Replacing the Domestic International Sales Corporation

Date of Submission


Document Type


Degree Name

Master of Science in Accounting




Domestic international sales corporations--Taxation--United States

Call No. at the Univ. of New Haven Library

AS 36 .N29 Acc. 1985 no.3


Summary, pp. 39-41: The Tax Reform Act of 1984 substantially altered the export related activities of all taxpayers engaged in international trade arena. The Foreign Sales Corporation provisions of the Act replace the Domestic International Sales Corporation provisions which were enacted in 1971. The original DISC provisions were instituted as a macro-economic tool designed specifically to balance the trade deficit by providing exporters with certain tax incentives. The tax benefits associated with a DISC increased directly proportional to the increase in the value of goods and services exported.

The major reason for the passage of the FSC provisions stems from a long-running dispute with our major trading partners. The general agreement on tariffs and trade (GATT) generally prohibits export subsidies that would give one country an edge or added incentive over another country when purchasing or selling its goods on the open market. Since the DISC's inception in 1971, our major trading partners have been at odds with the United States over the legality and validity of the DISC.

The FSC provisions were enacted in order to conform to the United States export subsidies to the GATT regulations, and thereby alleviate the long-running dispute. The new FSC regulations, although only temporary, give exporters a few options and many decisions to make. Exhibit 6, which is a comparison of export entities available to U.S. manufacturers, compares the tax treatment of the export entities under the old provisions and the new provisions. Before an exporter sets up any of the entities, he must first determine which entity would best fit his needs. The current entities available are:

1. The Foreign Sales Corporation {FSC)

2. The Small Foreign Sales Corporation

3. The Interest Charge DISC

Each one of the above DISC alternatives has its own advantages and disadvantages. Exhibit 6 clarifies, not only the tax treatment of the different entities, but also the management and administrative requirements of each entity. In determining which entity to select, each structure must be analyzed based on its merits and the needs of the user. Many planning opportunities will arrise as the selection process begins. Among them, are the following:

1. Making timely elections.

2. Selecting a country in which to establish the new entity.

3. Winding up the DISC.

4. Treatment of the accumulated DISC income.

5. Incremental pricing.

6. Foreign economic process.

At this time, there appears to be no conclusive method or alternative which is preferable to the other, and the above list of planning opportunities are not all inclusive. It must be noted again that the provisions are new and the regulations are temporary and, accordingly, are subject to change.