Domestic International Sales Corporation Explained
The Domestic International Sales Corporations (DISC) is a tax incentive for the U.S. businesses involved in export activities. A U.S. company with qualifying income from exports of U.S. made goods, or its shareholders, form a corporation and elect DISC status for it. After the formation of the DISC, the exporters sign a contract with the DISC agreeing to pay a commission to the DISC on all the export sales.
The money received as the commission is generally used for purchasing export receivables from the exporters or to provide them loans. The shareholders of DISC enjoy tax reduction on the dividends and undistributed income. The DISC has no employees or physical assets. Basically, it is a shell entity.
A Little More on Domestic International Sales Corporations
Controversy Surrounding the Domestic International Sales Corporations
The European Community claimed the DISC was violating the terms of Generally Accepted Trade Tarrifs. The United State responded by challenging the European tax regulations concerning export-based income. Both the DISC and European tax regulations were found to be incompatible to GATT by the panel in 1976. The dispute was finally settled by the Tokyo Round Code on Subsidies and Countervailing Duties. In1981, the GATT Council adopted the panel reports with the recommendation of applying the settlement terms. However, later in 1999, a WTO panel declared that the 1981 decision did not establish a legal instrument complying with GATT-1994.
In 1984, Foreign Sales Corporations were adopted as an alternative to DISCs. In the face of a mounting international pressure, the U.S. authority also decided to amend the DISC-related rules. According to the new rule, the DISC and its shareholders can enjoy the subsidized tax rate only when the shareholders pay interests on the deferred tax.
References for Domestic International Sales Corporations