CORPORATION TAXES UPDATES

Transcription

1 CORPORATION TAXES UPDATES

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3 2016 Fall Tax Seminar Bureau of Corporation Taxes Jeff Creveling, CPA Chief of the Taxing Division Valerie Greene Corporation Tax Manager Glenwood Hoskin, Jr. Corporation Tax Supervisor 1 Topics Legislative Changes Completing RCT-101 for 2015 Completing the RCT-128 Properly New Tax Forms 2016 CNI Affiliate Tax Addback and Credit 2

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5 Due Date of the RCT-101 The statute was revised for tax years beginning after December 31, Corporate net income tax reports (RCT-101) are due 30 days after the federal report is due, or would be due if that corporation were required to file federally. Previously the due date of a Calendar year filer was April 15 Only applies to the RCT P.S Reports and payment of tax Amended reports Act 84 provides procedures for corporations filing amended corporate tax reports filed after December 31, Taxpayers will have three years from the due date of the original report to file an amended report. The department will have one year from the date the amended report is filed to notify the taxpayer in writing if the changes are accepted. o If the taxpayer is not notified within one year, the report is deemed accepted. o Regardless of the 1 year acknowledgement, the department may review that report and assess any additional tax due within the statutes timeframes. Increase or decrease the tax due to amended info. Adjust the original reported figures to cause a tax change Deny the amended entirely due to other issues such as the amended challenging our statues. Changes other than changes to federal taxable income, filed prior to 1/1/2017 will be processed under PA Regulations Amended report. All filing timeframes and rules under regulation are same as in the new statute 72 P.S Amended Reports

6 Proper completion of forms will ensure speedy systematic processing. It will also avoid improper assessments, excess creation of notices, the need for human intervention, and avoids delays for taxpayers who need clearances or license renewals. The following are helpful guidelines for properly completing corporation tax forms properly: Taxpayers must use the non-year specific RCT -101, year specific forms ( ) are not compatible in the system and result in delayed posting of the report to the account. o Starting in August 2016 the Department will reject these improperly completed reports. Any checks/payment made will be accepted and applied to the account. Initially the Department will call Taxpayers regarding these incorrect reports and send a letter regarding the situation. If the taxpayer responds to the letter within 15 business days of the mailing date, we will accept the original received date of the incorrect report. If the taxpayer does not respond within 15 days time frame, estimates will be imposed on all taxes due. If the report is submitted after the 15 day due date, the date of receipt of the revised information will be the new received date. The Department MAY consider processing RCT-128-C increases and amended increases by treating the information in the reports as additional information and perform a desk review. If these are processed, they may result in a larger $5 day penalty (RCT-128-C increases) or additional tax increase without the benefit of the extended review timeframe (Amended RCT- 101 s depending on when they are submitted) o Tax years prior to 2001 must be manually posted to the system o RCT-101-X is no longer accepted and was eliminated. The RCT-101 was revised in 2011 to be used to file original and amended reports. Original reports timely filed prior to 2011 are now beyond timeframes to amended reports (filed for changes OTHER than changes to federal taxable income due to federal audit/federal amended). When forms are not completed in their entirety, (as instructed) the result can create errors (such as 0% blank apportionment treated as 100% PA). Items that are updated in our system such as address changes and Corporate Tax Officer changes (the Department transmits to the Department of State), if not completed properly, can result in errors such as documents mailed to improper addresses or incomplete/incorrect Corporate Officers listed at the Department of State Much like the forms, if the software is not compatible, information may not get entered into the

7 system as intended. This can result in erroneous updates and assessments, which lead to problems, delays, and liens (when clearances are required for sales of asset or license renewals) Other issues o Submitting duplicate returns (paper and/or electronic) can cause delays in processing of returns. These duplicates may be treated as amended reports and will result in processing errors o Do not override your software as this will effect the calculation of the tax or delay the processing. This can also cause improper assessments or reports getting stuck in processing thus other functions in the BTS may perceive a report is missing when its actually stuck. o Do not enter ALPHA characters in NUMERIC fields!!! The result will be either the characters will be ignored and zero will be entered, or the report will remain in an In Processing status o Do not leave NUMERIC fields blank!!! This will result in a 0 being entered, and again the report will either process incorrectly (revising apportionment) or will remain In Processing status The system does have limitations regarding the submission of reports as follows: (1) The first report received and Processed (even if marked amended report ) will process as an original report (2) Any subsequent reports will then be processed as amended if marked as such, or as Report of Change if RCT-128 filed

8 How to properly complete and file the RCT-101 for 2015 Special Final Reports With the elimination of the Capital Stock/Foreign Franchise tax for tax years beginning January 1, 2016 and after. Many business types, such as S corporations, LLCs taxed as pass-through entities and business trusts that are not federally taxed as a C corporation will need to file final corporation tax RCT-101 returns. These returns should be marked as final returns. Who does this affect? Entities not subject to the Corporate Net Income Tax for the years mentioned above and after include: single member LLC s, Multi Member LLC s taxed as a partnership or S Corporation, Business Trusts and PA S Corporations (see below for exceptions related to PA S Corporations that have Built-In-Gains). Solicitation only corporations would also no longer be required to file the RCT-101. Corporations subject to the Corporate Net Income Tax (excluding PA S Corporations that have Built-In-Gains) must continue to file the RCT-101 annually. PA S Corporations that have Built-In-Gains PA S Corporations that have Built-In-Gains would file a final RCT-101 for tax year If Built-In-Gains are triggered in any subsequent tax year, the PA S Corporation would have to file the RCT-101 to report the amount of gain subject to tax. Such return should be marked as both First Report and Final Report. If the PA S Corporation does not have any Built-In-Gain to be recognized in a subsequent year, the PA S Corporation does not have an RCT-101 filing requirement. Why does this need to be done? Does it affect anything else? This is done to remove the business from the corporation tax filing requirement. This does not involve any claims for clearance, or asset distributions for entities actually withdrawing from Pennsylvania. The entity can continue to operate in Pennsylvania and can hold property and conduct business in Pennsylvania, but these entities, as of 2016, are not defined as corporations subject to Corporation Tax.

9 Section E, page 5, of the RCT-101 should be marked Final Report (No other boxes need to be checked and no dates need to be provided.) The preparer should attach a rider to the report stating, Report marked final due to corporation not being subject to CNI tax due to [reason], and no longer subject to Capital Stock/Franchise Tax as of The BTS will simply show the corporation tax types as closed on our records. No future reports will be requested to be filed. Other tax types will remain open and on the records. Filing a Final Report will result in saving commonwealth resources and avoid inefficiencies of unnecessary notices being mailed, phone calls being processed, etc. Do not file an amended report to ONLY claim it is final. Fax a statement similar to the Rider mentioned earlier to the Bureau of Compliance Entities that are actually closing out their corporate tax filing requirements due to sale of assets, clearance, etc, should file their reports as normal. Important: Entities not subject and not removed from the filing requirement may continue to get notifications from the Department such as Non-Filer Notices, as the BTS will consider them subject to Corporate Net Income Tax.

10 When completing the history of earnings, Section A CSFF: There are no gaps in dates, and current year is reflected on the current line. Do not leave spaces between years, the earliest year starts on the top line and subsequent years should be entered chronologically. The current year figure should ONLY be entered on the CUR YR line. Do not enter 52/53 week dates, enter the dates as First of the month and last of the month. Note the top line is used first, all years are in order. By doing this the BTS will process your report correctly, since it will be able to read the periods properly. When periods are not in order the system will only read the ones in order.

