Multistate Tax Symposium · 2020. 8. 31. · State Corporate Income Tax Complexities Post-Tax Cuts...

The 2020 National Multistate Tax SymposiumMastering the Art (and Articulation) of State Tax—Distilling the Complex

January 29-31, 2020

State Corporate Income Tax Complexities Post-Tax Cuts and Jobs ActAlysse McLoughlin, McDermott Will & Emery LLPSarah Murray, Deloitte Tax LLPThomas D. Powers, JPMorgan Chase & Co.

January 29-31, 2020

3The National Multistate Tax Symposium: January 29-31, 2020Copyright © 2020 Deloitte Development LLC. All rights reserved.

• Compliance – What We Learned

• Planning – Potential Opportunities and Considerations

• Documentation and Preparing for Controversy

Agenda

4

Compliance – What we learned


• Conformity drove compliance

• Forms weren’t updated

• Many states treated as a deemed foreign dividend and provided a state foreign dividend deduction

• Some states issued late guidance

• Key takeaways:

− Conformity vs. Non-Conformity and the impact to PTEP

Transition Tax – What we learned

Compliance


• To amend or not to amend…that is the question!

• Some states issued late guidance:

− Nebraska

◦ The NE DOR issued GIL 24-18-1(Dec. 21, 2018), which addresses the state treatment of foreign earnings subject to IRC Sec. 965 federal repatriation transition tax

◦ This document was subsequently superseded and revised by GIL 24-19-1 (9/13/19), and includes information on filing related 2017 amended returns.


Compliance

http://www.revenue.nebraska.gov/legal/GIL/GIL24-18-1_Section_965.pdf

http://www.revenue.nebraska.gov/legal/GIL/GIL24-19-01_Section_965.pdf


• Some states issued late conformity

• Examples of “Retroactive” conformity:

− Minnesota

◦ HF 5 signed by Governor on 5/30/19, which provided that changes incorporated by federal changes (i.e., IRC Sec. 965) are effective retroactively at the same time they became effective for federal tax purposes.

− Arizona

◦ AZ DOR issued Income Tax Notice for Corporate Taxpayers (June 4, 2019) – Addressing IRC Sec. 965, states: "For Arizona purposes, the IRC § 965(a) income is considered a foreign dividend and may be subtracted to the extent it is included in Arizona's starting point for corporations (Federal Taxable income). Because the income is not taxed the related federal deduction would need to be added back on the Arizona return."


Compliance

https://azdor.gov/news-events-notices/news/income-tax-notice-corporate-taxpayers


• Examples of “Non-Retroactive” conformity:

− New Hampshire

◦ H.B. 4, signed by gov. 9/26/19. Updates the BPT’s general conformity to the Internal Revenue Code (IRC) for all taxable periods beginning on or after January 1, 2020 to the IRC in effect on December 31, 2018 (previously, December 31, 2016)

− Iowa

◦ October 23, 2018, Iowa DOR issued guidance (Iowa Tax Reform Guidance: Deemed Repatriation of Deferred Foreign Income) for taxpayers, as it does NOT conform to IRC Sec. 965 for the 2017 tax year.


Compliance

http://gencourt.state.nh.us/bill_status/bill_status.aspx?lsr=1124&sy=2019&txtsessionyear=2019&txtbillnumber=hb4&sortoption=

https://tax.iowa.gov/sites/files/idr/documents/GuidancePublication_Section%20965.pdf


• Expense Disallowance Provisions

− Many states disallow expenses related to dividends and require these amounts to be netted against related DRDs

− Consider the methodology for expense attribution:

◦ Expenses attributable to income of a foreign corporation or non-taxable income

− Direct and/or indirect

− Interest expense only

◦ Form 1118

− Administrative guidance and past audit history


Compliance


Moving on from Transition Tax and into the GILTI, FDII and §163(j) era:

