Domestic tax implications of the TCJA. The Broadband Tax Institute October 24, 2018

Transcription

1 Domestic tax implications of the TCJA The Broadband Tax Institute October 24, 2018

2 Agenda State Environment after TCJA: an overview TCJA State conformity application issues and opportunities Select state legislative and administrative reactions What s in store for 2019

3 Today s presenters Meredith Garwood Charter Communications Deborah Bierbaum AT&T Todd Lard Eversheds Sutherland Scott Austin PricewaterhouseCoopers, LLP Scott Roberti Ernst & Young, LLP

4 Meredith H. Garwood, CPA Group Vice President, Strategic Tax Charter Communications 7820 Crescent Executive Drive Charlotte, NC Meredith Garwood is Group Vice President of Strategic Tax for Charter Communications. She leads Charter s federal and state tax policy for income, property and transaction taxes. She also leads the Company s tax controversy and property tax groups. Meredith represents the company in national state tax organizations and projects. She has been proactively involved in numerous tax policy initiatives including state tax reform efforts and federal tax reform. Meredith currently serves on the Board of the Council on State Taxation, Board of University of North Carolina at Chapel Hill Business School and is Treasurer for North Carolina Cable and Telecommunication Association. She is Past President of the Business Advisory Council to the Streamlined Sales Tax Governing Board and former Vice President of Women in Cable and Telecommunications-Carolinas. Meredith is a frequent speaker at various tax and industry forums. Meredith has over 25 years of tax experience in all areas of tax including income, property, and transaction taxes. Prior to joining Charter, Meredith was Group Vice President for Time Warner Cable and Senior Director of Tax with AT&T Wireless. Meredith worked with a leading public accounting firm for over eight years where her practice focused on various aspects of corporate tax. She graduated from the University of North Carolina at Chapel Hill with a BS in Business Administration and a Master of Accounting with a concentration in Taxation.

5 Deborah Bierbaum Assistant Vice President Tax Deborah Bierbaum is AVP Tax External Tax Policy for AT&T where she is responsible for global tax legislative policy issues. Deborah is the Acting Chair of the New Jersey Sales and Use Tax Review Commission and has served on the Commission since March of She is a board member of the Council On State Taxation and chairs the Legislative Committee and co-chairs the Joint Legislative Policy Steering committee. She has been actively participating in the state and local government effort to streamline state and local sales taxes and currently serves as a board member and Vice President of the Business Advisory Council to the Streamlined Sales Tax Governing Board. Deborah participates on a number of State Business tax committees and currently co-chairs the Joint NJ Business and Industry Association and New Jersey Chamber of Commerce Tax Counsel. She is the co-editor of Telecommunications: Taxation of Services, Property and Providers, CCH Before joining AT&T, Ms. Bierbaum was the Deputy Commissioner for Tax Policy at the New York State Department of Taxation and Finance. In that position she worked actively with a wide variety of industry groups to address their tax policy issues. Ms. Bierbaum has a Masters of Science degree in Taxation from Pace University and a Bachelor of Science degree in Business Administration and Accounting from Clarion University.

6 Todd A. Lard Partner Washington P: E: Education - LL.M. in Taxation, Georgetown University Law Center J.D., Oklahoma City University School of Law B.A.B.A., Accounting, Dallas Baptist University Bar Admissions District of Columbia Oklahoma Background - A nationally known state tax lawyer with significant experience and insight into state tax policy, digital economy and communications tax issues. Todd provides clients with strategic tax planning and solutions to state tax controversy matters, and advocates at the state and federal levels regarding state tax policy and legislative issues. Todd returned to Eversheds Sutherland (US) in 2013 after spending five years as Vice President and General Counsel at the Council On State Taxation (COST). His work there included legislative, administrative and judicial advocacy on complex state and local tax issues for multistate corporations, including nexus, jurisdiction, discriminatory taxation and apportionment. He testified before government authorities and filed amicus briefs at the U.S. Supreme Court and state appellate courts advocating fair and nondiscriminatory taxation of multistate corporations. In his previous tenure with the firm, Todd was an integral member of Eversheds Sutherland (US)'s State and Local Tax (SALT) practice. His work focused on state and local tax planning and controversy, and he worked significantly with cable and communications clients on their rapidly evolving products and resulting tax issues. Before joining Eversheds Sutherland (US), Todd served as a Tax Research Manager for Nextel Communications, worked in the Washington National Tax Office of KPMG, and was a litigator at McKinney Stringer & Webster. Todd is an Adjunct professor of law at the Georgetown University Law Center, where he teaches a course on state and local income taxes.