11 If nothing is entered on Line 1 Section B for Current Year Fed Deprec. of 168k prop., the system WILL NOT calculate ANY recovery/deduction. Line 2 Section B represents the recovery of unrecovered bonus depreciation reported on REV-799 Schedule C-4 when an asset is sold or in the last year of useful life and all the bonus was not recovered already If the figure on line 3 Section B is entered as a negative the system will treat it as a positive figure, as this figure is used to adjust for prior year over recovery due to the Luxury Limitation, it s added to the recovery figure to remove excess prior years recovery, and thus cannot be entered as a negative The system uses this information, plus the 168k depreciation addback if claimed (Line 3D Section C), plus the unrecovered Bonus depreciation carried in from the prior year to calculate the correct recovery deduction and carry out the remaining unrecovered Bonus depreciation as follows: ((Section B Line 1-Line 3D Section C) x 3/7) - Section B Line 3 + Section B Line 2)= Possible Recovery Carry in Unrecovered Possible Recovery=Carry out unrecovered The Possible Recovery cannot be larger than the unrecovered Carry in. When this recovery is larger, then the entire carry in will be recovered and there would be no carry out.

12 When completing CS/FF checkboxes use only 1 box, if qualified. Investment in LLC- used by foreign corporations whose ONLY activity in Pennsylvania is investment in LLCs active in Pennsylvania, since the LLC is not treated as a partnership for Capital Stock/Franchise Tax purposes. Corporation is Exempt from tax. Holding Company- used by corporations to claim a 10% apportionment if they have more than 90% of there income from dividends, interest, gains from the sales of securities AND also the performance of Management or Administrative Services AND more that 60% of the assets at the end of the tax period are investment in/advances to subsidiaries Family Farm- corporation that performs qualified farming activity, and 75% or more of the stock is held by qualified family members AND 75% or more of the assets are used in qualified farming activity. Corporation is Exempt from tax. All the above claims should be qualified by a rider to the report explaining how they qualify. Under Statute, Business Trusts and LLCs are not subject to Corporation Net Income Tax Under Statute PA S-Corporation are only assessed Corporate Net Income Tax on Built In Gains. The checkboxes for PA S-corp and Taxable Built in Gains allow for proper classification by the Department Under Federal Statute, foreign Corporations cannot be charged a Net Income based tax if they only solicit sales in a state other than their home state. This exemption is conditional in that the entity cannot conduct more than mere solicitation activities. PA form REV-976 must be completed in order to confirm the exemption.

13 Schedule A-1: Apportionment Schedule for CS/FF Tax Properly completed factors: When a factor exists but there is nothing in Pennsylvania, the factor should be entered as zero divided by the denominator, such as the property factor above. It will be treated as zero and used in the averaging/weighting of factors If a factor does not exist in or outside Pennsylvania, the factor should be entered as zero divided by zero, such as the payroll factor above. In this case no payroll expenses were incurred in Pennsylvania or any other states. The factor will be excluded in the averaging/weighting of factors since it does not exist. As long as all 3 factors are not zero divided by zero, the system will not read the factors as 100% Pennsylvania If a factor exists in Pennsylvania and everywhere, it should be entered as the amount in Pennsylvania divided by the amount in and outside of Pennsylvania, such as the sales factor above. The system will calculate the percentage and average it and weight it as needed. For tax years commencing in 2013, the sales factor for CNI tax is weighted at 100% Incorrectly completed factors: (Don t leave blank, enter all 0 or write NONE ) If incorrect information is provided to the department errors will occur when the report is processed. If a negative is entered the report will suspend (not post) and require employees to correct. This will create a delay in processing and/or erroneous tax. If a numerator is entered that is larger than the denominator (factor would be over ) the system will treat the factor as 100% ( ). Apportionment must have numerical figures, otherwise the field is read as blank and 0 is entered. When all fields are blank, the system treats the entity as a 100% taxable in Pennsylvania While technically it would be correct to report all the factors as 0/0, the system would read this as 100% Pennsylvania. This should ONLY be used if the corporation: Is a foreign corporation Has no factors of any kind in or outside Pennsylvania

14 Blank is not good. Schedule A-1: Apportionment Schedule for CS/FF Tax If incorrect information is provided to the department errors will occur when the report is processed. Apportionment must have numerical figures, otherwise the field is read as blank and 0 is entered. When all fields are blank, the system treats the entity as a 100% taxable in Pennsylvania Incorrect completion of the form: None is not good. 0 is not good.

15 The 3 factors and the Single factor should not both be completed with factors that exist. Whichever factors are not used should be left blank. If the 3 factor section is being used the Single Factor should be left blank, and vice versa. The system will only use 1 set of factors, and ignore the set completed as 0/0, if both sets are completed as 0/0 the entity is assumed to be 100% Pennsylvania. If both sets of factors are completed with existing factors, the system evaluates both sets and uses the larger of the 2 apportionments claimed. PLEASE NOTE: If you have established use of 4 factors through prior petitions, enter the 4 th factor under the sales factor and submit the report to the Special Handling address discussed later in the presentation.

16 The system cannot force figures as shown in the example above. The result of the above would be 100% in Pennsylvania and create a large assessment. When invested in partnerships, as detailed in statute and regulation, the corporation should include its own property, payroll and sales (or just sales for corporate net income tax for tax years 2013+) plus their percentage investment in the partnerships pass through of factors. You may petition this if you disagree and are within required timeframes. See Attachment A for an example of a properly completed form.

17 ATTACHMENT A

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20 To ensure proper receipt, posting of tax, and processing the department requires that taxpayers send paper copies of following reports to the address below and write SPECIAL HANDLING across the top of Page 1 of the RCT-101. Attach a short explanation as to how the report is considered a SPECIAL HANDLING report. Once received by the department the reports will be posted manually or enter them into the system for special Net Operating Loss usage. Department of Revenue Bureau of Corporation Taxes RE: Special Handling P.O. Box Harrisburg, PA Types of reports that require special handling: (1) Reports prior to 2001 (2) Regulated Investment Companies- under statute the Capital Stock/Franchise Tax part is not calculated using the fixed formula that regular corporations use (3) Reports claiming use of Section 381 and/or 382 Net Operating Losses - these losses have limitations that differ from Pennsylvania Statutory limitations. Special entries must be made in the system prior to processing to ensure proper use of the Net Operating Losses. (4) Extra Statutory treatment- multiformity, subparagraph 18, such as use of a 4 th factor or elimination of a factor, etc. (5) 2 distinct activities - warehouse and trucking, Transport of Property and persons, and corporation invests in partnerships where one entity is entitled to Special apportionment (Revenue Miles etc.) and the other is not entitled to special apportionment (claim 3 factor etc). ( Buckeye Pipeline )

