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Transcript of Deloitte US - The National Multistate Tax Symposium West ... o If assume all DRD eligible, state tax...

  • The National Multistate Tax Symposium West Move forward with confidence—State implications of tax reform

    April 30-May 2, 2018

  • Tax reform and ASC 740— State tax considerations Doug Andersen, Deloitte Tax LLP Holly O’Brien, Deloitte Tax LLP

    May 1, 2018

  • 3 Copyright © 2018 Deloitte Development LLC. All rights reserved.

    • Tax reform and state tax considerations

    • Taxes and credits within the scope of ASC 740

    • Identifying and measuring deferred taxes

    • Other considerations

    • What to remember

    Agenda

  • 4

    Tax reform and ASC 740 state tax considerations

  • 5 Copyright © 2018 Deloitte Development LLC. All rights reserved.

    State corporate tax code conf. to IRC – as of April 13, 2018

    FL

    NM

    DE

    MD

    TX

    OK

    KS

    NE

    SD

    NDMT

    WY

    CO UT

    ID

    AZ

    NV

    WA

    CA

    OR

    KY

    ME

    NY

    PA

    MI*

    VT

    NH

    MA

    RI CT

    VA WV

    OH INIL

    NC TN

    SC

    ALMS

    AR

    LA

    MO

    IA

    MN

    WI

    NJ

    GA

    DC

    AK

    HI

    Disclaimer: Slide to be used for illustrative purposes only. Not to be used as a substitute for research into application of rules.

    Rolling conformity to IRC currently in effect

    Selectively conforms (as noted for each affected state to ‘IRC currently in effect’, or

    to ‘IRC as of a specific date.’)

    Conforms to IRC as of a specific date (as noted for each affected state)

    Not applicable b/c state does not levy an

    entity level tax with an IRC reference point

    Specific Date Conformity

    AZ - 1/1/17

    FL - 1/1/18

    GA – 2/9/18

    HI - 12/31/16

    ID – 12/21/17 or

    12/31/17

    IN - 1/1/16

    IA - 1/1/15

    KY - 12/31/17

    ME - 12/31/16

    MI* - Current or

    1/1/18

    MN - 12/16/16

    NH - 12/31/16

    NC - 1/1/17

    SC - 12/31/16

    TX - 1/1/07

    VA – 2/9/2018

    VT - 12/31/16

    WI – 12/31/17

    WV - 12/31/17

    Selective Conformity

    AL - Current

    AR - Varies by

    IRC section

    CA - 1/1/15

    MS - Current

    State conformity to IRC references specific (and/or decouples from specific) Tax Reform provisions

    ID - 12/21/17 (2017 TY) or 12/31/17 (2018 TY)

    VA – 2017 tax year conformity only

    GA – 2/9/2018. Selective nonconformity

    FL – 1/1/2018. Nonconformity to 100% bonus

    WI – 12/31/2017. Selective nonconformity

    AZ – 2017 tax year conformity only

    OR – Selective nonconformity

    *Contact a tax advisor for more information*

  • 6 Copyright © 2018 Deloitte Development LLC. All rights reserved.

    Tax reform and ASC 740—State tax considerations

    Provision “To-Do”

    Federal corporate rate reduction

    • Determine federal impact of state items (re-measure deferred taxes)

    Transition tax on deemed repatriation/actual repatriation

    • Determine whether transition tax should be treated in same manner that states treat Subpart F income (many states do not provide full exclusion and/or require netting expenses and do not provide 8 years to pay)

    • Analyze impact on valuation allowance and deferred taxes

    • Evaluate state treatment of actual repatriations

    • Consider impact on apportionment (i.e., receipts factor)

    NOL modifications • Analyze impact on valuation allowance analysis, including:

    • Impact on federal and state NOLs • Impact on ability to utilize state credits

    Interest expense limitation

    • Evaluate impact of any additional limitations on interest expense for state purposes (related to third party and affiliated indebtedness)

    • Analyze impact on valuation allowance analysis

    • Analyze state definition of “taxpayer” for purposes of limitation

    Immediate federal expensing

    • Evaluate state conformity to IRC section 168(k)(1)(A)

    • Determine whether any state ITC/R&D credits use federal basis which will need to be valued or eliminated

    • Analyze impact on valuation allowance analysis

    Base erosion and anti-abuse tax (“BEAT”)

    • Determine state conformity

    Global intangible low-taxed income (“GILTI”)

    • Determine whether GILTI should be treated in same manner that states treat Subpart F income (see transition tax above)

    • Analyze impact on valuation allowance analysis

    Lost or modified federal deductions and/or credits

    • Evaluate impact of lost or modified federal deductions

    • Evaluate impact of modified credits

    • Analyze impact on valuation allowance analysis

  • 7 Copyright © 2018 Deloitte Development LLC. All rights reserved.

