Multistate Tax Symposium State tax reboot The age of ... · Multistate Tax Symposium State tax...

The 2019 National Multistate Tax SymposiumState tax reboot—The age of Multistate

February 6-8, 2019

February 6-8, 2019

State treatment of federal Tax Cuts and Jobs Act’s foreign income and GILTI Susan Courson-Smith, PfizerKenneth Jewell, Deloitte Tax LLPAlysse McLoughlin, McDermott Will & Emery

3The National Multistate Tax Symposium: February 6-8, 2019Copyright © 2019 Deloitte Development LLC. All rights reserved.

• Overview and General Concepts

−IRC Section 965 Deemed Repatriation

−IRC Section 951A GILTI

−Foreign Derived Intangible Income (FDII)

• Closing Thoughts

Agenda

4

Overview and general concepts


Overview of Federal Tax Cuts and Jobs Act (2017 Tax Act)

2017 Tax Act—multistate considerations for multinational entities

Tax reform legislation includes three major changes for federal taxation of multinational entities:

Tax on Global Intangible Low-Taxed Income (GILTI)

Deemed Repatriation of Foreign E&P

Deduction for Foreign-Derived Intangible Income (FDII)


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

State conformity to IRC references specific (and/or decouples from specific) 2017 Federal Tax Act 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

NY – Selective nonconf. to deemed repatriation provs., eff. 1/1/17

IN – 2/11/2018 (effective 1/1/2018). Nonconformity to 163j

CT - Nonconformity to 163j

OK – 965(h) election is available

NC – 2/9/2018. Selective nonconformity

HI – 2/9/2018. Selective nonconformity

NJ – Selective nonconformity

UT – 965(h) election is available

VT – 12/31/2017. Limited nonconformity

ME – Selective nonconformity to 965 and GILTI

MA – Nonconformity to 245A, 250, and 965(c) deductions

SC – 2/9/18. Overall nonconformity.

*Contact a tax advisor for more information*

Selective Conformity

AL - Current

AR - Varies by

IRC section

CA - 1/1/15

MS - Current

Specific Date Conformity

AZ - 1/1/17

FL - 1/1/18

GA – 2/9/18

HI - 2/9/18

ID – 12/21/17 or

12/31/17

IN - 2/11/18

IA - 1/1/15

KY - 12/31/17

ME – 3/28/18

MI* - Current or

1/1/18

MN - 12/16/16

NH - 12/31/16

NC – 2/9/18

SC – 2/9/18

TX - 1/1/07

VA – 2/9/2018

VT - 12/31/17

WI – 12/31/17

WV - 12/31/17

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

FL

NM

DE

MD

TX

OK

KS

NE

SD

NDMT

WY

COUT

ID

AZ

NV

WA

CA

OR

KY

ME

NY

PA

MI*

VT

NH

MA

RICT

VAWV

OHINIL

NCTN

SC

ALMS

AR

LA

MO

IA

MN

WI

NJ

GA

DC

AK

HI


State corporate tax code conformity to IRC – as of November 1, 2018


Overall trends in state responses to 2017 Tax Act


• Select states have provided guidance to treat GILTI in a manner consistent with the treatment of Subpart F income

• A very select group of states have offered informal guidance on apportionment representation for GILTI

• Select states that otherwise adopt special deductions have specifically decoupled from the FDII deduction

• 2018 state legislative sessions ended without addressing GILTI or FDII by statute

• Too early to know the trends in what state administrative guidance will be in areas outside of deemed repatriation

8

IRC Section 965 Deemed Repatriation


Continuing state complexity and open questions

Deemed Repatriation—multistate tax considerations for multinational entities

• Applies for last tax year of controlled foreign corporation (CFC) beginning before January 1, 2018

• IRC section 965(a) provides for addition to 10(+)% shareholder of CFCs equal to pro rata share of CFC’s untaxed deferred E&P (“965 inclusion”)

−965 inclusion based on the greater amount of post-1986 deferred income as measured on:

◦ November, 2, 2017, or

◦ December 31, 2017

−965 inclusion calculation allows for netting of E&P balance against E&P deficits

• IRC section 965(c) provides for deduction for corporations to impose effective tax rate of:

−15.5% (to extent of US shareholder’s pro rata share of CFC’s cash & cash equivalents (the “US shareholder’s aggregate foreign cash position”); and

