Joseph Englert
Joseph Englert

Interest Charge Domestic International Sales Corporation

How exporters can benefit.

October 27, 2011
by Joseph Englert

Export tax benefits can play an important role in helping private and public, small- to large-sized U.S. exporters remain globally competitive. The benefits include increasing the exporter’s cash flow, creating low-cost pretax working capital to fund export growth, and decreasing the exporter’s effective tax rate, not to mention dividends taxed at the 15-percent rate for individual U.S. shareholders.

Surprisingly, despite these excellent financial opportunities, only several thousand out of more than 240,000 U.S. exporters now receive export tax benefits. Much of this is due to a lack of knowledge about what export tax benefits remain in the Internal Revenue Code (IRC) and how to use them. Previously, exporters received Foreign Sales Corporation (FSC) and Extraterritorial Income Exclusion (ETI) benefits, but in response to a ruling from the World Trade Organization (WTO), the Internal Revenue Service (IRS) repealed these programs in 2001 and 2006, respectively.

Now what can exporters do? Export Assist, Inc. searched the IRC for existing export tax benefits that were already WTO approved. This search revealed that:

  • The Interest Charge Domestic International Sales Corporation (IC-DISC had been a part of the IRC (Sections 992-995) since 1972 and WTO approved since 1984 and
  • There were certain export exceptions and exemptions in the U.S. Virgin Islands as well as under various Code sections, such as Section 954 and Section 956.

Reader Note: Don’t miss Joseph Englert’s IC-DISC presentation at the upcoming AICPA/Export Assist Inc. Workshop on Export Tax Benefits webinars, November 8 and November 15.

Interest Charge Domestic International Sales Corporation (IC-DISC)

The Interest Charge Domestic International Sales Corporation (IC-DISC) is the only safe-harbor export-tax benefit available. It is attractive to privately-held small- and medium-size companies with only a domestic presence, especially those interested in the 15 percent IC-DISC dividend tax rate for individual shareholders, as legislated in the Jobs and Growth Tax Relief Reconciliation Act of 2003 (the Job Act), which is currently scheduled to expire on December 31, 2012. The IC-DISC is also an excellent deferral vehicle that both private and public companies can use to secure low-cost working capital, buyer financing and funds for research and development. This is especially attractive in today’s hard economic times when bank loans and working capital are very difficult and expensive, if available at all.

IC-DISC Tax Benefits


The IC-DISC’s income can be paid as a dividend. The Jobs Act lowered the dividend tax rate to 15 percent for individuals. This rate is in effect until December 31, 2012.


The IC-DISC income attributable to the annual revenue limit of $10 million of export sales that is deferred from current taxation may be loaned back to the U.S. exporter as a producer’s loan or accounts receivable loan to fund low-cost working capital, buyer financing and research and development. For the privilege of deferring (i.e., borrowing tax money), an interest charge on the tax of the IC-DISC’s earnings is assessed annually and paid by the shareholders. The annual interest rate for 2010 is 0.34 percent, which the base period treasury-bill rate effective September 30, 2010 determines. The remaining IC-DISC income is deemed distributed and taxed as a dividend. No tax liability reserve is required by the exporter.

IC-DISC Structure

The IC-DISC is a domestic (U.S.) corporation that has a single class of stock with a minimum par value of $2,500. An IC-DISC election must have been made and not terminated. In order to qualify for an IC-DISC, the U.S. exporter must have export property that:

  • A person other than an IC-DISC manufactured, produced, grew or extracted in the U.S.,
  • Is held primarily for sale, lease or rental for direct use, consumption or disposition outside the U.S. and
  • Contained a minimum of 50 percent U.S. content.

Determination of Commission Income

The IC-DISC acts as a commission agent on the export sales of the parent company. The commission income of the IC-DISC is calculated based on the combined taxable income and expenses related to the export sales of the U.S. exporter and the IC-DISC using one of the two following methods, whichever is greater:

  • The ‘Four-Percent’ Gross Receipt Method

    The commission that the IC-DISC may earn on the export transactions of the exporter will not exceed four percent of the qualified export receipts of the IC-DISC and the exporter.
  • The ‘50-50’ Combined Taxable Income Method

    The IC-DISC commission earned on export transactions of the exporter will not exceed 50 percent of the combined taxable income of the IC-DISC and the exporter.

The maximum commission that the IC-DISC may charge is the sum of the amount of income computed under the above-listed options. Since the commission paid to the IC-DISC cannot exceed the combined taxable income of the exporter and the IC-DISC, when the exporter is a privately-held C corporation, it cannot cause a loss to the exporter on export sales but may cause an acceptable domestic loss upon consolidation.

The net income of the IC-DISC computed using one of these two methods is not subject to current taxation. It may be deferred up to $10 million in gross receipts with the remainder deemed distributed or it may be paid in full as a dividend.

Increasing IC-DISC Revenue

There are additional structures beyond the “safe harbor” commission IC-DISC that might increase revenue on the export profit and loss by accepting additional risk and rearranging the U.S. exporter’s business flow and responsibilities.

Depending on the activity, the combined taxable income (CTI) could be increased from 50 percent for the commission IC-DISC up to 85 percent for the IC-DISC that owns a Foreign International Sales Corporation (FISC). These additional IC-DISC activities include:

  • Safe Harbor Buy/Sell IC-DISC. The IC-DISC purchases and sells export property. The parent company reimburses the IC-DISC-paid export promotion expenses plus 10 percent. Does not require a Section 482 transfer pricing study.
  • Buy/Sell IC-DISC. The IC-DISC buys qualified export inventory directly from the parent company, taking the title to the merchandise, marking it up and exporting it (as exporter of record) to the customer (parent company’s subsidiaries and unrelated customers). Requires a Section 482 transfer pricing study.
  • Export Invoice Factoring. The IC-DISC purchases invoices (connected to the commissions paid) from the parent company on a non-recourse, discounted basis (e.g., at a 3% or 4% discount rate). Requires a Section 482 transfer pricing study.
  • IC-DISC with FISC. The IC-DISC owns 100 percent of a FISC that buys and on-sells inventory at a mark-up to foreign customers. The FISC must be located in a jurisdiction outside the 50 states and Puerto Rico. The parent company pays a commission to the IC-DISC for the FISC sales and requires a Section 482 transfer pricing study.


It is recommended that a business plan is created to determine if the additional revenue that these activities may generate is sufficient for the parent company to change its internal business process.

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Joseph G. Englert is president and founder of San Francisco, Calif-based Export-Assist, Inc. He formerly worked at the U.S. Department of Commerce and teaches trade finance seminars for the Foreign Commercial Service Division, International Trade Administration and the Office of Import Administration.