Robert Feinschreiber and Margaret Kent are practitioners that have 20 years experience in interest charge DISC. Mr. Feinschreiber began his involvement with DISC program preceding its 1971 enactment. You can reach them at 305-361-5800 or multijur@aol.com
The US Congress plans to repeal the extraterritorial income (El) provisions during 2004, with an ideal effective date expected to be before March 1. The repealer provisions are expected to be included as part of S. 1637 or as H.R. 2896. Such a measure is now before both houses of Congress. The first session of Congress has already terminated. The second session began January 20, 2004.
The World Trade Organization (WTO) had previously declared these El provisions were illegal, and had called for the United States to repeal them. The European Union has threatened to impose sanctions on a wide variety of US goods unless Congress repeals the El provisions by its self-imposed deadline of March 1, 2004.
The intended repeal of the extraterritorial income provisions would not eliminate all US export tax incentives, but would leave exporters of US products with just one export boost, the Domestic International Sales Corporations (DISC) provisions.
The US trading partners successfully challenged DISC 20 years ago by applying the General Agreement on Tariffs and Trade (GATT) procedures, specifically the 1979 Tokyo Round. That challenge did not lead to an outright DISC repeal, but to its curtailment.
New DISCs
US Congress severely
reduced the impact of the DISC provisions, truncating DISCs established
after the GATT challenge, by imposing two limitations:
1. The DISC is limited to $10 million in gross revenues per year for each corporate group.
2. DISC shareholders must pay interest to the US government for the deferred tax.
Despite these limitations, a DISC provides its owners with three benefits:
1. Secure long-term tax deferral, if the DISC continues to meet a myriad of technical tax requirements.
2. Provide income "smoothing" between tax- able years, often a benefit when tax rates differ.
3. Achieve estate tax benefits, but only for certain privately-held exporters.
The DISC provisions meet the needs of mid- sized exporters while hopefully withstanding further WTO challenges to US export incentive programs.
Non-US enterprises that export goods from the United States can form a DISC and obtain US tax deferral benefits. These exports can include sales to the shareholder's home coun- try and related party transactions.
How DISCs Work
Most DISCs are "paper"
entities, but US law treats DISCs as viable for legal and tax
purposes. A DISC need not have corporate substance or perform
substantial economic functions. A DISC needs no office space,
no employees, and no tangible assets. Gone are the foreign sales
corporation (FSC) requirements ...