−8% of the US shareholder’s pro rata share of the remainder

• FTC eligible but reduced

• Election to pay tax over 8 years

• US corporations filing federal consolidated return to be treated as single US shareholder


Continuing state complexity and open questions

Deemed Repatriation—multistate tax considerations for multinational entities

• IRC Section 965(a) Inclusion in Separate vs. Combined States

−Even though the IRC Section 965 regulations treat consolidated group as a single taxpayer for certain purposes

◦ IRC Section 965 by statute allows netting of E&P deficits among affiliates as defined in Section 1504. Thus – netting would generally be allowed in separate company states too

• Deductibility of IRC Section 965(c) “participation deduction”

−Considerations in states that have not legislatively decoupled from IRC Section 965(c)

−“Double deduction” rules

−Reporting guidance that both IRC Section 965(a) and (c) should be excluded from the state return if not in Line 28

• Adoption by more states of expense allocation disallowance related to untaxed dividends

• Apportionment factor representation

• Non-conformity to payment due date and installment election under IRC Section 965(h)

• IRC Section 961 basis adjustments

11

IRC Section 951A GILTI


What is GILTI?

GILTI—multistate considerations for multinational entities

• GILTI is a new broad residual basket of deemed income from CFC’s that is not limited to income from intangibles

• GILTI is not a dividend as defined at IRC Section 316

• GILTI is not Subpart F income as defined, though IRC Section 951A is included in Subpart F of the Internal Revenue Code


Federal taxation of GILTI


CFC Gross Income

• Expenses attributable to CFC income under

Section 954(b)(5)

• Exclusions (ECI, Subpart F, related party

dividends, foreign oil and gas extraction income)–

10% x Qualified Asset Base (“QBAI”)

GILTI inclusion

(Section 951A)

GILTI deduction

(Section 250)

2018–2026:

50% x (GILTI + Section 78 Gross Up)

2026 and after:

37.5% x (GILTI + Section 78 Gross Up)

Foreign Tax credits 80% of Foreign Tax Credits in GILTI basket allowed


State tax issues raised by GILTI


• Conformity, including state treatment of federal special deductions

• Scope of state DRDs and/or state treatment of certain foreign income

−GILTI is codified in IRC Section 951A within Subpart F of the IRC (i.e., Sections 951–965), but is separate and distinct from “Subpart F Income,” as defined in Section 952.

• Because there are generally no foreign tax credits for state tax purposes, GILTI may result in additional state tax even if no additional federal income tax

• Due to Federal-state filing group differences, a given member of a federal consolidated filing group can have a GILTI inclusion even of the consolidated group is in a net tested loss position, and vice versa

• Due to the consolidated netting rules applicable to tested losses, QBAI and specified interest, a given member of a federal consolidated filing group can have a GILTI inclusion for state tax purposes even if the consolidated group is in a net tested loss position, and vice versa

• Benefits and burdens of worldwide combined reporting – greater certainty on the tax base (including intergroup eliminations) and full apportionment representation versus multi-year lock-in periods and the uncertainty of legislation/case law on the state taxability of GILTI and/or apportionment representation


Calculation considerations


• More federal/state tax basis differences to track

− A consideration for both basis in the stock of CFC’s and the stock of US shareholders of CFC’s in both non-conforming states and conforming states that do not follow the federal consolidated return regulations

• Interaction with IRC Section 163(j) limitation on business interest expense deduction

− Tested income under GILTI is calculated with regard to the IRC 163(j) limitation

− For states that include GILTI in the tax base, but decouple from the new IRC 163(j) interest expense limitation rules, CFC tested income may need to be recalculated without regard for new IRC 163(j) limitation.

◦ However, this may be a limited population of states


Calculation of GILTI under Proposed regulation 1502-51


Proposed Treasury Regs. Sec. 1.1502-51 would treat tested losses of a CFC as a group asset in the first instance that is allocated to all members with positive tested income based on each member’s share of total positive tested income of the consolidated group*.

CFC1 has $100 of tested income. CFC2 has $100 of tested income. CFC3 has $100 of tested loss.

Under the proposed regulation, S2 does not net the tested loss of CFC3 against the tested income of CFC2 resulting in $0 net tested income for S2. Rather, the regulations require that the $100 tested loss of CFC3 be allocated to S1 and S2 based on a ratio of tested income of each member over consolidated tested income. Accordingly, S1 and S2 are each allocated $50 of CFC3’s $100 tested loss, resulting in S1 and S2 each having net tested income of $50.

