Domestic international sales corporation
This is a provision unique to U.S. tax law
Tax law
Tax law is the codified system of laws that describes government levies on economic transactions, commonly called taxes.-Major issues:Primary taxation issues facing the governments world over include;* taxes on income and wealth...

. In 1971, the U.S. Congress
United States Congress
The United States Congress is the bicameral legislature of the federal government of the United States, consisting of the Senate and the House of Representatives. The Congress meets in the United States Capitol in Washington, D.C....

 voted to subsidize exports of U.S. made goods through the income tax
Income tax
An income tax is a tax levied on the income of individuals or businesses . Various income tax systems exist, with varying degrees of tax incidence. Income taxation can be progressive, proportional, or regressive. When the tax is levied on the income of companies, it is often called a corporate...

 law. The initial mechanism was through a Domestic International Sales Corporation (DISC), an entity with no substance which received tax benefits. Today, shareholders of a DISC continue to receive reduced income tax rates on qualifying income from exports of U.S. made goods.

A DISC is a U.S. corporation which has elected DISC status and meets certain other largely symbolic requirements. A corporation so electing is not subject to U.S. Federal income tax
Taxation in the United States
The United States is a federal republic with autonomous state and local governments. Taxes are imposed in the United States at each of these levels. These include taxes on income, property, sales, imports, payroll, estates and gifts, as well as various fees.Taxes are imposed on net income of...

. Properly structured, a DISC has no activities other than on paper and no activities not related to the export of qualifying goods.

Mechanism for benefit: A DISC contracts with a producer or reseller of U.S. made goods or provider of certain qualifying construction-related services to provide "services" to such related supplier for a fee. The fee is determined under formulas and rules defined in the law and regulations. Under these regulations, the fee is deductible by the related supplier and results in a specified net profit
Net profit
Net profit or net revenue is a measure of the profitability of a venture after accounting for all costs. In a survey of nearly 200 senior marketing managers, 91 percent responded that they found the "net profit" metric very useful...

 to the DISC. This net profit is not subject to Federal income tax. The DISC then distributes the profit to its shareholders, who are taxable on the income as a dividend. If the shareholders are U.S. resident individuals or others eligible for the reduced rate of tax (now 15%) on dividends, then the tax rate
To tax is to impose a financial charge or other levy upon a taxpayer by a state or the functional equivalent of a state such that failure to pay is punishable by law. Taxes are also imposed by many subnational entities...

 on the income allocated to the DISC is reduced.

The pricing rules in the law and regulation are independent of the transfer pricing
Transfer pricing
Transfer pricing refers to the setting, analysis, documentation, and adjustment of charges made between related parties for goods, services, or use of property . Transfer prices among components of an enterprise may be used to reflect allocation of resources among such components, or for other...

rules normally applicable to transactions between related parties. Thus, DISC profits are not dependent on the economic contribution of the DISC, and a DISC need have no substance.

Since a DISC has no substance, implementation and maintenance is fairly easy. Complexities can arise, however, in making calculations of the permitted DISC income due to rules designed to help maximize the subsidy. These rules include a "no loss" rule, overall profit percentage, grouping, marginal costing and other techniques, use of which may be improved by software tools.

Additional substantial rules apply.

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