DISCs provide their owners with substantial tax savings as. well as boost U .S .exports and jobs. A key feature of this tax benefit is the special DISC intercompany pricing rules that let you put the lion's share of your export profit in your DISC. We will analyze the DISC pricing rules under the following headings:
1. In general, 9515.1
2. Four percent of gross receipts...: " '9515.2
3. Fifty percent of combined taxable income. '9515.3
4. Ten percent of export promotion expenses. '9515.4
5. Section 482 pricing ,9515.5
6. Choice of pricing methods ,9515.6
7. Grouping transactions '9515.7
8. Marginal cost pricing, 9515.8
DISCs can be-and often are-set up with little substance. All that's required is capital of at least $2,500. Without special pricing rules, a DISC would have all or almost all of its profit reallocated under Section 482.
(1)The Basics. The special DISC pricing rules let the DISC earn a major share of the total profit on export transactions.2 These rules apply equally to DISCs operating on a buy-sell basis and DISCs operating on a commission basis. A DISC can keep up to 4 percent of the gross receipts from a sale. For a DISC that acts as an agent and receives a commission, the 4 percent measure is based on the gross receipts of the DISC's principal. Alternatively, the DISC can earn 50 percent of the total combined taxable income from the transaction. In addition to the profit from either method, a DISC can earn an extra profit equal to 10 percent of its export promotion expenses.
(2) Related Supplier. Not all DISC transactions are eligible for the special intercompany rules. To qualify, the company selling the goods to the DISC or hiring the DISC on a commission basis must qualify as a related supplier. Two tests must be met for a company to qualify:
a) The company dealing with the DISC must be a related party. That means that the company must be controlled by the same interests as the DISC for Section 482 allocation purposes.
b) The related party must singly engage in the transaction directly with the DISC.4 Thus, only the last company that deals with the DISC can qualify as a related supplier.
Example (I) : Manuco sells its
products to Sellco, which then resells them to the DISC. Only
Sellco is treated as the related supplier and only the transaction
between Sellco and the DISC is eligible for the special DISC pricing
A DISC can have different related suppliers for different transactions.
Footnote references start at the end of this analysis.
@ 1981 P-H Inc.-U.S. Taxation of International Operations '9515.1