*This same allocation methodology also applies to consolidated QBAI and specified interest expense.

US Parent

US sub. 1

CFC 1

US sub. 2

CFC 2 CFC 3

100%

100% 100%

$100 Tested

Income

$100 Tested

Income

$100 Tested

Loss


Calculation of GILTI without application of the consolidated return regulations


Same structure as the previous slide; however, in this example the consolidated return regulations do not apply. In states that do not adopt the federal consolidated return regulations, a US shareholder would need to determine its net tested income or loss based on its ownership of any CFC (directly or indirectly) within the meaning of IRC section 958(a) and would not be able to benefit from any affiliate’s tested loss.

In this case, S1 would have $100 of net tested income and S2 would have $0 of net tested income. It would also follow that absent the application of the consolidated allocation principles in the proposed regulation, it is possible for individual members of the consolidated return group to have tested income for state tax purposes notwithstanding the consolidated group is in a net tested loss position.

This is a plausible fact pattern that can trigger large differences between federal and state net GILTI inclusion in separatereporting states and group return states that don’t conform to federal consolidated return regulations

US Parent

US sub. 1

CFC 1

US sub. 2

CFC 2 CFC 3

100%

100% 100%

$100 Tested

Income

$100 Tested

Income

$100 Tested

Loss


Basis Adjustments


• GILTI tax basis adjustments in the shares of CFC’s and their US corporate shareholders under the consolidated return regulations

• The proposed regulations amend Treasury Regs. Sec. 1502-32 to require:

− A reduction in basis in the stock of a US group member owning a tested loss CFC to the extent such tested loss is used by other members of the consolidated group to off-set tested income

• Proposed regulation 1502-51 would require:

− A reduction in basis in the stock of a CFC to account for the amount of tested loss generated by that CFC that off-set tested income produced by other CFC’s owned by members of the same consolidated filing group

− Such basis reductions are not limited to the US shareholders basis in the shares of the tested loss CFC (similar to ELA concept)

• Accordingly, additional federal/state tax basis differences will arise in states that do not conform to the 2017 Tax Act and states that do conform but do not generally adopt the federal consolidated return regulations


State tax issues raised by GILTI


• How will GILTI income be sourced for apportionment purposes?

−Potential state approaches to factor representation:

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

◦ Include the Gross IRC Section 951A amount in the sales factor

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

◦ Exclude GILTI from the sales factor

◦ New Jersey’s approach based on a taxpayer specific proportional GDP approach


Potential statutory and Constitutional issues – Tax base


• If a state includes GILTI income in its tax base, potential taxpayer responses may include:

−GILTI should be considered a “dividend” similar to Subpart F under state statutes

◦ Massachusetts Guidance

−Taxing GILTI discriminates against interstate commerce and/or foreign commerce clause

• 505 U.S. 71 (1992) – “Kraft” case: Discrimination against foreign source income under the Foreign Commerce Clause

• Application of the Kraft holding to GILTI in separate company filing states

• Application of the Kraft holding to GILTI in unitary combined filing states

−GILTI cannot be taxed without proper apportionment factor representation


Potential Constitutional issues – Apportionment


• 445 U.S. 425 (1980): “The linchpin of apportionability … is the unitary business principal”

• Are the CFC’s and the US shareholder’s engaged in a unitary business?

• If GILTI is apportionable income derived from a unitary business, it should get factor representation

• In a unitary combined reporting state, factor representation for GILTI should be on par with factor representation afforded to income generated by unitary domestic affiliates – gross receipts of the CFC, and not limited to the gross or net GILTI inclusion amount

• In addition to Constitutional arguments, there may be “distortion” arguments available under state statute, regulations, administrative guidance and/or case law


Types of state responseExamplestate

Language of response

Apply subtraction to GILTI IL“…the Illinois subtraction modification for foreign dividends will exclude a portion of the increase from Illinois base income” related to the GILTI inclusion.

Apply subtraction to GILTI GAGeorgia expanded the provision for the state’s subtraction for subpart F income to include “income specified in Section 951A of the Internal Revenue Code of 1986.”

Exclude GILTI WIFor Wisconsin tax purposes, conformity to the Internal Revenue Code does not include Section 951A.

No legislation, but released administrative guidance treating GILTI as taxable

NY

“Although this new GILTI income is treated similarly to Subpart F income, it is specifically not characterized as Subpart F income under the IRC and therefore would not qualify as other exempt income. Thus, the income would flow through to New York, be treated as business income, and be subject to tax.”