7 Scott L. Austin Principal, State and Local Tax (215) Scott is the leader of PwC s Mid-Atlantic Market State and Local Tax practice. For over 20 years, he has provided state and local tax consulting services to public, private and foreign owned clients in various industries. Scott has extensive experience in the state tax aspects of federal tax reform, corporate restructuring, M&A, audit defense, refund appeals, compliance and credits and incentives. He also routinely consults on the state tax considerations of multinational transactions. Scott is currently serving as the firm s State and Local Tax Controversy Leader and State Tax Reform Co-Leader. Scott is a member of the Pennsylvania Bar and he received his BA in Economics from Lehigh University, a JD from Rutgers School of Law, and an LL.M. in Taxation from New York University School of Law. He is a frequent speaker at TEI, COST and BTI, and has written articles in various journals, on topics such as state tax aspects of federal tax reform, state apportionment, and controversy matters.

8 Scott Roberti Executive Director, State Tax Policy Scott is a member of EY s National Tax team leading the firm s State Policy Services practice. Scott is an experienced tax executive whose background includes developing and leading diverse project teams of tax and non-tax professionals focused on delivering state tax policy initiatives on a national platform for our clients. Prior to joining EY, Scott was the Director, State Tax Policy for the General Electric Company for 17 years. Scott retired from GE in March of 2017 after a 25 year career with GE s tax department. During his tenure in the industry, Scott has developed successful state tax policy models employing a wing-to-wing approach from issue identification to government facing engagement. Such models included boundary-less team effort with tax, government affairs & policy, business stakeholders and strategic external network. His experience also includes serving as Co-Chair Council on a State Taxation Legislative & Policy Committee. He has been a frequent leader for state chamber coalitions focused on developing consensus on business or industry specific tax regimes in collaboration with state tax officials. Scott also formerly served on Connecticut s Economic Competitive Council, appointed by former State Senator John McKinney.

9 State environment after TCJA: an overview

10 TCJA State responses Next steps Timeline of notable events Jan 2019 New Congress sworn in. Most state legislatures convene, having the opportunity to address TCJA provisions Dec 2018 Nov 2018 Oct 2018 Aug 2018 Calendar year-end public companies begin to prepare to file Form 10-K and evaluate estimated taxes paid for TY2018 Gubernatorial/Midterm elections Corporations file extended state income tax returns for TY2017 Begin release of proposed Treasury Regulations addressing key TCJA provisions; state taxing authorities step up publication of updated tax forms, TCJA information notices & granting penalty relief for late filing Jun 2018 Mar 2018 Feb 2018 Most state legislative sessions end June 30, with conformity bills enacted, opening the door for state taxing authorities to interpret laws and issue administrative guidance on state tax impacts of TCJA provisions Georgia, Idaho, and other states begin to enact tax laws that specifically address TCJA provisions relative to each state s tax policy West Virginia becomes the first state to enact new corporate tax laws that intersect with the TCJA, ushering in a period of highly-active state legislative sessions addressing state taxes Dec 2017 President Trump signs into law the TCJA (Public Law )

11 Estimated percentage change in state corporate tax base from TCJA by state ( ) State % increase in state corporate tax base State % increase in state corporate tax base Alabama 11% Nebraska 11% Alaska* 12% Nevada n/a Arizona 14% New Hampshire* 13% Arkansas 12% New Jersey* 12% California** 12% New Mexico* 11% Colorado 12% New York* 12% Connecticut* 12% North Carolina 12% Delaware 10% North Dakota 10% Florida 13% Ohio n/a Georgia 12% Oklahoma 13% Hawaii* 13% Oregon* 10% Idaho 9% Pennsylvania* 14% Illinois 9% Rhode Island* 11% Indiana* 12% South Carolina 12% Iowa 13% South Dakota n/a Kansas 11% Tennessee* 12% Kentucky* 12% Texas n/a Louisiana 12% Utah* 12% Maine 12% Vermont 14% Maryland* 12% Virginia 13% Massachusetts* 12% Washington n/a Michigan 9% West Virginia 9% Minnesota* 12% Wisconsin* 9% Mississippi* 4% Wyoming n/a Missouri 11% District of Columbia 12% Montana* 9% Overall change 12% * State starts with IRS Form 1120 line 28. To the extent IRC 250 deductions not allowed, this impact would be higher by 4%. ** There may be a California impact relating to cash repatriation for waters -edge filers once the deemed repatriated earnings have been actually distributed as dividends to US corporate shareholders. California Franchise Tax Board has estimated this amount at approximately $350 million. From Ernst & Young LLP and the Council on State Taxation study: The impact of federal tax reform on state corporate income taxes (March 2018)