21 RCT-128-C page 1 Step D This section reflects the taxable income and Pennsylvania CNI Tax before and after the Federal changes Line 2 should reflect the tax as last processed by the Department, if a Correction to tax, Desk Review, or Field Audit was performed, as any adjustments from the RCT-128-C will be adjustment to said figures The figure on Line 4A is what is posted to the taxpayer s financials (provided your calculations are correct) The figures reflected here should be in whole dollars Reports not filed within timelines and tax increases, this date triggers the calculation of the $5/Day penalty If the RCT-128-C if being filed to reflect changes in Net Operation Losses (Loss before and after the federal changes), then lines 3,4, and 4A should be ZERO Completing of the Final Change Date If the report is not filed timely, date is left blank and there is a tax increase as a result of the RCT- 128C being filed, the $5/day penalty will be charged based on due date of the original RCT-101. TY commencing prior to 2013, is considered late if filed after 30 days from the Final Changes date. TY commencing in 2013 forward, is considered late if filed after 6 months from the Final Changes date. Examples: 12/31/2010 ROC filed with no Final Changes date. The RCT-101 was due 4/15/2011 (and no PA extension filed) + ROC was due 30 days after Final Changes date, so $5/day would be charged from number of days from 5/15/2011 up to date RCT-128-C was received. 12/31/2013 ROC, RCT-101 was filed Federal Extension (=PA Extension) 6 months, so PA Report was due 10/15/ ROC due 6 months after, $5/day would be charged from the number of days from 4/15/2015 to date RCT-128-C was received

22 RCT 128-C page #2 Section A: Bonus depreciation If Bonus depreciation is to be recovered, this section MUST be completed properly. If there were no changes to these figures due to federal changes, complete this section with the same figures as originally filed. Same figures should also be reflected on a revised REV-799 Schedule C-3 and/or Schedule C- 4, with support as needed. The BTS will already have the carry in bonus depreciation to be recovered. DO NOT WRITE AS ORIGINALLY FILED or any alpha character in these fields, as they will not be read by the system and will be perceived as blank and a zero will be entered by the system, resulting in possible denial of recovery items Section B: PA Corporate Net Income Tax The CNI calculation must be completed, do not write SEE ATTACHED across the CNI calculation area and attach a separate calculation. Alpha characters in numeric fields will generate erroneous notices. This section must be completed reflecting the following: Any figures as adjusted due the federal changes. Any figures not changed should be reported as originally filed. If a line was not blank on the original report but is left blank on the RCT-128-C because it did not change the system believes that as a result of the audit this figure actually decreased to zero. o Do not write AS ORIGINALY FILED across lines that did not change. o Numeric cells must have a number in them, if left blank they are assumed to be zero All addback and deductions lines should be completed as originally filed, or with the new figures. Reports with Special Handling Issues, should be filed per instruction on slide 15. Additions: Tax Preference items (Attach copy of federal Form 4626), was removed due to lack of use. (Now reported on Line 3E.) New Line 3D- revised to reflect the new Intangible expense or related interest expense. Line 3E- Still report Other add backs, including Tax Preference Items formerly reported on prior year RCT 128-C Section B, Line 3B New Line 14 - Allows taxpayer claiming the addback on Line 3D to claim the allowable corresponding credit

23 RCT 128-C page #3 Schedule C-1: Apportionment Schedule For Corporate Net Income Tax (Include Form RCT-106.) The apportionment schedule C-1 should reflect: Section C-1- reflects only the Sales Factor and the Special Apportionment Factor See Important on slide #7 for more information Preparer s Information: We now request foreign corporation report Providence, Country Code, and Foreign Postal Code, to enable mail/notices to be better directed outside the US. Attaching proper documentation While this does not affect the processing of the RCT-128-C in the BTS, Be sure to enclose: A copy of the Federal Audit papers (RAR), or the federal amended forms or FF1120-X, and separate company breakouts. A schedule showing the Taxable income figures before, the actual change, and the figures after the changes For Tax Decreases due to federal amended filing, proof should be provided that shows the federal amended figures were accepted. Proof of Acceptance may be: o A copy of IRS refund check o IRS statement of adjustment to account o IRS account transcript o Other documentation at the departments discretion

24 ATTACHMENT B

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26 The Capital Stock/Foreign Franchise tax has been eliminated for tax years beginning January 1, 2016 and after. This means that many business types, such as S corporations, LLCs taxed as pass-through entities and business trusts that are not federally taxed as a C corporation will not need to file a RCT- 101 return for 2016, unless they meet an exception. Revised Tax Forms for 2016 RCT-101 RCT-128-C Who Should Continue to File? Any Corporations subject to Corporate Net Income Tax Entities that file the FF1120/elect to be treated as a C-Corporation Entities that file FF1120S should file ONLY if they have Built-In Gains or they elected to be treated as Pennsylvania C-Corp (filed REV-976) Corporation filing the FF1120F are considered C-Corporations for federal purposes and are required to file, regardless of any Treaties or related agreements with the Federal Government Corporations filing other federal income/reporting forms (FF1120-C, FF1120-RIC, etc) are required to file unless they can show under statute that they are not subject to Corporate Net Income Tax Note: RIC s no longer file the special version of the Capital Stock/Franchise Tax as it was part of Article VI that expired RIC are still subject to/responsible to file the CNI Tax

27 IRs filing Type RCT-101 (08-16) page 1 of 4 pa CoRpoRaTe NeT INCoMe Tax RepoRT A = 1120 B = 1120S C = Other DEPARTMENT USE ONLY 2016 step a Tax Year Beginning Tax Year Ending step B Amended Report Federal Extension Granted step C Revenue ID Federal EIN Business Activity Code Corporation Name Address Line 1 Address Line 2 City State ZIP Week Filer Address Change Change Fed Group First Report KOZ/EIP/SDA Credit Royalty/Related Interest Add-Back (Act 52 of 2013) Parent Corporation EIN Province Country Code Foreign Postal Code File Period Change S Corp Taxable Built-in Gains Regulated Inv. Co./ Sub Paragraph 18 step D: pa CoRpoRaTe NeT INCoMe Tax a. Tax liability from page 2 (can not be less than zero) B. estimated payments & Credits on Deposit use whole DollaRs only C. Restricted Credits step e: payment Due/overpayment Calculation: A minus B minus C See instructions. CNI step f: Transfer/Refund Method (see instructions.) e-file opt out (see instructions.) Transfer: Amount to be credited to the next tax year after offsetting all unpaid liabilities. Refund: Amount to be refunded after offsetting all unpaid liabilities. step g: Corporate officer (Must sign affirmation below) NaMe phone form BaRCoDe I affirm under penalties prescribed by law, this report, including any accompanying schedules and statements, has been examined by me and to the best of my knowledge and belief is a true, correct and complete report. If this report is an amended report, the taxpayer hereby consents to the extension of the assessment period for this tax year to one year from the date of filing of this amended report or three years from the filing of the original report, whichever period last expires, and agrees to retain all required records pertaining to that tax and tax period until the end of the extended assessment period, regardless of any statutory provision providing for a shorter period of retention. For purposes of this extension, an original report filed before the due date is deemed filed on the due date. I am authorized to execute this consent to the extension of the assessment period. Corporate officer signature Date