    Variables to quantify

    state impact of

    transition tax

    Significant variables require analysis and integrated modeling State Transition Tax

    Coordination with International Transition Tax Computation, Analysis and Conclusions

    State Conformity to section 965— Fixed vs. Rolling IRC Conformity

    Impact in Unitary States that Include CFCs in Group and Applicable "80/20" Exclusions

    Availability of section 965(c) Deduction

    State Tax Treatment of Cash Dividends—Nonconforming States

    State Definition of "Subpart F Income"—section 965 Inclusion

    Sales Factor Treatment of Deemed and Actual Dividends

    Disallowance of deductions related to non-taxable dividends

  • 8 Copyright © 2018 Deloitte Development LLC. All rights reserved.

    State Treatment of Dividends Received Deduction (DRD) – as of March, 2018

    For dividends paid by foreign corporations greater than 80% owned to a member of a water’s edge group, the following are states where income would NOT be eligible for a 100% DRD or exclusion:

    Of these states, the ones in blue would currently conform to section 965 as enacted.

    •AK

    •CA

    •CO

    •ID

    •KS

    •LA (if paid or deemed paid before 6/30/18)

    •NM (if filing consolidated/combined)

    •ME

    •MA

    •MN

    •MT

    •NH

    •ND

    •OR

    •UT

    •VT

  • 9 Copyright © 2018 Deloitte Development LLC. All rights reserved.

    State Transition Tax ASC 740—State tax considerations example

    • Assumptions:

    o Section 965 repatriation amount = $3B

    o Blended (aggregate) state tax rate = 5%

    o No cash dividends paid

    • All deemed dividend is apportionable income

    • Section 965 deemed inclusion is Subpart F income

    • Single sales factor apportionment

    • No state special rules regarding limitation on dividends eligible for DRD, distortion tests, etc.

    • Potential conclusions:

    o If assume all DRD eligible, state tax = $0

    o If assume all taxable, state tax = $150M (5% x $3B)

    o Based on specific state analysis below, state tax = $15.3M (before federal benefit)

    State A State B State C

    Conformity to 12/31/2017 IRC No Yes Yes

    Deemed Dividend $0 $3B $3B

    DRD% 100% 80% 80%

    Dividend amount incl. in state tax base 0 $600M $600M

    Dividends Statutorily Included In Sales Factor Yes No Yes

    Sales Factor Numerator $20M $50M $30M

    Sales Factor Denominator $100M $100M $3.1B

    Sales % 20% 50% 1%

    State tax rate (before federal benefit) 5% 5% 5%

    Actual state tax (before federal benefit) 0 $15M $300K

  • 10 Copyright © 2018 Deloitte Development LLC. All rights reserved.

    Risk of Not Performing a GILTI Specific State Analysis – Illustrative Example

    Federal Context:

    o GILTI Inclusion Amount: $1B,

    o GILTI Deduction Amount = ($500M)

    o FDII Deduction Amount = ($100M)

    State Tax Assumptions:

    o Blended State Tax Rate: 6%

    o All GILTI is apportionable income but is not included in the receipts apportionment factor

    o Entity recognizing GILTI income is considered an 80/20 company that may be excludable from certain combined groups, as applicable

    o States would not allow a “double benefit” for GILTI deduction, if GILTI income is not included in state taxable income

    GILTI/Foreign Derived Intangible Income (FDII) ASC 740—State tax considerations example

  • 11 Copyright © 2018 Deloitte Development LLC. All rights reserved.

    GILTI/FDII ASC 740—State tax considerations example

    Risk of Not Performing a GILTI Specific State Analysis – Illustrative Example

    Potential Conclusions:

    - If assume all GILTI income is DRD eligible, state tax = $0

    - If, however, assume all taxable, state tax = $24M ($400M * 6%)

    - Based on specific state analysis, however (see below) state tax = $13.6M (before federal tax benefit)

    State A State B State C State D

    Conformity to 2018 IRC No Yes Yes Yes

    § 951A GILTI Income $0 $1B $1B $1B

    DRD Applicable N/A No No 100%

    US Shareholder Files as part of group?

    Yes Yes No Yes

    Includable Income $0 $1B $0 $0

    Section 250 Deduction Allowed?

    N/A No No Yes

    Allowable Deduction N/A $0 $0 ($100M)

    Taxable In