12 State tax policy environment is one of the most active state tax legislative periods ever State considerations in conforming to federal changes: Economic development impact/opportunity Challenges in states facing budget shortfalls and understanding the impacts of the changes Balanced budget requirements Tax relief versus need for funding state services and infrastructure improvements 2018 Gubernatorial and congressional mid-term elections Impact of $10,000 cap on state and local tax paid deduction relief? Gubernatorial Responses: Blue States: NY Governor Cuomo Press Conf. Missiles fired from Washington toward NY CT Governor Malloy Budget Address The corporations have received a very large reduction in corporate taxes as part of the federal plan, and so we ve adjusted that tax, Malloy said. Red States: GA Governor Deal slashes state tax windfall by 75%. R candidates vowing bigger tax reductions ID Governor & Legislature adopted favorable conformity, use of state attributes and rate reduction

13 TCJA state conformity application issues and opportunities

14 Key business tax provisions Corporate tax rate and corporate AMT 21% tax rate, effective 1/1/18 Eliminate corporate AMT with refunds for AMT credits Interest expense deduction Limit deduction to net interest expense that exceeds 30% of ATI ATI through 2021 = EBITDA; Beginning in 2022 = EBIT Expensing 100% deduction for qualified property placed in service after 9/27/17 for five years; phase-down starting in 2023 Net operating losses (NOLs) Indefinite carryforward/repeal carryback (subject to certain exceptions) Offset limited to 80% of taxable income for NOLs arising after 2017 Like-kind exchanges Tax-free treatment limited to exchanges involving real property only Domestic production deduction (current law Section 199) Repeal deduction for tax years after 2017

15 Key international provisions Territorial System Dividend Exemption 100% deduction for foreign-source portion of dividend received by domestic corporation from specified 10%-owned foreign corporations. Retain current year taxation of passive income (via subpart F rules) Transition Tax One-time mandatory transition tax on accumulated untaxed post-1986 earnings of 10% owned foreign subsidiaries. Payable in installments up to 8 years 15.5% rate on cash and cash equivalents, and 8% rate on the remainder Base Erosion and Anti-abuse Tax (BEAT) Add-on minimum tax that applies to certain corporations BEAT is the excess of 10% (5% in 2018) of modified taxable income (generally taxable income grossed up by BEAT payments (certain deductible payments from US corp to related foreign corp, including for some services)) over regular tax liability reduced by certain credits Beat is the excess of 12.5% after 2025 (6%/11%/13.5% for banks, securities dealers) Global Intangible Low-taxed Income (GILTI) Minimum tax on net foreign income in excess of 10% of qualified business asset investment reduced by a 50% (37.5% in 2026) deduction GILTI is calculated on a global basis and is subject to immediate taxation. Only a portion of FTCs allowed (expense allocation appears to be required) Foreign-Derived Intangible Income (FDII) Deduction Reduced rate of tax (via a US deduction) on income associated with exports FDII deduction is allowed on income in excess of a 10% return on assets used to generate certain export income A deduction for FDII reduces the applicable US tax: Before % of FDII, After % of FDII