28 ReVeNue ID Tax year end NaMe RCT-101 (08-16) page 2 of 4 pa CoRpoRaTe NeT INCoMe Tax RepoRT 2016 section a: BoNus DepReCIaTIoN (Include REV-799, Schedule C-3, if claiming bonus depreciation.) 1. Current year federal depreciation of 168k prop. 2. Current year adjustment for disposition of 168k prop. 3. Other adjustments. section B: pa CoRpoRaTe NeT INCoMe Tax 1. Income or loss from federal return on a separate-company basis use whole DollaRs only 2. DeDuCTIoNs: 2a. Corporate dividends received (from REV-798, Schedule C-2, Line 6). 2B. Interest on U.S. securities (GROSS INTEREST minus EXPENSES). 2C. Current yr. addtl. PA deprec. plus adjust. for sale (REV-799, Sched. C-3, Col. H; must include REV-799). 2D. Other (from REV-860, Schedule OD) See instructions. ToTal DeDuCTIoNs - Add Lines 2A through 2D and enter the result on Line additions: 3a. Taxes imposed on or measured by net income (from REV-860, Schedule C-5, Line 6). 3B. Employment incentive payment credit adjustment (Include Schedule W). 3C. Current year bonus depreciation (from REV-799, Sched. C-3, Col. C; must include REV-799). 3D. Intangible expense or related interest expense (REV-802, Sched. C-6, Line 11; must include REV-802). 3e. Other (from REV-860, Schedule OA) See instructions. ToTal additions - Add Lines 3A through 3E and enter the result on Line 3. 2A 2B 2C 2D 2 3A 3B 3C 3D 3E 3 4. Income or loss with Pennsylvania adjustments (Line 1 minus Line 2 plus Line 3). 5. Total nonbusiness income or loss (from REV-934, Column C, Total; must include REV-934). 6. Income or loss to be apportioned (Line 4 minus Line 5). 7. Apportionment (from Schedule C-1, 3D, or 5 if using Special Apportionment). 8. Income or loss apportioned to PA (Line 6 times Line 7). 9. Nonbusiness income or loss allocated to PA (from REV-934, Column A, Total; must include REV-934). 10. PA taxable income or loss after apportionment (Line 8 plus Line 9). 11. Total net operating loss deduction (from RCT-103, Part A, Line 4). 12. PA taxable income or loss (Line 10 minus Line 11). 13. PA corporate net income tax (Line 12 times ). If Line 12 is less than zero, enter "0". 14. Less: Credit for tax paid by affiliate(s) for intangible expense or related interest expense (from REV-803, Sched. C-7, Line 9; must include REV-803). 15. Tax Due (Line 13 minus Line 14.) schedule C-1: Apportionment Schedule For Corporate Net Income Tax (Include Form RCT-106.) * sales factor Sales - PA Sales - Total 1A 1B 1C special apportionment Numerator 2A Denominator 2B Apportionment Proportion 2C * Refer to the CT-1 PA Corporation Tax Instructions, REV-1200, found at

29 ReVeNue ID Tax year end section C: CoRpoRaTe status ChaNges NaMe RCT-101 (08-16) page 3 of 4 pa CoRpoRaTe NeT INCoMe Tax RepoRT 2016 pa Corporations: Did you ever transact business anywhere? Did you hold assets anywhere? final Report If yes, enter date all business activity ceased If yes, enter date of final disposition of assets* foreign Corporations: Did you ever transact business in PA on your own or through an unincorporated entity? Did you hold assets in PA on your own or through an unincorporated entity? If yes, enter date PA business activity ceased If yes, enter date of final disposition of PA assets* *Schedule of Disposition of Assets, REV-861, must be completed and filed with this report. Has the corporation sold or transferred in bulk, 51 percent or more of any class of assets? (See instructions.) If yes, enter the following information. (Include a separate schedule if additional space is needed.) Purchaser Name Address Line 1 Address Line 2 City State ZIP Province Country Code Foreign Postal Code section D: general INfoRMaTIoN QuesTIoNNaIRe Describe corporate activity in PA Describe corporate activity outside PA Other states in which taxpayer has activity State of Incorporation Incorporation Date 1. Does any corporation, individual or other business entity hold all or a majority of the stock of this corporation? 2. Does this corporation own all or a majority of stock in other corporations? 3. Is this taxpayer a partnership or other unincorporated entity that elects to file federal taxes as a corporation? 4. Has the federal government changed taxable income as originally reported for any prior period for which reports of change have not been filed in PA? If yes: First Period End Date: Last Period End Date: Accounting Method - Federal Tax Return Accounting Method - Financial Statements A = Accrual C = Cash O = Other A = Accrual C = Cash O = Other Other Other

30 ReVeNue ID Tax year end NaMe RCT-101 (08-16) page 4 of 4 pa CoRpoRaTe NeT INCoMe Tax RepoRT 2016 schedule of Real property IN pa (Include a separate schedule if additional space is needed.) Did you own or rent property in pa titled to the corporation or any single Member llc during this filing period? If yes, the below section must be completed. O = Own R = Rent street address City County KoZ/KoeZ CoRpoRaTe officers (see instructions.) Must provide requested information for all filled officer positions. President/Managing Partner Vice President Secretary Treasurer/Tax Manager ssn last Name first Name MI preparer s INfoRMaTIoN Mail to Preparer Firm Federal EIN Firm Name Address Line 1 Address Line 2 City State ZIP Province Country Code Foreign Postal Code I affirm under penalties prescribed by law, this report, including any accompanying schedules and statements, has been prepared by me and to the best of my knowledge and belief is a true, correct and complete report. Tax preparer s signature Date INDIVIDual preparer phone ptin/ssn

31 step a Tax Year Beginning DEPARTMENT USE ONLY RCT-128C (08-16) page 1 of 3 RepoRT of Change in pa CoRpoRaTe net income Tax Tax Year Ending step B Week Filer Royalty/Related Interest Add-Back (Act 52 of 2013) step C Revenue ID Federal EIN Business Activity Code Corporation Name Address Line 1 Address Line 2 City State ZIP Address Change KOZ/EIP/SDA Credit Parent Corporation EIN Province Country Code Foreign Postal Code S Corp Taxable Built-in Gains Regulated Inv. Co./ Sub Paragraph 18 step d As required by Section 406 of the Tax Reform Code of 1971, the above-named corporation reports the following change(s) or correction(s) in its corporate net income as reported to or changed by the federal government. 1. PA taxable income after change or correction in federal return 2. PA taxable income previously reported to the commonwealth 2a. Increase or decrease in PA taxable income 3. PA corporate net income tax after change 4. PA corporate net income tax before change 4a. Increase or decrease in PA corporate net income tax 5. Remittance made payable to the PA Department of Revenue step e: Transfer/Refund method (see instructions.) 1 2 2A 3 4 4A 5 Transfer: Amount to be credited to the next tax year after offsetting all unpaid liabilities use whole dollars only Refund: Amount to be refunded after offsetting all unpaid liabilities important: notice of final Change was ReCeiVed from The internal ReVenue service or amended federal ReTuRn filed on note: If the date is not provided, interest will be imposed from the original due date applicable to that tax year. Also, a $5 a day penalty may be imposed for a late filed return. step f: Corporate officer (must sign affirmation below) name phone form BaRCode I affirm under penalties prescribed by law, this report, including the accompanying explanations, is made in good faith and is a true and correct statement of the PA taxable income after final changes or corrections, as determined or accepted by the federal government, to the corporation s federal income tax return for the period. Corporate officer signature date

