Inception date: 01 Jan 2014 | Removal date: open ended
Still in force

Tax-based export incentive

On October 8, 2013 the governor of Oregon signed into law a bill (HB3601) 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. For tax years beginning on or after January 1, 2013, the new law changes this treatment for IC-DISCs formed on or before January 1, 2014 (the date HB3601 takes effect). For these IC-DISCs, the Oregon minimum tax does not apply; in lieu of regular corporate rates, a special 2.5% tax rate applies to commissions received by the IC-DISC; a related taxpayer is allowed a deduction for commissions paid to the IC-DISC; the Federal taxable income of a shareholder subject to the Oregon personal income tax is reduced by the amount of any dividend paid by the IC-DISC.

The IC-DISC replaced 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.