• Conformity is still key

• Guidance from states was scant, unclear or everchanging

− e.g., New York, New Jersey, Nebraska

• Monitoring “retroactive” conformity is important for purposes of PTEP

− IRC Sec. 959 and IRC Sec. 961

− If a state included the income or deemed income in the state tax base, even if it then allowed a deduction, there may be likely PTI and basis increase for state purposes

• Federal mapping more important than ever

− Federal forms and whitepaper presentation may significantly impact state proforma treatment

GILTI, FDII and 163(j) – What we learned

Compliance


GILTI

• Non-Conformity: CA, HI, IA (2020), SC, TX, WI

− Necessary to track previously taxed income related to GILTI and non-conformity

− Federal Schedule C is no longer enough

• Conforming state compliance potential “pitfalls”:

− Mechanics of the components of GILTI and varying deductions by state:

◦ Sec. 250(a)(1)(B), Sec. 78, State specific GILTI deduction/DRD

− Separate state only GILTI calculations (no cross chain netting and no FTCs)

− Aggregation of ownership in separate states to qualify for maximum DRD

− Federal-state filing group differences (i.e., 80/20 entities and nexus combined returns)

− Disconnect between federal and state taxable income limitations

GILTI – What we learned

Compliance


FDII

• Non-Conformity: Approximately half of the states allow the deduction

• Conforming state compliance potential “pitfalls”:

− Federally, FDII may have been attributed to a single entity

− Separate state only FDII calculations

FDII – What we learned

Compliance


• IRC. Sec. 163(j)

• What amounts should be used for each state’s calculation?

• Separate state calculations

− Differing guidance by state and unique state only rules

◦ Pennsylvania

◦ Virginia

• Combined/Consolidated calculations

− Who is the “taxpayer”

◦ Michigan, Massachusetts

− Federal-state filing group differences

− Exclusion or inclusion of entities

◦ 80/20 exclusion, foreign entity inclusion

163(j) – What we learned

Compliance

Corp A Corp B Corp C Total

Business I/I 1,000 600 0 1,600

Adjusted TI 300 (500) 1,200 1,000

Business I/E 1,200 200 1,800 3,200

Federal 163(j) limitation 713 119 1,069 1,900

Separate Co. 163(j) limitation 1,090 200 360 1,650


Communicating the impact of “Tax Reform” on the compliance process to business stakeholders

• Increased consulting fees

• Increased compliance fees

• Significant compression on internal tax department resources

Communicating to Business Stakeholders

Compliance

15

Planning – Potential Opportunities and Considerations


• Facts:

− No federal IRC Sec. 163(j) limitation

− Company A is a separate filer with a 163(j) limitation

− Company B is a unitary-only filer

• Potential Opportunity:

− Company B assumes a portion of Company A’s 3rd party liabilities

• Considerations:

− Debt to equity ratio and debt capacity of entity assuming debt

− IRC Sec. 357(c) analysis

− IRC Sec. 385 analysis

− Legal agreements and ability of Company B to service the debt

− Treasury, accounting and financing impact

163(j)


Company C

Company A

Company B

CFCs

Assumption by subsidiary of

Company A 3rd party liabilities

Example Scenario:


• Facts:

− No federal IRC Sec. 163(j) limitation

− Company A is a separate filer with a 163(j) limitation

− Company B is a Holding Company for foreign subsidiaries

− Company C files in similar states as Company A


− Company B and C convert to DREs to flow operating income and GILTI into Company A

• Considerations:

− IRC Sec. 332 liquidation analysis; solvency analysis

− Nexus differences between A, B and C

− Business and operations impact of conversions

− Impact of conversion on foreign share ownership

163(j)


Company C

Company A

Company B

CFCs

Corp A Corp B Corp C Total

Business I/I 1,000 600 0 1,600

Adjusted TI 300 (500) 1,200 1,000

Business I/E 1,200 200 1,800 3,200

Federal 163(j) limitation 713 119 1,069 1,900

Separate Co. 163(j) limitation 1,090 200 360 1,650

Example Scenario:


• Additional 163(j) Considerations

− Ability to transfer expenses from limited entities

− Ability to reclassify interest as COGS

− Consider elective returns

− Breaking nexus

163(j)



• Facts:

− Federally tested income and loss from CFCs are netted for GILTI purposes

− States that do not adopt the federal consolidated return regulations determine net tested income or loss based on ownership of any CFC (directly or indirectly) and would not be able to benefit from any affiliate’s tested loss

− Company A receives tested losses and files in unitary only states

− Company B receives tested income and files in separate states


− Contribute CFCs to Company B to consolidate ownership and net tested income and losses

• Considerations:

− IRC 351 analysis

− Legal agreements and share transfer considerations

− Impact on Sec. 163(j) at Company B

GILTI


CFCs

Company A

Company B

CFCs

Contribution of CFCs

CFCs

Tested Losses

Tested Income

Example Scenario:


• Facts:

− Company A receives GILTI and files in separate company states

− Company B is a holding company for foreign entities and only files in unitary states


− Contribute CFCs to Company B to consolidate ownership and mitigate separate company taxation of GILTI

− Identify and convert certain CFCs to provide “80/20” treatment for Company B

• Considerations:

− IRC Sec. 351 and 332 analyses

− Legal agreements and share transfer considerations

− Impact to Sec. 163(j) at Company A

− Business, operational, and legal impact

GILTI


CFCs

Company A

Company B

CFCs

Contribution of CFCs

CFCsCFC

Example Scenario:


• Additional GILTI Considerations

− Reverse 80/20 treatment of foreign entities

− Worldwide elections

− Consider apportionment dilution impact against structural changes

GILTI and Apportionment



Apportionment

• Potential state treatment of GILTI for apportionment purposes:

− Exclude GILTI from the sales factor

− Include the GILTI amount net of the 50% deduction pursuant to IRC Section 250 (in states that allow)

− Include the Gross 951A amount in the sales factor

− Include the factors of the CFCs attributable to generating the GILTI income (“Detroit Formula”)

o If GILTI income = 80% of CFC’s income, then 80% of the CFC’s property, payroll, and sales would be included in the apportionment factor of the US shareholder.

o Similar to CFC inclusion rules in California that allow the factors of CFC to be included proportionally to Subpart F income

o Numerator inclusion of GILTI income based on shareholder’s activity or other measure

GILTI and Apportionment



Communicating the potential impact of planning related to “Tax Reform” to business stakeholders

• Impact to cash tax liabilities

• Impact to state statutory effective rate

• Impact to overall effective rate



24

Documentation and Preparing for Controversy


Methods of documenting positions related to Tax Reform and preparing for controversy

• Tax technical position memoranda

• Tax opinions

• Originally filed returns

− Consider level of authority

− Consider applicability of underpayment penalties and interest

− Consider impact on ASC 740

• Amended returns

− Protective claims

• Letter Rulings

Documenting Positions in the event of Controversy



The role of Controversy

• Audit assistance for originally filed and amended returns

• Protests of audit results

• Settlement agreements

• Closing agreements

• Litigation

Controversy



Communicating the value of documentation and controversy to business stakeholders

• Mitigate tax liabilities

• Capture refunds

• Manage risk by solidifying positions

• Financial statement impact related to ASC 740 positions and reserves




• Understanding avenues to voice development of policy/legislation/regulations

Lobbying


Contact information

Thomas D. Powers

JPMorgan Chase & Co.

[email protected]

Alysse McLoughlin

McDermott Will & Emery LLP

[email protected]

Sarah Murray

Deloitte Tax LLP

[email protected]

mailto:[email protected]




This presentation and related panel discussions contain general information only and the respective speakers and their firms are not, by means of this presentation, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This presentation is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor. The respective speakers and their firms shall not be responsible for any loss sustained by any person who relies on this presentation.

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Multistate Tax Symposium · 2020. 8. 31. · State Corporate Income Tax Complexities Post-Tax Cuts...

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