32 ReVenue id Tax year end name RCT-128C (08-16) page 2 of 3 RepoRT of Change in pa CoRpoRaTe net income Tax 2016 section a: Bonus depreciation (Include REV-799, Schedule C-3, if claiming bonus depreciation.) 1. Current year federal depreciation of 168k prop. 2. Current year adjustment for disposition of 168k prop. 3. Other adjustments use whole dollars only section B: pa CoRpoRaTe net income Tax 1. Income or loss from federal return on a separate-company basis 1 2. deductions: 2a. Corporate dividends received (from REV-798, Schedule C-2, Line 6). 2B. Interest on U.S. securities (GROSS INTEREST minus EXPENSES). 2C. Current yr. addtl. PA deprec. plus adjust. for sale (REV-799, Sched. C-3, Col. H; must include REV-799). 2d. Other (from REV-860, Schedule OD) See instructions. ToTal deductions - Add Lines 2A through 2D and enter the result on Line additions: 3a. Taxes imposed on or measured by net income (from REV-860, Schedule C-5, Line 6). 3B. Employment incentive payment credit adjustment (Include Schedule W). 3C. Current year bonus depreciation (from REV-799, Sched. C-3, Col. C; must include REV-799). 3d. Intangible expense or related interest expense (REV-802, Sched. C-6, Line 11; must include REV-802). 3e. Other (from REV-860, Schedule OA) See instructions. ToTal additions - Add Lines 3A through 3E and enter the result on Line 3. 2A 2B 2C 2D 2 3A 3B 3C 3D 3E 3 4. Income or loss with Pennsylvania adjustments (Line 1 minus Line 2 plus Line 3). 5. Total nonbusiness income or loss (from REV-934, Column C, Total; must include REV-934). 6. Income or loss to be apportioned (Line 4 minus Line 5). 7. Apportionment (from Page 3, Schedule C-1, 3D, or 5 if using Special Apportionment). 8. Income or loss apportioned to PA (Line 6 times Line 7). 9. Nonbusiness income or loss allocated to PA (from REV-934, Column A, Total; must include REV-934). 10. PA taxable income or loss after apportionment (Line 8 plus Line 9). 11. Total net operating loss deduction (from RCT-103, Part A, Line 4). 12. PA taxable income or loss (Line 10 minus Line 11). 13. PA corporate net income tax (Line 12 times ). If Line 12 is less than zero, enter " Less: Credit for tax paid by affiliate(s) for intangible expense or related interest expense (from REV-803, Sched. C-7, Line 9; must include REV-803). 15. Tax Due (Line 13 minus Line 14) important: if the department of Revenue has made prior changes to the pa corporate net income, these changes must be taken into consideration when completing the Report of Change, RCT-128C

33 ReVenue id Tax year end name RCT-128C (08-16) page 3 of 3 RepoRT of Change in pa CoRpoRaTe net income Tax 2016 determination of apportionment percentages From RCT-106, applicable for the tax year being reported schedule C-1: Apportionment Schedule For Corporate net income Tax (Include Form RCT-106.) See instructions for apportionment in the CT-1 PA Corporation Tax Instructions, REV-1200, found at sales factor special apportionment Sales - PA Sales - Total 1A 1B 1C Numerator Denominator 2A 2B Apportionment Proportion 2C CoRpoRaTe officers must provide requested information for all filled officer positions ssn last name first name mi President/Managing Partner Vice President Secretary Treasurer/Tax Manager preparer s information Mail to Preparer Firm Federal EIN Firm Name Address Line 1 Address Line 2 City State ZIP Province Country Code Foreign Postal Code I affirm under penalties prescribed by law, this report, including any accompanying schedules and statements, has been prepared by me and to the best of my knowledge and belief is a true, correct and complete report. Tax preparer s signature date individual preparer phone ptin/ssn

34 Revised RCT-101 With the elimination of the CS/FF tax the 2016 RCT 101 was revised to be a tax year specific form and only include CNI tax. The non-year specific forms will continue to be used for any reports for tax years commencing prior to 1/1/2016, as these entities are subject to CS/FF tax prior to 1/1/2016, and are subject to loans tax prior to 1/1/2014. The year specific change was done to prevent taxpayers from using the wrong form for tax years prior to Now only 4 pages (used to be 6.) RCT 101 page #1 IRS Filing Type : Used for classification of reports for the Department of Revenue. o A = FF1120, o B = FF1120S (for Built-In gains) or o C = Other (such as FF1120F) Step B: New Checkboxes o Royalty/Related Interest Addback (Act 52 of 2013) - check if the REV-802 and 803 forms (discussed later) are also filed (separate from the RCT-101) o S-Corp Taxable Built-in Gains Step C: Added Address Information- for foreign corporations to report special items that don t fit the normal address. We now request foreign corporation report Providence, Country Code, and Foreign Postal Code, to enable mail/notices to be better directed outside the US. Step D: Revised to only reflect the CNI Tax figures

35 RCT 101 page #2 (old page #3) With CS/FF tax elimination there are many changes to page content, section headings and more. To minimize confusion and frustration during the transition to the new form. The department pretty much just removed obsolete content and revised the hierarchy of the remaining content. Section B: PA Corporate Net Income Tax Additions: Tax Preference items (Attach copy of federal Form 4626), was removed due to lack of use. (Now reported on Line 3E.) New Line 3D- revised to reflect the new Intangible expense or related interest expense. Line 3E- Still report Other add backs, including Tax Preference Items formerly reported on prior year RCT 101 Section B, Line 3B New Line 14- Allows taxpayer claiming the addback on Line 3D to claim the allowable corresponding credit Schedule C-1: Apportionment Schedule For Corporate Net Income Tax (Include Form RCT-106.) * The apportionment schedule C-1 should reflect: Sales factor (no longer use property and payroll factors 2016+), or Special Apportionment Factor (such as Revenue Miles) if the corporation s activities qualify Important: If the factor is entered as 0/0 it will be treated 100% PA, so if the factor does not exist, enter the factor as 0/1 Corporations that ARE subject to Corporate Net Income tax but happen to have a 0% Factor in Pennsylvania ARE REQUIRED TO FILE A REPORT REGARDLESS. The absences of Pennsylvania Sales or Special Apportionment does not imply the entity is not subject to filing a corporation tax report (if the intention is to eventually conduct activity in Pennsylvania). RCT 101 pages #3 & 4 (old pages #5 and 6) We now request foreign corporation report Providence, Country Code, and Foreign Postal Code, to enable mail/notices to be better directed outside the US. * Refer to the CT-1 PA Corporation Tax Instructions, REV-1200, found at

36 Revised RCT-128 With the elimination of the CS/FF tax the 2016 RCT 128 was revised to be a tax year specific form and only include CNI tax. The non-year specific forms will continue to be used for any reports for tax years commencing prior to 1/1/2016, as these entities are subject to CS/FF tax prior to 1/1/2016, and are subject to loans tax prior to 1/1/2014. The year specific change was done to prevent taxpayers from using the wrong form for tax years prior to RCT-128-C page #1 Step B: Deleted the PA S-Corporation checkbox Added the Royalty/Related Interest checkbox Step C: Added Foreign Address items (Providence, Country Code, Foreign Postal Code)

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38 Statute Article IV/Corporate Net Income statutes were adjusted to include the details regarding the addition to Corporate Net Income Tax, as well as the allowable credit. 72 P.S. 7401(3)1.(t)(1)-(4) Additional statutes included terms that needed to be defined in the statute such as: Intangible Expense/Cost- royalties, licenses, or fees paid for the use etc., of patents, trade names, etc P.S. 7401(8) Interest Expense/Cost - deduction under IRC 163 directly related to an intangible expense - 72 P.S. 7401(9) Affiliated Entity- persons or entities related to or over 50% owned direct or indirectly (see statute for details) - 72 P.S. 7401(10) For tax years commencing 2015 forward no deductions will be allowed for any intangible expenses/costs or interest expense/costs in connection with transactions conducted with affiliated entities subject to tax in PA or another state that included that expense in calculation of tax base. The expense will be an add back to PA Taxable income Adjustment are made when: The entity is part of a consolidated filing with affiliated entities (as defined in statute) The entity incurs all intangible costs/expenses to an affiliated entity unless exempt (under the statute) INCLUDES expenses associated with these intangible assets: Patents/patent applications, trade name/trademarks, service marks, copyrights, and mask works, or other similar expenses or costs, regardless of classification such as interest expense, royalties, license fees, management fees, etc. Service Marks - a trademark used to identify a service vs a product (roto-rooter), can also be a sound (MGM roar). Mask works - trademark regarding the representation of a semiconductor chip. Arms length - rates and terms- a transaction in which the buyer and seller act independent of each other, and have no relationship to each other.

