Export Tax Benefits – a Hidden Treasure!

Few years back on a main platform of Dublin, Ireland’s train station, you could not miss this huge poster advertisement by New York City as part of its campaign to woo visitors, saying “Shop till the dollar drops”. The advertisement hinted that the US dollar was dropping and the goods and services were becoming highly affordable or inexpensive to the Europeans as the Euro was appreciating against the dollar. Alas, the situation has changed since that era and U.S. dollar has gained significantly against the Euro in recent times. Does that mean U.S. exporters have no competitive edge over their worldwide competitors? Does that mean that U.S. exporters are losing grounds in international markets?

Refreshingly, some of the tax benefits contained in ICDISC provisions of the Internal Revenue Code can come to the rescue and assist significantly in helping U.S. exporters to become more competitive even when the overall tax rate in U.S. has climbed to a new level over the years. By utilizing the opportunity and bringing down the tax rate, U.S. exporters can offer more reasonable pricing structures. This tax benefit can be a blessing in disguise and provide a hedge against the increasing value of US dollar.

Repeal of ETI and Exporters:

After repealing the export tax benefit in terms of “extraterritorial income exclusion” from the Internal Revenue Code following the WTO’s determination that it provided illegal tax subsidy to US exporters in violation of GATT terms, it is widely believed that US does not offer tax benefits to the exporters. However, contrary to the belief, there is still an old provision in the Code that can benefit the exporters. IC – DISC or Interest Charged Domestic International Sales Corporation provides a legitimate export benefit that deserves to be looked into.

How can it be beneficial to US exporters?

Although IC-DISC in itself is not a taxable entity, its US shareholders are subject to tax on deemed dividend distributions from the IC-DISC. Since these deemed distributions do not include income derived from the first $10 million of qualified exports receipts each year, US shareholder can defer paying US tax on the income derived from up to $10 million of qualified export receipts each year. In order to defer paying the tax until actual distributions are received, US shareholder must pay interest to IRS at the current market rate for 52-week Treasury bills (currently around 2-3%). Even if the shareholders of ICDISC decide to take the distributions, the distributions are taxed at qualified dividend rate of 20% and NII tax of 3.8% leaving a significantly after tax income in the hands of shareholders.

What needs to be done?

Since ICDISC is a tax saving vehicle, the IRS reviews them closely. It is important to hire an experienced tax professional in order to comply with the requirements. There are several ways in which the Code allows taxpayers to maximize the export profits and thereby tax benefits.
Conclusion:
By carefully structuring and planning your export transactions, it is possible to save and/or defer US tax at a nominal cost. This can go a long way in increasing competitiveness and margins in foreign trade.

Pallav Acharya, CPA, FCA, CGMA is a Principal with CPA Global Tax & Accounting PLLC (www.cpaglobaltax.com) who has wealth of experience in cross-border tax issues with exporters, MNCs and other international tax clients. He can be reached at (480) 889-8949 or via e-mail at pallava@cpaglobaltax.com.