International Tax Committee 6/22/17 IC-DISC Planning International Tax Committee 6/22/17

IC-DISC Summary Explore the Interest Charge Domestic International Sales Corporation (IC-DISC) benefit for qualified manufacturers and distributors Understand restrictions and compliance requirements that apply to IC-DISCs Discuss the availability of qualified dividends on the IC-DISC benefit Discuss recent court guidance on the use of Roth IRAs to own IC-DISC stock

Taxation of IC-DISCs The IC-DISC entity is tax exempt Shareholders are taxed on dividends Actually paid In certain cases, on deemed dividends Dividends are qualified dividends taxed at 15%/20% (plus 3.8% NIIT) Shareholders must pay an interest charge on undistributed DISC income Recent rate of 0.5414566 % (just over ½ of 1%)

IC-DISC Structure Operating company (Supplier) sets up domestic corporation (IC-DISC) Sales of export property generate earnings to DISC, paid pursuant to the “Supplier’s Agreement” Shareholders of the DISC are typically the same as the operating company, or the Supplier itself

Intercompany Pricing 4% of qualified export receipts on the IC-DISC's sale of the property plus 10% of the IC-DISC's export promotion expenses 50% of the IC-DISC's and the seller's combined taxable income from qualified export receipts on the property, derived from the IC-DISC's sale of the property plus 10% of the IC-DISC's export promotion expenses, or Taxable income based on the sale price actually charged, provided that under section 482 the price actually charged clearly reflects the taxable income of the IC-DISC and the related person.

Intercompany Pricing 4% and 50/50 methods are safe harbor methods Sec. 482 method is generally only available to an IC-DISC that is an operating entity Consideration must be given to the “no loss rule”

Qualified Export Property (EP) Use Test Made/grown/extracted in the US by other than the IC-DISC Destination Test For sale, lease or disposition outside the United States Must be delivered outside of the US within 12 months of the date of sale Not more than 50% of the FMV of the EP is attributable to articles imported into the United States

Qualified Export Receipts (QER) 95% of DISC receipts must relate to sale or lease of EP Also includes architectural services for building plans to be constructed outside of the United States, whether services are performed here or abroad. Excluded Receipts Sales for ultimate use inside the US

Qualified Export Assets (QEA) 95% of DISC assets must be QEA Working capital Inventory Supplier receivables / Accounts receivable Producer’s loans Certain other assets EX/IM Paper Funds awaiting investment

Beyond Dividends - Producer’s Loans Limited to accumulated IC-DISC income at the start of the month in which loan is made. Note must carry a stated maturity date of not more than 5 years Be made to a producer of Export Property

Recent Guidance - Roth IRAs Summa Holdings, Inc. v. Commissioner, 848 F.3d 779 Funds in two newly created Roth IRAs used to contribute to a newly formed IC-DISC in exchange for shares Subsequently a newly formed holding company acquired the shares in the IC-DISC from the Roth IRAs Each Roth owned 50% of the holding company, which owned 100% of the IC-DISC

Recent Guidance - Roth IRAs IRS is challenging this type of structure as abusive Tax Court held that transferring funds from an IC-DISC to a Roth IRA circumvented the limitations on contributions to a Roth IRA 6th Circuit reversed and held for taxpayers. Similar cases are at issue in other circuits