Most countries have Value Added Tax regimes and exempt exports from the related tax liabilities. The U.S. does not have a VAT and, in general, fully taxes exports. Prior to the TCJA, the only remaining export incentive was the Interest Charge – Domestic International Sales Corporation (“IC-DISC”) regime, which was most applicable to closely held enterprises. Now, the U.S. has two sets of provisions to help level the global tax playing field with respect to exports: the IC-DISC and the deduction for Foreign-Derived Intangible Income (“FDII”). FDII is only applicable for regular C-Corporations, whereas any legal entity form can derive IC-DISC benefits. As well, C-Corporations can use both the IC-DISC and FDII provisions in tandem.
Here are some notable features of both sets of export tax incentives:
Calculations are performed at the transactional or group level and may completely eliminate the taxable income of an exporter, moving that income to the IC-DISC, which is exempt for U.S. income tax. The IC-DISC’s income may be deferred, subject to an annual $10 million limitation, or distributed. When the IC-DISC’s income is distributed, it is fully subject to income tax; however, it is treated as qualified dividend income to individual shareholders. Thus, a significant tax rate benefit can apply.
FDII provides a 37.5% deduction on Foreign-Derived Intangible Income and, along with the 50% GILTI deduction, is subject to a taxable income limitation. FDII = Foreign-Derived Deduction Eligible Income (“FD-DEI”) divided by Deduction Eligible Income multiplied by Intangible Income.
FDII = FD-DEI/DEI x Intangible Income
Forte’s team has been developing software and related services to help U.S. exporters maximize available ax savings since 1981, and led national practices at two of the Big 4 Accounting firms. VantagePoint, Forte’s proprietary global tax software, has the most comprehensive IC-DISC optimization logic commercially available to professional service firms and automates the production of Form 1120-IC-DISC. VantagePoint includes the FDII computations along with GILTI and other major changes included in the TCJA.