16 965 Toll Charge 16

17 965 Toll charge conformity map As of October 8, 2018 WA NH Y MT ND VT ME AK CA^ OR NV ID AZ*^ UT^ WY CO NM SD NE KS OK** TX MN WI IA** IL MO AR^ MS^ LA# NY^ MI PA OH IN WV VA*^ KY***^ NC^ TN SC^ AL GA^ CT^ MD DC^ MA RI NJ DE * (#2) adopts 965 for 2017, not 2018 ** (#1) dividends are allocable; no DRD *** (#1) adopts 965 for 2018, not 2017 # (#1) provides a 100% DRD for dividends paid after 7/1/18 ^ (#14) expense disallowance provisions attributable to DRDs or exempt income HI FL^ #5 No General Corporate Income Tax #19 Adopts 965, with 100% DRD or Subpart F modification Based on 100% ownership of CFC #15 Adopts 965, without 100% DRD or Subpart F modification #12 Does not adopt 965 PwC State and Local tax implications of US Tax reform 17

18 IRC 965 Toll charge Key state considerations Conformity-Gross vs. net: - Starting point - Special deduction? - Addition modification - partnership vs. corporation Conformity to IRC 243 vs. state DRD - ownership % vs Impact of Partnership as US Shareholder - Allocable vs Apportionable - Application of DRD Rules Filing methodology - Water s edge vs. worldwide - Group composition Expense disallowance - Asset ratio/income ratio - States with authority to attribute expenses - Audit settlements - Form 1118 expenses Sales factor representation - Allocation - Sourcing - Post 1986 receipts vs. 965 income - Investment capital vs. business capital Section 78 gross-up 8 year payment Conformity in 2018 Reliance upon departmental guidance? Actual Distributions - Treatment in conforming vs. nonconforming states - State PTI, basis and pre-unitary E&P considerations APB 23 considerations in non-conforming states 965 Proposed Regulations-Rules related to affiliation and consolidation - The-2 and-8 portions of the regulations are the most likely portion of the new regulations that will create Federal vs State differences to 965(a) and 965(c). PwC State and Local tax implications of US Tax reform 18

19 Global Intangible Low Tax Income (GILTI) 19

20 International provisions Section 951A, GILTI inclusion A majority of states imposing income tax will potentially tax at least some component of a US corporate shareholder s Section 951A GILTI inclusion in the 2018 tax year. Key Pre-TCJA fixed conformity (not taxable)* Full modification to Section 951A (generally not taxable) Special rules (taxability typically impacted by percentage ownership of subsidiary or state return filing methodology) or partial modification to Section 951A No modification to Section 951A (generally taxable) No state corporate income tax Source: Ernst & Young LLP analysis of state laws as of October 11, 2018 (exceptions may apply) *IA generally conforms to post-tcja IRC beginning in tax year Page 20

21 GILTI Key state considerations While GILTI is mechanically includable in federal taxable income in a manner which is similar to Subpart F income, it is statutorily and conceptually different Consequently, historic state conventions regarding modification of Subpart F income may not be applicable to GILTI. Since the 50% deduction is in another code section, IRC 250, which is a special deduction, not all states will conform to the deduction. Applicability of State DRDs or other subtraction modifications Filing methodology - Water s edge vs. worldwide - Group composition Expense disallowance - Similar concerns as for 965 to the extent a state allows a DRD for GILTI Sales factor representation - Allocation - Sourcing - Receipts vs. GILTI inclusion US Constitutional concerns-states can t favor domestic income/activity over foreign GILTI Proposed Regulations-Rules related to consolidated groups PwC State and Local tax implications of US Tax reform 21

22 Foreign Derived Intangible Income (FDII) 22

23 FDII Conformity map As of October 8, 2018 CA OR WA NV ID AZ UT MT WY CO NM ND SD NE KS OK MN IA* MO AR WI IL MI OH IN KY TN VT NY PA WV VA NC SC NH Y ME CT MD DC MA RI NJ DE AK TX LA MS AL GA HI FL * (#1) adopts FDII in 2019 #5 #31 #15 No General Corporate Income Tax States conforming to FDII States not conforming to FDII PwC State and Local tax implications of US Tax reform 23

24 FDII Key state considerations Since FDII is a special deduction, not all states will conform to the deduction. Filing methodology - Water s edge vs. worldwide - Group composition FDII focuses on domestic to foreign distribution models impact on and sales factor - Property that is sold by the taxpayer to any person who is not a US person and that the taxpayer establishes to the satisfaction of the Secretary is for a foreign use; or - Services provided by the taxpayer that it establishes to the satisfaction of the Secretary are provided to any person, or with respect to property, not located within the United States. Does not include financial services income. Expense disallowance related to deductions PwC State and Local tax implications of US Tax reform 24

