by Ryan L. Losi, CPA (VirginiaBusiness.com, 1/17/2014)
A bill currently before the Virginia General Assembly would allow small and mid-sized Virginia businesses to receive full advantage of a vitally important export tax incentive, known as a Domestic International Sales Corporation (DISC).
DISCs are U.S. corporations that meet specific criteria of U.S. Internal Revenue Code (IRC) (Sections 991-997), allowing a U.S. exporter to exclude a portion of its qualifying “export” income from federal taxation. Under the federal DISC rules, exporters pay their affiliated DISCs commissions from export income, and deduct those commissions from income. Qualifying commissions are not taxable to a DISC, and are instead taxed when paid to the DISC’s shareholders as a dividend. That dividend is then taxed federally at a maximum rate of 20 percent, resulting in permanent Federal tax savings for U.S. exporters and their owners (avoiding the 39.6 percent maximum rate that applies to ordinary income).
This exclusion has created an incentive for small and mid-sized manufacturers and exporters to grow exports. If HB 480 and SB 515 become law, Virginia taxpayers will receive full advantage of this tax incentive, both with federal and state tax exemptions promising to keep (and increase) jobs and capital investment in the commonwealth.
During the “Great Recession,” Virginia companies benefited from taking their Virginia-made products and services overseas, to foreign countries with better economies, and bringing that money back to help expand their businesses and create new jobs. Policymakers are seeing the propagation of international export of U.S. made products as a solution to both accelerating hiring and creating new jobs.
The DISC regime was first enacted by Congress in the early 1970s as a means to stimulate exports. It has since evolved through the years. Today, it is the last remaining export incentive providing permanent tax savings. In March 1995, Va. Code §58.1-401 was amended to conform to the IRC’s other export regime, the Foreign Sales Corporate (FSC) regime, which was similar to the DISC regime although at the time provided a much larger benefit to large companies, as well as smaller companies.
However, in the early 2000s, Congress repealed the FSC regime, leaving only the DISC regime. Virginia has yet to update its books to reflect this change. Thus, Virginia has not authorized DISCs incorporated in Virginia to take advantage of the favorable tax treatment at the state level. Virginia taxpayers have been denied the DISC incentive originally intended by the General Assembly.
Virginia companies today are at a significant disadvantage for creating qualifying DISCs in Virginia. They instead are turning to other states, such as Delaware, to set up their DISCs — a move that is taking business and investments out of Virginia!
Sponsored by Del. Ron Villanueva (R-Virginia Beach) and Sen. Frank Wagner (R-Virginia Beach), HB 480 and SB 515, the legislation would allow Virginia taxpayers to receive full advantage of this incentive. Exporters will benefit from a nearly 20 percent reduction in federal taxes, and Virginia will continue receiving the same amount of state income tax. Additionally, capital that would otherwise flow to accounts in neighboring states and corporate charter and other fees paid to establish and operate DISCs would remain in Virginia’s banking system and within the Virginia economy.
By restoring this export program, the fiscal impacts would be felt throughout the commonwealth. The Virginia State Corporation Commission would see an increase in fee revenue from incorporation fees and annual corporate maintenance fees, which are currently going to other states that recognize DISCs, such as Delaware. Exporters, who have been required to pay fees to out-of-state professionals and support services (registered agents for instance), could now pay Virginia-based professionals for these same services, creating more job opportunities within the state. Virginia will better position itself to the world as a pro-business state that is devoted to business growth and exports.
With exports surpassing $18 billion annually, Virginia is a leading economic contender in international trade. The Port of Virginia is the third largest on the East Coast and supports 343,000 jobs, while nearly one-sixth of all manufacturing workers in Virginia depend on shipping overseas for their jobs.
Thousands of businesses statewide would benefit greatly from passage of this legislation. Eligible industries cover a wide segment of the Virginia economy, including agricultural products (soy, tobacco, timber, etc.), a wide range of manufactured goods, software and other information technology products, biomedical products, minerals and mining products and many sectors of the recycling industry (such as scrap metals and used computers and cellular phones).
For Virginia exporters, the world awaits. DISC is the last remaining export incentive, it’s permanent, and it’s here to stay. I hope that you, as Virginia business executives, will see the economic impact this legislation can have on Virginia and support its passage in the Virginia General Assembly.
Ryan L. Losi CPA, is a shareholder and executive vice president of PIASCIK. He is a member of the American Institute of Certified Public Accountants, Virginia Society of Certified Public Accountants, Virginia International Business Council, Virginia Leaders for Export Trade, Society of International Business Fellows, VSCPA Tax Committee and the Virginia International Trade Alliance. He can be contacted by phone (877) 527-2046 or email email@example.com.