Higher taxes on exporters? Despite trade deficits, some in Congress are considering it

Should Congress target exporters for a tax increase? Despite the record U.S. trade deficits, some in Congress are considering such an action. An effort by Congress last December to raise taxes on smaller exporters was only headed off after an outpouring of protest from the affected companies. And more such efforts may be in store.

At issue is a section of the tax code that was first enacted in 1984 and is intended to help exporters that are set up as “pass-through” companies (such as S Corporations and LLC’s).

Called the “Interest Charge Domestic International Sales Corporation” (IC-DISC), this tax provision permits U.S. exporters to at least partly match the tax rebates that countries with Value Added Taxes (VAT’s), like most European nations, provide to their exporters.

Under the IC-DISC rules, a U.S. exporter can establish a small domestic international sales corporation (the “DISC”) to which the exporter pays an annual commission on its export sales. The DISC then can defer taxes on this commission income (capped at $10 million) as long as an interest charge (hence the “IC”) is paid to the Treasury while the income is being deferred from taxation.

Any IC-DISC income that is not deferred is paid to the shareholders of the IC-DISC as dividends.

While some other U.S. tax code provisions affecting exporters have been successfully challenged by the European Union at the World Trade Organization, the WTO has given the U.S. a pass on this one. (Unlike the tax provisions that were successfully challenged, the IC-DISC does not offer exporters anything that is unavailable to other companies. Any U.S. company can elect to be a pass-through entity, many companies can defer taxes by paying an interest charge, and dividend income from most sources is taxed at 15%.)

Today, the IC-DISC is part of the arsenal of many successful U.S. exporters. A recent survey by RSM McGladrey, Inc. (for the accounting profession) found that 40% of all U.S. manufacturers were using IC-DISC’s.

Despite the U.S. trade deficit and despite the fact that most IC-DISC users are small, closely-held companies, some in Congress have attempted to greatly weaken this tax provision. The tax provision that was halted in Congress in December would have more than doubled the tax rate on the IC-DISC dividend income — from 15% to 35%. SBEA was among those urging Congress not to take the drastic step of raising taxes on exports, and to preserve the 15% rate.

This year, the issue has re-emerged, and SBEA is again counseling Congress to help the U.S. maintain its exporting momentum by leaving the tax on IC-DISC dividends where it is. In addition to efforts to raise taxes on IC-DISC’s, some in Congress, including Rep. Charles Rangel (D-NY), Chairman of the Ways and Means Committee of the House of Representatives, have proposed the TOTAL elimination of IC-DISC’s.

If your company uses an IC-DISC or is considering doing so, you may wish to contact your two U.S. Senators and your Representative about this issue.

A coalition also has been formed to defend IC-DISC’s. SBEA is a member of the coalition, and so are many individual companies. Called the “Alliance to Preserve American Exports,” the coalition may be reached through Mr. Brian Reardon at Venn Strategies in Washington, at 202-466-4791 or by e-mail to: “breardon AT vennstrategies.com.”