25 163(j) Business Interest Limitation 25

26 Tax impacts of debt and acquisition of capital assets Recall that, from a federal policy standpoint, the Section 163(j) business interest deduction limitation and full expensing of qualified property under Section 168(k) go hand-in-hand. However, in the state tax base an imbalance may exist. State tax base

27 IRC 163(j) interest limitation conformity As of October 1, 2018 AK CA OR WA NV ID AZ UT MT WY CO NM HI ND SD NE KS TX OK MN WI IA* IL MO AR MS LA IN MI TN** AL KY OH GA WV SC FL PA VA NC VT NY NH Y ME #5 #20 #3 CT MD DC MA RI NJ DE No General Corporate Income Tax Adopts 163(j) as of 1/1/18 Adopts 163(j) with interest addback related to intangible income * (#1) adopts 163(j) in 2019 ** (#1) adopts 163(j) in 2018 and 2019, then decouples. State has interest addback #8 #5 #2 #8 Adopts 163(j) and has general interest addback provisions Enacted Legislation Decoupling from 163(j) [Note some of these states did not decouple as of 1/1/2018 but decoupled at a later date and some states may still have an intercompany interest expense adjustment] For 2018 tax year IRC adopted as of 1/1/2017 effectively decoupling from 163(j) Does not adopt 163(j) as of 1/1/18 PwC State and Local tax implications of US Tax reform 27

28 IRC 163(j) interest limitation Key state considerations Conformity to new 163(j) creates a number of considerations including: Not only applies to third-party indebtedness, but also to intercompany indebtedness (depending on consolidated treatment) - Therefore, a taxpayer with intercompany indebtedness would need to apply the Section 163(j) limitation first, and then determine whether a state interest addback provision would further limit interest deductibility. It is unclear whether the applicable Section 163(j) limitation amount should be applied first to the intercompany debt or to third-party debt. This lack of clarity will be particularly important in states with interest addback provisions applicable to intercompany debt. New carryover attribute for disallowed interest causes complexity for state income tax purposes since states may: - Apply intercompany interest addbacks to the carryover - Apportion the carryover, and/or - Impose 381 and 382 limitations Notice applies federal limitation at consolidated group level may not apply in many states Interplay of limitations for interest between related members in states with special in lieu of industry taxes such as insurance and telecommunications. PwC State and Local tax implications of US Tax reform 28

29 TCJA State legislative and administrative reactions

30 Select SALT developments New Jersey AB 4202, enacted July 1, 2018, as amended by AB 4495, enacted October 4, 2018 TCJA related changes: 965 Toll Charge Retroactively reduces the dividend received deduction for 80% owned subsidiaries to 95% and provides a cap on the tax for 2017 and 2018 at 3.5% or three year average (2014 to 2016) actual apportionment factor. Decouples from the federal 965(c) deduction. GILTI and FDII Allows the section 250 deductions for GILTI and FDII effectively taxing 50% of GILTI. Silent on apportionment factor representation. 163(j) Interest Limitation Applies on a pro-rata basis to third party and related party interest, regardless of whether the interest is also subject to either of NJ s related party interest addback provisions. Treatment of Foreign income - Broader definition of entire net income with removal of the word "specific" in the provision which disallows federal exemptions or credits. May be an attempt to overturn Infosys case. Other Corporate Business Tax changes: Rate Increases the tax rate to 11.5% for 2018 and 2019 tax years and 10.5% for 2020 and 2021 tax years. Increase does not apply to utilities (which may include some telecommunications entities). Sourcing Adopts market sourcing for services beginning in Net operating loss deduction Allows net operating losses to survive a merger and converts pre-combined filing losses to post-apportionment.

