Domestic international sales corporation

This is a provision unique to U.S. tax law. In 1971, the U.S. Congress voted to subsidize exports of U.S. made goods through the income tax law. The initial mechanism was through a Domestic International Sales Corporation (DISC), an entity with no substance which received tax benefits. Today, shareholders of a DISC continue to receive reduced income tax rates on qualifying income from exports of U.S. made goods.

A DISC is a U.S. corporation which has elected DISC status and meets certain other largely symbolic requirements.^[1] A corporation so electing is not subject to U.S. Federal income tax.^[2] Properly structured, a DISC has no activities other than on paper and no activities not related to the export of qualifying goods.^[3]

Mechanism for benefit: A DISC contracts with a producer or reseller of U.S. made goods or provider of certain qualifying construction-related services to provide "services" to such related supplier for a fee. The fee is determined under formulas and rules defined in the law and regulations.^[4] Under these regulations, the fee is deductible by the related supplier and results in a specified net profit to the DISC. This net profit is not subject to Federal income tax. The DISC then distributes the profit to its shareholders, who are taxable on the income as a dividend.^[5] If the shareholders are U.S. resident individuals or others eligible for the reduced rate of tax (now 15%) on dividends, then the tax rate on the income allocated to the DISC is reduced.

The pricing rules in the law and regulation are independent of the transfer pricing rules normally applicable to transactions between related parties. Thus, DISC profits are not dependent on the economic contribution of the DISC, and a DISC need have no substance.

Since a DISC has no substance, implementation and maintenance is fairly easy. Complexities can arise, however, in making calculations of the permitted DISC income due to rules designed to help maximize the subsidy.^[6] These rules include a "no loss" rule, overall profit percentage, grouping, marginal costing and other techniques, use of which may be improved by software tools.

Additional substantial rules apply.^[7]

1. ^ 26 USC 992.
2. ^ 26 USC 991.
3. ^ DISC status may be lost if the DISC has non-qualifying receipts or assets in excess of 5% of its total receipts or assets. However, to prevent inadvertent loss of the intended benefits, DISC rules permit a DISC to elect to make distributions or deemed distributions retroactively. 26 USC 992(c), supra.
4. ^ 26 USC 994 and regulations thereunder.
5. ^ 26 USC 995.
6. ^ 26 CFR 1.994-1 and -2.
7. ^ See 26 USC sections 991-997 and regulations thereunder.