations, the IC-DISC may provide U.S. exporters significant benefits including a qualified dividend tax rate versus an ordinary income tax rate, deferral of IC-DISC income from current taxation (up to $10m annual revenue limit), increased cash flow for exporter due to tax savings, a lower ETR, and elimination of double taxation in C corporations.

The IC-DISC is a tax incentive whereby U.S. exporters exporting U.S. products to foreign destinations are able to receive the qualified dividend tax rate currently at 20% plus the 3.8% net investment income tax imposed by Section 1411, for a total of 23.8% maximum federal income tax rate. This is a considerable reduction from the maximum federal income tax rate for individuals currently at 40.8% (maximum federal individual income tax rate 37% plus 3.8% net investment income tax).

The DISC generally determines its income on a transaction by transaction (T by T) basis or if it so elected it could determine income on groups of transactions. Whether it used the T by T method or grouped their transactions, the DISC’s income is based on one of the following three pricing methods:

1 Four percent of qualified gross export receipts plus 10% of the DISC’s export promotional expenses attributable to such receipts

2 Fifty percent of combined taxable income (CTI) plus 10% of the DISC’s export promotional expenses attributable to such income

3 Taxable income based upon the sale price actually charged but subject to the rules under Section 482 transfer pricing rules

Example — ABCUS company IC-DISC high-level cost-benefit
		Export earnings without IC-DSIC	With IC-DISC
Standard	ABCUS 2013 “Taxable” export income	$3,600,000	$3,600,000
50% CTI method	$1,800,000	$1,800,000
Individual standard & QD rate	37.00%	20.00%
After tax cash for owners	$1,134,000	$1,440,000
	Cash tax savings		$306,000.00