39 Types of Expenses Added Back - These cost can be either: Direct (both entities are party to same agreement) or Indirect (both parties are not parties to the same agreement) There are 2 type of indirect expenses: o Amortization of Intangible Property - because it s defined as an indirect expense (created solely from the affiliate/intercompany transactions) o Embedded Intangible Costs - paid to acquire, use, maintain, manage, sell, exchange, or dispose of an intangible expense (in COGS, management fees, etc.) Interest Expense (defined in statute) directly related to intangible expense or cost, directly related if the PA corp tax payer and affiliate engage in any intangible transactions and interest is paid during the year. Intangible/Interest Expense Not Added Back The following intangible/interest expenses would not be added back to PA taxable income the expense was incurred at arm s length and its principle purpose was not tax avoidance the expense was with an affiliated entity domiciled in a foreign nation w/income tax treaty with the US for the prevention of double taxation the affiliated entity made payment to a non- affiliated entity an amount less than or equal to taxpayer proportional share of transaction REV-802 Must be completed and submitted by the taxpayer who is claiming the affiliate addback. The form is used to calculate the addback figure and allows the taxpayer to provide all items needed to verify the credit. If needed we can correspond for the information needed to verify figures or check our system to see if the taxpayer is providing correct affiliated info when those entities file in PA. If the addback is not claimed and it appears the corporation may have qualified expenses with affiliates the Department may correspond to request completion of the form.. Completed form must be ed to ra-rvintngbladbac@pa.gov INFORMATION NOTICE CORPORATION TAXES February 19, 2016

40 ATTACHMENT E REV-802 (08-16) PAGE 1 OF 2 SCHEDuLE C-6-ADD-bACK FOR INTANGIbLE ExPENSES OR COST AND RELATED INTEREST Tax Year BeGINNING Tax Year COrPOraTION NaMe revenue ID ending PART I. PAYMENTS MADE DIRECTLY OR INDIRECTLY TO AN AFFILIATED ENTITY Where Managed Intangible Related Affiliated Entity Name FEIN Where Organized and Directed Expenses Interest Expense (Corporate HQ) 1. 1a. 1b. 2. 2a. 2b. 3. 3a. 3b. 4. 4a. 4b. 5. TOTAL PAYMENTS 5a. 5b. Exclusion of payments: 6. Tax avoidance was not principal purpose and was done at arm's length rates and terms. 6a. 6b. 7. Affiliated entity domiciled in a foreign nation that has in force a comprehensive income tax treaty with the U.S. Government. (Complete Part II.) 7a. 7b. 8. Affiliated entity was a conduit for the intangible expenses or cost/related interest paid directly or indirectly by the taxpayer to an unaffiliated entity. (Complete Part III.) 8a. 8b. 9. Total Amount Excluded from Total Intangible Expenses or Cost/Related Interest Payments 9a. 9b. 10. Add-back of Intangible Expenses or Cost/Related Interest Payments 10a. 10b. 11. TOTAL INTANGIbLE ExPENSES AND RELATED INTEREST ExPENSE 11. PART II. TRANSACTIONS WITH FOREIGN ENTITIES Domestic Country of Domestic Affiliate Intangible Related Foreign Affiliated Entity Name Foreign Affiliate FEIN Expenses Interest Expense 1. 1a. 1b. 2. 2a. 2b 3. 3a. 3b. 4. 4a. 4b. 5. TOTAL ExCLuDED 5a. 5b REV-802 (08-16) PAGE 2 OF 2 REVENuE ID SCHEDuLE C-6-ADD-bACK FOR INTANGIbLE ExPENSES OR COST AND RELATED INTEREST PART III. TRANSACTIONS WITH unaffiliated ENTITIES 1. Unaffiliated Entity Name Affiliated Entity FEIN Intangible Related Interest Expenses or Cost Expense or Cost a. Intangible Expenses Paid to Unaffiliated Entity 1a. b. Related Interest Expense Paid to Unaffiliated Entity 1b. c/d. Total Payment Portion Allocation Percentage 1c. 1d. e/f. Exclusion Amount 1e. 1f. 2. Unaffiliated Entity Name Affiliated Entity FEIN Intangible Related Interest Expenses or Cost Expense or Cost a. Intangible Expenses Paid to Unaffiliated Entity 2a. b. Related Interest Expense Paid to Unaffiliated Entity 2b. c/d. Total Payment Portion Allocation Percentage 2c. 2d. e/f. Exclusion Amount 2e. 2f. 3. Unaffiliated Entity Name Affiliated Entity FEIN Intangible Related Interest Expenses or Cost Expense or Cost a. Intangible Expenses Paid to Unaffiliated Entity 3a. b. Related Interest Expense Paid to Unaffiliated Entity 3b. c/d. Total Payment Portion Allocation Percentage 3c. 3d. e/f. Exclusion Amount 3e. 3f. 4. Unaffiliated Entity Name Affiliated Entity FEIN Intangible Related Interest Expenses or Cost Expense or Cost a. Intangible Expenses Paid to Unaffiliated Entity 4a. b. Related Interest Expense Paid to Unaffiliated Entity 4b. c/d. Total Payment Portion Allocation Percentage 4c. 4d. e/f. Exclusion Amount 4e. 4f. 5. Unaffiliated Entity Name Affiliated Entity FEIN Intangible Related Interest Expenses or Cost Expense or Cost a. Intangible Expenses Paid to Unaffiliated Entity 5a. b. Related Interest Expense Paid to Unaffiliated Entity 5b. c/d. Total Payment Portion Allocation Percentage 5c. 5d. e/f. Exclusion Amount 5e. 5f. 6. TOTAL ExCLuDED 6a. 6b

