IMPLEMENTATION LEVEL

Subnational

AFFECTED FLOW

Outflow (subsidised)

ANNOUNCED AS TEMPORARY

No

NON-TRADE-RELATED RATIONALE

No

ELIGIBLE FIRMS

all

JUMBO

No

TARIFF PEAK

No
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Inception date: 27 Feb 2014 | Removal date: open ended
Still in force

Tax-based export incentive

On February 27, 2014 the governor of Virginia signed into law a bill (H.480/S.515) that amounts to a state-level complement to a Federal tax mechanism that incentivizes exports. At issue is the Interest Charge Domestic International Sales Corporation (IC DISC, or “icy disk”), a tax mechanism that predates the coverage period for the GTA. Effective for taxable years beginning on or after January 1, 2014, this Virginia law exempts IC-DISCs from the Virginia corporate income tax.

The IC-DISC replaces a series of earlier export deduction mechanisms, namely the DISC, FSC, and ETI export incentive tax regimes. Whereas those earlier arrangements were subject to charges of GATT- or WTO-illegality, the IC-DISC is const5ructed in a way that it is not considered an illegal export subsidy. Each U.S. shareholder of an IC-DISC is obligated to pay interest to the Internal Revenue Service (IRS) with respect to any deferred U.S. tax, in an amount equal to the product of (i) the shareholder’s deferred tax liability and (ii) the base-period Treasury bill rate. That rate is defined as the annual rate of interest equivalent to the average one-year constant maturity Treasury yields.

As defined in section 1.992-1(a) of the Treasury Regulations, a DISC is a corporation that satisfies a series of conditions in a given taxable year. These require inter alia that at least 95% percent or more of the gross receipts are qualified export receipts (gross receipts from the sale, exchange, or other disposition of export property or services, etc.); that the adjusted basis of the qualified export assets be at least 95% of the sum of the adjusted basis of all assets; etc.

Or as more simply described by Forbes magazine, “The bottom line is that the tax laws provide an opportunity for a company to use an IC-DISC to have the tax on 50% of its export income reduced by more than 50%. Profits are taxed at the dividend rate (currently 15%) as opposed to ordinary income tax rates (top rate currently 35%).” An IC-DISC will typically be established as a commission-based entity, and a portion of the U.S. exporter's export sales gross receipts are treated as a commission paid to the IC-DISC, and up to $10 million of export gross receipts each year may sit tax-free in the IC-DISC, subject only to an interest charge paid by the exporter.

 

AFFECTED COUNTRIES

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