No legislation but released guidance that GILTI is deductible

KY“For federal purposes, GILTI is treated similarly to Subpart F income, therefore, GILTI is considered nontaxable income for Kentucky income tax purposes.”

GILTI–Types of State Responses

GILTI —multistate considerations for multinational entities


State tax issues raised by the federal taxation of GILTI

GILTI —multistate considerations for multinational entities

• If, and how, a state decouples from GILTI is important

−Excluding GILTI income vs. subtraction for GILTI income

• If GILTI income is included in gross income:

−Increase to basis (IRC Section 961)

−Treated as previously taxed income (PTI) (IRC Section 959)

−Not included in the tax base when cash is distributed

• If GILTI income is excluded from gross income:

−May not result in increase to basis

−May not be treated as PTI

−Included in the tax base when cash is distributed

24

Foreign Derived Intangible Income (FDII)


Federal treatment of FDII

FDII —multistate considerations for multinational entities

FDII

Deemed

Intangible

Income (“DII”)

Foreign Derived

Deduction Eligible

Income (“FDDEI”)

Deduction Eligible

Income (“DEI”)

Deduction = 37.5% x FDII


Federal treatment of FDII

FDII —multistate considerations for multinational entities

Ded

ucti

on

elig

ible

in

co

me

LESS: Subpart F, GILTI, Financial Services Income, CFC Dividends, Domestic Oil and

Gas, Foreign Branch IncomeG

ro

ss i

nco

me

LESS: Portion of DII that is not derived in connection with sales of

property intended for foreign use or services provided to any person

or with respect to any property not in the US

Deem

ed

in

tan

gib

le i

nco

me

LESS: 10% x Qualified Business Asset Investment (“QBAI”) of US company

FDII


State tax issues raised by the federal taxation of FDII

FDII—multistate considerations for multinational entities

• State tax issues include:

−Conformity, including state treatment of federal special deductions

−Apportionment

◦ Are sales related to FDII excluded from sales factor to the extent of deduction?

◦ FDII data may allow for favorable sourcing positions

−Market source services to foreign customers

−Source sales of TPP offshore

−Federal rules for determining “foreign deduction eligible income” may be different than state apportionment rules

−Deduction is still available for entities with no GILTI inclusion as long as it has FDII


Issues with IRC Section 250 deduction (GILTI and FDII)

FDII—multistate considerations for multinational entities

• Section 250 Deduction = 37.5% x FDII + 50% x (GILTI + Sec. 78 Gross Up)

• Deduction is limited to taxable income after NOL, any excess will result in reductions to FDII and GILTI

• State Considerations

−States typically provide an exclusion or subtraction from taxable income for the amount included in gross income pursuant to Section 78.

◦ Should the state deduction be reduced to 50% of GILTI income only?

−Some states allow the GILTI deduction but not the FDII deduction, or vice versa.

◦ If a deduction was reduced by the federal income limitation, should they be recalculated for state purposes?

−Most states have their own NOL provisions and start with federal taxable income before NOL.

◦ Should the limitation be calculated with respect to state taxable income?

29

Closing thoughts


Future of state tax policy and multinationals

2017 Tax Act—multistate tax considerations for multinational entities

Are states ready for the Constitutional

challenges to GILTI? How long will it take to achieve clarity?

How will states compete for

repatriated cash with C&I?

Do states need tax haven rules if they tax GILTI? What

would be left to tax?

Can state budgets afford decoupling

from base broadeners and/or

allowing FDII deduction?

Will the states allow foreign factor

representation for GILTI income? If not, will we see more worldwide

filers?


Contact information

Alysse McLoughlin

McDermott Will & Emery LLP

[email protected]

Susan Courson-Smith

Pfizer

[email protected]

Kenneth Jewell

Deloitte Tax LLP

[email protected]

mailto:[email protected]




This presentation contains 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.

As used in this document, “Deloitte” means Deloitte Tax LLP a subsidiary of Deloitte LLP. Please see www.deloitte.com/us/about for a detailed description of the legal structure of Deloitte USA LLP, Deloitte LLP and their respective subsidiaries. Certain services may not be available to attest clients under the rules and regulations of public accounting.

Copyright © 2019 Deloitte Development LLC. All rights reserved.

http://www.deloitte.com/us/about

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