41 REV-802 (08-16) SCHEDULE C-6 ADD-BACK FOR INTANGIBLE EXPENSES OR COSTS AND RELATED INTEREST EXPENSE GENERAL INFORMATION Purpose of Schedule For taxable years beginning after December 31, 2014, corporations are required to add back certain deductions taken on the federal return for interest, royalties and other expenses (referred to as intangible expenses) related to intangible property such as trademarks and patents that were paid, accrued or incurred directly or indirectly with one or more affiliated entities. This schedule is used to calculate the required add-back to federal taxable income for intangible or related interest expenses. Who Must File Corporations that entered into transactions with an affiliated entity for the payment of intangible expenses as defined in 72 P.S. 7401(8) or interest expense as defined in 72 P.S. 7401(9) must file this schedule to report those expenses. When to File This schedule must be filed at the same time the corporation files its RCT-101, PA Corporate Net Income Tax Report. Where to File This schedule must be submitted with RCT-101 and with REV-803, Schedule C-7, Credit for Tax Paid by Affiliated Entities, if applicable. Corporations must report all payments for intangible or related interest expenses in Part I of Schedule C-6, even if an exception is claimed with respect to such amount. Allowable exceptions should be reported on Part I, Lines 6, 7 and 8. Failure to properly complete Schedule C-6 may result in disallowance of claimed exceptions. COMPLETING PA SCHEDULE C-6 Corporation Name Enter the complete name of the corporation as shown on the RCT-101, PA Corporate Net Income Tax Report. Revenue ID Enter the 10-digit Revenue ID number of the corporation as shown on RCT-101. The Revenue ID is a unique 10-digit number assigned by the Department of Revenue. Tax Year Beginning and Tax Year Ending Enter the tax year beginning and tax year ending as shown on RCT-101. LINE INSTRUCTIONS PART I. Payments Made Directly or Indirectly to an Affiliated Entity This form allows for the listing of up to four transactions with four affiliated entities. In the event that the corporation has more than four transactions with four affiliated entities, in any combination, a photocopy of this schedule should be used. Lines 1 4 List the name of each affiliated entity and Federal Employer Identification Number (FEIN) for which the corporation accrued or incurred intangible or related interest expenses. This information must be provided even if the corporation believes it is subject to a statutory exception. The statutory exceptions must be claimed on Parts II and III and summarized on Lines 6 8 of Part I. List by state(s) where the affiliated entities were incorporated or organized as legal entities and where the affiliated entities maintain their commercial domicile. Commercial domicile is the location where a corporation is managed or directed, the operational headquarters for the entity. Line 5a Enter the total payments for intangible expenses with affiliated entities by adding Lines 1a - 4a. REV Line 5b Enter the total payments for related interest expenses with affiliated entities by adding Lines 1b - 4b. Line 6a Enter the amount of intangible expenses or costs paid or incurred to affiliated entities in which tax avoidance was not a principal purpose and was done at arm s length rates and terms. Line 6b Enter the amount of related interest expense or cost paid to affiliates in which tax avoidance was not a principal purpose and was done at arm s length rates and terms. Line 7a Enter the related intangible expenses paid to an affiliated entity domiciled in a foreign nation that has in force a comprehensive income tax treaty with the U.S. Government from Part II, Line 5a. Line 7b Enter the related interest expense paid to an affiliated entity domiciled in a foreign nation that has in force a comprehensive income tax treaty with the U.S. Government from Part II, Line 5b. Line 8a Enter the related intangible expenses paid to an affiliated entity who acted as a conduit of the expense paid to an unaffiliated entity from Part III, Line 6a. Line 8b Enter the related interest expense paid to an affiliated entity who acted as a conduit of the expense paid to an unaffiliated entity from Part III, Line 6b. Line 9a Enter the total amount of excluded intangible expenses by adding Lines 6a - 8a. Line 9b Enter the total amount of excluded related interest expense by adding Lines 6b - 8b. Line 10a Enter the intangible expenses required to be added back to federal taxable income by subtracting Line 9a from Part I, Line 5a. Line 10b Enter the related interest expense required to be added back to federal taxable income by subtracting Line 9b from Part I, Line 5b. Line 11 Enter the total intangible expenses and related interest expense by adding Lines 10a and 10b. Carry the total to RCT-101, Section B, Line 3D. PART II. Transactions with Foreign Entities Part II is for providing intangible or related interest expenses or costs paid or accrued to an affiliated entity that is excluded by reason that the transaction was directly or indirectly between the taxpayer and an affiliated entity domiciled in a foreign nation which has in force a comprehensive income tax treaty with the United States. These treaties provide for the allocation of all categories of income subject to taxation, or the withholding of tax, on royalties, licenses, fees and interest for the prevention of double taxation of the respective nations' residents and the sharing of information. This form allows for the listing of up to four transactions with four affiliated entities. In the event that the taxpayer has more than four transactions with four affiliated entities, in any combination, a photocopy of this schedule should be used. Lines 1 4 Enter the name of each foreign affiliated entity for which this exception applies. Enter the country of domicile of the foreign affiliated entity. If the expenses were paid through a domestic affiliate, enter the FEIN of the domestic affiliated entity. Enter the total intangible expenses or cost or related interest expense to each foreign affiliated entity. REV-802 2

42 Line 5a Enter the total intangible expenses or cost paid to each foreign affiliated entity covered by tax treaty by adding Part II, Lines 1a - 4a. Carry total to Part I, Line 7a. Line 5b Enter the total related interest expense or cost paid to each foreign affiliated entity covered by tax treaty by adding Part II, Lines 1b - 4b. Carry total to Part I, Line 7b. PART III. Transactions with Unaffiliated Entities Part III is for providing intangible expenses or cost or related interest excluded by reason that the affiliated entity that received the payment had directly or indirectly paid, accrued or incurred payment to an unaffiliated entity. The payment to the unaffiliated entity is paid, accrued or incurred on the intangible expense or cost or related interest, and is equal to or less than the taxpayer's proportional share of the transaction. The taxpayer's proportional share shall be based on relative sales, assets, liabilities or another reasonable method. This form allows for the listing of up to five transactions with five affiliated entities. In the event that the taxpayer has more than five transactions with five affiliated entities, in any combination, a photocopy of this schedule should be used. Unaffiliated Entity Name and Affiliated Entity FEIN Enter the name of the unaffiliated entity or outside party that received the related interest or intangible expenses or cost from the affiliated entity (conduit). Enter the FEIN of the affiliated entity, from Part I, that was the conduit. Line a Enter the amount of intangible expenses or cost paid to the unaffiliated entity. The amount paid should be equal to or less than the taxpayer s proportional share of the transaction. Line b Enter the amount of related interest expense or cost paid to the unaffiliated entity. The amount paid should be equal to or less than the taxpayer s proportional share of the transaction. Line c/d It is possible that the conduit or affiliated entity charged the taxpayer a mark-up for the transaction, and that the conduit/affiliated entity may have been a conduit for other transactions between other entities affiliated with the taxpayer and the outside party. The amount of intangible expenses or cost or related interest that went from the affiliated entity to the outside party may be greater than the actual amount of intangible expenses or cost or related interest transacted by the taxpayer for the outside party. The amount of exception cannot exceed the actual amount paid to the outside party for the taxpayer s use of the intangible property. All mark-ups to the conduit/affiliated entity must be excluded, and all amounts for transactions from other affiliated entities must be excluded. In the event that the amount(s) between the taxpayer and outside party were not segregated from the mark-ups and other transactions, the exception shall be computed using a ratio or percentage based on the relative sales/receipts for the intangible expenses or cost or related interest, or assets, or liabilities or another reasonable method. The taxpayer should indicate on this form if the actual segregated amount(s) were used, or pro-rations using receipts, assets, liabilities or another reasonable method were used, and attach a schedule showing the computations. Enter the percentage used to allocate the portion of the total payments that are related specifically to the use of the intangible property by the taxpayer, exclusive of any markups by the conduit/affiliated entity. Attach a statement describing the computation used to calculate the exclusion percentage. Line e Enter the exclusion amount for intangible expenses or cost by multiplying Line a by Line c. Line f Enter the exclusion amount for related interest expense or cost by multiplying Line b by Line d. Line 6a Enter the total intangible expenses or cost excluded by adding Part III, Lines 1e - 5e. Carry total to Part I, Line 8a. Line 6b Enter the total related interest expense or cost excluded by adding Part III, Lines 1f - 5f. Carry total to Part I, Line 8b. REV-802 3

