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Domestic
International Sales Corporation
The
Domestic International Sales Corporation has come
back into favour after a period of disuse. The form
existed until 2002 to encourage export activity by
allowing tax deferral within the DISC while it was
more or less exclusively engaged in export sales activity;
but when the Foreign Sales Corporation regime was
replaced following adverse rulings from the WTO, the
DISC temporarily ceased to be of interest.
Then
in 2003 the Jobs and Growth Tax Relief Reconciliation
Act introduced a beneficial regime for commission-earning
DISCs under which the eventual tax charge on the DISCs
profits (in the hands of its shareholders) was reduced
to 15%.
In order
to qualify for a DISC, the US exporter must have export
property that is
manufactured, produced, grown or extracted in the
United States by a person other than a DISC, is held
primarily for sale, lease or rental for direct use,
consumption or disposition outside the United States,
and contains a minimum of 50% US content. These rules
are subject to a 95% test.
A
DISC may own a FISC (Foreign International Sales Corporation)
outside the US and Puerto Rica (eg in the US Virgin
Islands) which subject to transfer pricing rules can
be a beneficial combination.
In order
to qualify as a Domestic International Sales Corporation
(DISC), a corporation needs to have only one class
of stock with par value of at least USD2,500. An DISC
election must have been made and not terminated.
There
are complex rules governing the allocation of expenses,
treatment of loss sales, treatment of interest expense,
etc.
The profits
of a DISC are not subject to corporate taxation (it
is deferred), although income from a DISC is subject
to corporate taxation in the hands of shareholders
in certain circumstances:
- Deemed
distribution
- Distribution
upon disqualification
- Income
attributable to military property
- Disposition
of DISC stock
- There
was a foreign investment attributable to DISC earnings
- Any
income attributable to qualified export receipts
exceeding USD10 million.
Form
8404 (Computation of Interest Charge on DISC-Related
Deferred Tax Liability) must be filed to report the
interest charge on a DISC. The priority of distributions
is:
- Out
of previously taxed income (PTI)
- Out
of accumulated DISC income
- Out
of other E&P
This
is a highly simplified account of the DISC, whose
operation is closely controlled by detailed legislation.
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