Robert Verzi, an international tax partner with Atlanta-based accounting firm Habif, Arogeti & Wynne LLP, wrote the following article to alert GlobalAtlanta readers to a tax incentive for exporters.
He said that the domestic international sales corporation (DISC) tax incentive is the last of three measures designed to make American exporters more competitive with European companies that benefit from value-added tax refunds on their export products.
Two previous export tax incentives, the foreign sales corporation and the extraterritorial income exclusion, were challenged by the European Union as illegal export subsidies and repealed by the U.S. in 2007, Mr. Verzi said.
The DISC has been revised to meet international trade standards and is available to U.S. exporters.
“It’s easy to implement and claim the benefits if you know about it,” Mr. Verzi said. “A lot of people have associated these DISCs with 20 and 30 years ago–they’ve gotten dust on them and now we’re dusting them off.”
Mr. Verzi outlines how U.S. companies can take advantage of the refunds:
As recently reported in a GlobalAtlanta story, Georgia exports are a bright spot in an otherwise unfavorable economic landscape. There is additional good news for Georgia exports–an overlooked export tax incentive is available which can reduce Federal and state income on such exports by 50 to 100 percent.
Specifically, if your business has either type of transaction listed below, you can convert ordinary income (taxed at about 34 or 35 percent) to capital gain income taxed at 15 percent. The following types of income qualify for this special tax benefit:
1. Exported property which is manufactured in the United States.
2. Engineering or architectural services rendered for projects located (or proposed for location) outside the United States.
You will have to form a U.S. corporation and elect for such corporation to be treated as a domestic international sales corporation, or DISC. The DISC is essentially a paper company and needs very little substance.
Its taxable income is computed using special pricing rules, but it does not pay U.S. income tax. A DISC can earn income in an amount equal to the greater of:
1. 50 percent of the taxable income of your export sales.
2. 4 percent of the gross receipts on the export sales.
The amount determined under the 4 percent method cannot exceed the total amount of taxable income derived from export sales. The income earned by the DISC would be subject to the 15 percent income tax when distributed to its shareholders.
Here’s how it works:
-Company XYZ forms a DISC. Company XYZ has $3 million export sales.
-Assume that the cost of goods sold relating to these sales is $1.5 million and other expenses $500,000, leaving a net export profit of $1 million.
XYZ Corporation would use the 50 percent method described above, since this alternative would generate the most tax benefit. So, $500,000, 50 percent of $1 million, would be subject to tax at 15 percent instead of the corporate rate of 34 percent if XYZ was a C corporation, or 35 percent if XYZ were an S corporation (assuming the shareholder is in the top marginal individual tax rate).
Assuming the latter, XYZ Corporation and its shareholder would save $100,000 in federal income tax per year. In addition, state income taxes can be saved by using the DISC structure. The savings are unlimited. The more your business exports, the more the potential tax savings.
Taxpayers can take advantage of these substantial savings only after they form a U.S. corporation and make an election to treat the company as a DISC.
Feel free to contact Mr. Verzi, international tax partner with Habif, Arogeti & Wynne LLP, to discuss this tax savings opportunity.