31 Select SALT developments New Jersey AB 4202, enacted July 1, 2018, as amended by AB 4495, enacted October 4, 2018 Mandatory Combined Filing effective for tax years ending after July 31, 2019: Water s edge with election for worldwide or federal affiliated group binding for 6 years. Increases the minimum tax to $2,000 per entity. Utilizes the Joyce apportionment methodology. Net operating losses after combined filing can be share among the groups; the pre-combined net operating losses can only be used by the entity that generated the loss. Credits existing prior to the effective date of combined filing and those earned after can be shared among the group members. Credits earned by entities that join the group after combined filing takes effect cannot be shared. Rate regulated utilities are excluded (gas, electric, water and waste) from combined filing. Includes combinable captive insurance companies in the combined group. Intercompany gains/losses are generally deferred Entire net income for foreign combined members based on P&L statement

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34 Select SALT developments Georgia HB 918 (enacted March 2, 2018) & SB 328 (enacted March 26, 2018): Updates date of conformity to the IRC to February 9, 2018, but decouples from certain corporate tax changes in the TJCA including: Full expensing (IRC 179) Bonus depreciation (IRC 168(k)) 30% business interest expense deduction limitations (IRC 163(j)) conforms to this section as of December 21, 2017 Temporarily reduces the corporate and personal income tax rates from 6% to 5.75% in 2019 Further reduced to 5.5% in 2020 if resolution approved by legislature and governor Rate cuts expire at end of 2025; rates revert back to 6% in 2026 International Provisions: GILTI (IRC 951A) subtracted from GA taxable income GILTI deduction (IRC 250(a)(1)(B)) does not apply because GILTI not taxable FDII deduction (IRC 250(a)(1)(a)). GA conforms as FDII is included in GA taxable income Deemed repatriation (IRC 965) and foreign DRD (IRC 245A) are subtracted from GA taxable income Expense directly attributable to nontaxable dividend income must reduce the amount of the GA DRD

35 Select SALT developments Idaho HB 355 (enacted February 9, 2018) IRC conformity date updated to the IRC in effect on December 21, 2017 (i.e., day before enactment of TCJA), except IRC 965 and 213 adopted as they were in effect on December 31, 2017 Requires addback for amounts deducted under IRC 965. HB 384 (enacted February 15, 2018) Allows taxpayers to use available net operating losses, Idaho credits and capital loss carryovers in years beyond the normal statute of limitations if there is an increase in taxable income due to a bonus depreciation adjustment HB 463 (enacted March 12, 2018) Similar changes to HB 355, but also includes 2018 conformity Reduces individual and corporate income tax rates Requires addback for amounts deducted under IRC 254A and 250

36 What s in store for 2019?

37 Current state tax trends driving 2019 agenda States responding to the TCJA States responding to the US Supreme Court ruling in South Dakota v. Wayfair Corporate and individual income tax rate cuts State-level tax reform Continued movement to: Single sales factor apportionment and Market-based sourcing for sales of non-tpp States designate federal Opportunity Zones Sales tax base expansion to include services, streaming and sharing

38 Source: as of October 8, 2018

39 Source: as of October 8, 2018

40 Source: as of October 8, 2018

41 Q&A

42 Appendix

43 IRC 965 Toll charge State flow chart E&P Federal 965 calculation (affiliated or consolidated) Conform to 965? No Cash distributed? No Yes PTI? Basis? DRD? No or Partial Sales factor No Yes Yes Full Gross Gross or net? Net Expense and/or interest addback Subpart F dividend vs. other foreign inclusion Sourcing & 80/20 rules PwC State and Local tax implications of US Tax reform 43

44 GILTI flowchart PwC State and Local tax implications of US Tax reform 44

45 FDII Computational basics STEP 1 STEP 2 Determine amount of Foreign Derived Deduction Eligible Income STEP 3 STEP 4 Understanding the mathematical relationships between elements of the FDII deduction computation STEP 5 PwC State and Local tax implications of US Tax reform 45

46 FDII Statutory definitions Foreign Derived Intangible Income (FDII): Described statutorily as the amount which bears the same ratio to the deemed intangible income of such corporation as the foreign-derived deduction eligible income bears to deduction eligible income of such corporation. Deemed Intangible Income (DII): The amount of deduction eligible income (DEI) in excess of a 10% return on a corporation s qualified business asset investment (QBAI) Qualified Business Asset Investment (QBAI): The average aggregate adjusted bases as of the close of each quarter of such taxable year in tangible personal property used in a trade or business of the corporation and depreciable under section 167. Deduction Eligible Income (DEI): The gross income of a domestic corporation excluding: subpart F income, GILTI, any financial services income (as defined in Section 904(d)(2)(D)), any dividend received from a CFC by its US shareholder, any domestic oil and gas income of the corporation, and any foreign branch income less properly allocable deductions. Foreign-derived deduction eligible income (FDDEI): Any deduction eligible income of the taxpayer that is derived in connection with: - (1) property that is sold by the taxpayer to any person who is not a US person and that the taxpayer establishes to the satisfaction of the Secretary is for a foreign use; or - (2) services provided by the taxpayer that it establishes to the satisfaction of the Secretary are provided to any person, or with respect to property, not located within the United States. Does not include financial services income. Foreign use: Property sold to a foreign related party is considered foreign use if such property is ultimately sold by a related party, or used by a related party in connection with property which is sold or the provision of services, to another person who is an unrelated party who is not a United States person. PwC State and Local tax implications of US Tax reform 46

47 IRC 163(j) interest limitation Consolidated groups Treatment of Consolidated Groups-Notice provides that, consistent with congressional intent as reflected in the Conference Report, the Treasury Department intends to issue regulations clarifying that the Section 163(j) limitation applies at the level of the consolidated group (as defined in (h)). A consolidated group s taxable income for purposes of calculating adjusted taxable income (as defined in section 163(j)(8)) will be its consolidated taxable income (as determined under ), and intercompany obligations (as defined in (g)(2)(ii)) will be disregarded for purposes of determining the limitation in section 163(j)(1). The Treasury Department and the IRS anticipate that such regulations will not include a general rule treating an affiliated group that does not file a consolidated return as a single taxpayer for purposes of section 163(j), as amended by the Act. PwC State and Local tax implications of US Tax reform 47

48 IRC 163(j) interest limitation Consolidated groups (continued) State Adoption of the Consolidated Group Single Taxpayer Treatment: In a separate-company filing context, states typically do not follow federal consolidated return regulations. Is there a difference if the federal consolidated treatment is found in a regulation under Section 163 vs a federal consolidated return regulation? Certain states may provide authority for a broad adoption of federal consolidated return regulations. Some states have a formal history of following only certain specific federal consolidated return regulations (for example, Treas. Reg. sec ). Alternatively, some consolidated or unitary combined states statutorily treat the state filing group as a single taxpayer. If a combined group of corporations is treated as a single taxpayer, a state could conclude that the Section 163(j) limitation (which federally is applied to a taxpayer ) is measured by the group s income. Finally, treatment may be uncertain in those states that are silent regarding the application of federal consolidated return regulations. PwC State and Local tax implications of US Tax reform 48

49 State responses to TCJA as of October 10, 2018 TCJA provision / State proposal IRC conformity update bills IRC 965 (transition tax on accumulated foreign earnings) IRC 245A (future foreign DRD), 250 (FDII/GILTI deduction), 951A (GILTI) 30% business interest expense limitation (IRC 163(j)) PTE deduction (IRC 199A) Bonus depreciation (IRC 168(k)) SALT cap workaround/charitable contribution in lieu of tax Carried interest fee Employer payroll tax New entity level tax on PTEs State actions Enacted: AZ, FL, GA, HI, ID, IN, IA, KY, ME, MI, NC, OH, OR, SD, VA, VT, WV, WI Proposed: MN (vetoed), VT (vetoed) Enacted: ID, IN, GA, NY, NJ, NC, OR, UT, VA, WI Proposed: ME, MD, MA, MN (vetoed), Guidance: AL, AZ, AR, CA, CO, CT, FL, IL, LA, MA, MD, NJ, NY, NYC, OR, PA, RI, TN, UT, VT Enacted: GA, HI, ID, IN, NJ, NY, NC, WI Proposed: IL, MA, MN (vetoed), NY Enacted: CT, GA, IN, NJ, TN, WI, VA Proposed: NY, SC Guidance: KY, ME Enacted: CT, DC, HI, IA, IN, KY, ME, NJ, OR, WI; IA (allow) Proposed: ME, MN, MT (proposed reg.), NJ, NM Enacted: CT, FL, IA, KY, OH, PA WI, VA Proposed: ME, MN, NY, TN Guidance: KY, ME Enacted: CT, NY, NJ, OR Proposed: CA, DC, ID, MD, RI, WA Proposed: CA, IL, NJ, NY, RI Enacted: NY Enacted: CT Proposed: CA, NY

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