43 ATTACHMENT F REV-803 (08-16) PAgE 1 OF 2 SCHEDULE C-7-CREDIT FOR TAX PAID BY AFFILIATED ENTITIES Tax Year BeGINNING Tax Year COrPOraTION NaMe revenue ID ending PART I. STATE INCOME TAX LIABILITY FOR AFFILIATED ENTITIES 1. Affiliated Entity Name FEIN Jurisdiction Credit Code a. Imposed State Tax 1a. b. State (or Jurisdiction) Income Tax Credits 1b. c. Adjusted Tax 1c. d. Total Intangible Expenses & Related Interest 1d. e. Total Income 1e. f. Liability Due 1f. 2. Affiliated Entity Name FEIN Jurisdiction Credit Code a. Imposed State Tax 2a. b. State (or Jurisdiction) Income Tax Credits 2b. c. Adjusted Tax 2c. d. Total Intangible Expenses & Related Interest 2d. e. Total Income 2e. f. Liability Due 2f. 3. Affiliated Entity Name FEIN Jurisdiction Credit Code a. Imposed State Tax 3a. b. State (or Jurisdiction) Income Tax Credits 3b. c. Adjusted Tax 3c. d. Total Intangible Expenses & Related Interest 3d. e. Total Income 3e. f. Liability Due 3f REV-803 (08-16) PAgE 2 OF 2 REVENUE ID SCHEDULE C-7-CREDIT FOR TAX PAID BY AFFILIATED ENTITIES 4. Affiliated Entity Name FEIN Jurisdiction Credit Code a. Imposed State Tax 4a. b. State (or Jurisdiction) Income Tax Credits 4b. c. Adjusted Tax 4c. d. Total Intangible Expenses & Related Interest 4d. e. Total Income 4e. f. Liability Due 4f. 5. Affiliated Entity Name FEIN Jurisdiction Credit Code a. Imposed State Tax 5a. b. State (or Jurisdiction) Income Tax Credits 5b. c. Adjusted Tax 5c. d. Total Intangible Expenses & Related Interest 5d. e. Total Income 5e. f. Liability Due 5f. 6. Total Liability Due 6. PART II. CREDITS ALLOWED & LIMITATIONS 1. Total Liability Due from Part I Enter Apportionment Factor Percentage from RCT-101, Schedule C Multiply Line 1 by Line Enter Amount from Schedule C-6, Line Enter Apportionment Factor Percentage from RCT-101, Schedule C Multiply Line 4 by Line Enter PA Corporate Net Income Tax Rate Multiply Line 6 by Line Enter Smaller amount of Line 3 or Line

44 REV-803 (08-16) Schedule c-7 credit FOR TAX PAId BY AFFIlIATed entities GeNeRAl INFORMATION Purpose of Schedule The purpose of this credit is to ensure there is no double taxation and discrimination against interstate commerce in the addition of intangible expense or cost and interest expense or cost. For taxable years beginning after December 31, 2014, taxpayers that are required to add back intangible expenses or cost and related interest expense or cost deductions to their federal taxable income may claim a credit for a portion of the tax paid by the affiliated entity if: 1) the affiliated entity was subject to tax within the Commonwealth of Pennsylvania or another state, and 2) the tax base includes the intangible expense or cost and interest expense or cost that was paid, accrued or incurred by the taxpayer. The portion of tax paid by the affiliated entity is computed by multiplying the apportionment factor of the taxpayer in Pennsylvania by the greater of: 1) the tax liability of the affiliated entity with respect to the portion of its income representing the intangible expense or cost, or the interest expense or cost, paid, accrued or incurred by the taxpayer; or 2) the aforementioned tax liability before it was offset by a credit given by Pennsylvania or that state, except credits made for prepayments of tax. The resultant credit for tax paid by the affiliated entity shall not exceed the taxpayer s liability in this commonwealth attributable to the addition of intangible expense or cost and interest expense or cost to federal taxable income. (72 P.S. 7401(3) (1) (t)) When to File This schedule must be filed at the same time the corporation files its RCT-101, PA Corporate Net Income Tax Report. Where to File This schedule must be submitted with RCT-101 and with REV-802, Schedule C-6, Add-back for Intangible Expenses or Costs and Related Interest Expense. completing PA Schedule c-7 corporation Name Enter the complete name of the corporation as shown on the RCT-101, PA Corporate Net Income Tax Report. Revenue Id Enter the 10-digit Revenue ID number of the corporation as shown on RCT-101. The Revenue ID is a unique 10-digit number assigned by the Department of Revenue. Tax Year Beginning and Tax Year ending Enter the tax year beginning and tax year ending as shown on RCT-101. line INSTRucTIONS PART I. State Income Tax liability for Affiliated entities This Part allows for the listing of up to five income tax returns that the Affiliated Entity (or Entities) filed in jurisdictions that are non-unitary and that include in their tax base the intangible and related interest expense that was paid by the taxpayer as shown on REV-802, Schedule C-6 Add-back for Intangible Expenses or Cost and Related Interest. If the taxpayer availed itself to any of the three statutory exceptions on Schedule C-6, they cannot claim the credit on this schedule. If the number of affiliated entities and number of returns goes over the five lines shown in Part I, the taxpayer should photocopy Part I, using a separate copy for each affiliated entity so that the income tax paid to the qualifying jurisdictions will be separately shown on Lines REV Affiliated entity Name List the name of the affiliated entity for which the credit is computed. List entities in the same order as provided on Part I of the REV-802, Schedule C-6 Add-back for Intangible Expenses or Costs and Related Interest Expense. FeIN List the FEIN of the affiliated entity for which the credit is computed. Jurisdiction Include only those states where the affiliated entity was required to file on a non-unitary basis. Do not include states where unitary returns, partial unitary returns, or elective unitary returns were filed inclusive of the affiliated entity. Also, include only those states where the affiliated entity was subject to a corporate tax on net income. credit code Use the following codes to describe the type of add-back credit: 01=Research; 02=Community Development; 03=Investment; 04=Economic Revitalization; 05=Jobs Creation; 06=Film Production; 07=Environmental Protection; 08=Other. line a For each affiliated entity, enter the amount of state income tax deducted for each non-unitary filing state, as computed and included in the total amount deducted for state income taxes reported under federal Form 1120, Line 17 Taxes and Licenses, for that affiliated entity. This amount of corporate net income tax is only for the non-unitary filing state, not the total amount for all state income taxes paid on Line 17 for the affiliated return. Example: Affiliated entity has a total state income tax expense of $1,000,000 on Line 17 of its federal Form But of this $1,000,000, only $250,000 was for corporate net income tax incurred for three states that require the filing of non-unitary returns. The remainder of the $1,000,000 deducted on Line 17 was either for taxes based on net worth or capital stock, or was allocations from states that require the filing of combined returns (unitary filings). Only the corporate net income taxes incurred for these three states, individually listed will be included on Line a. line b Enter the amount for any state tax credits other than for the payment of tax that were included in the amount shown on Line a. line c Enter the amount of tax based on income and adjusted for credits by adding Line a and Line b. line d Enter the total amount of intangible expense or cost and related interest expense or cost that the taxpayer paid to the affiliated entity. The transaction must be included in the tax base of the affiliated entity for that state. line e Enter the total income received by affiliated entity as reported on Line 1C and Lines 4 through 10 on its proforma federal Form 1120 that was taxable as income for that state. To the extent any of these items of income are offset by an additional deduction to Line 28 in determining taxable income for that state, those items are not taxable income. line f Compute the tax liability that the affiliated entity incurred for each state that was attributable to the intangible expenses and related interest expense or cost paid by the taxpayer to the affiliated entity, using the formula: c * (d/e) = f. Divide Line d by Line e, then multiply the quotient by Line c. line 6 Enter the total liability due by adding Lines 1f 5f. REV-803 2

45 PART II. credits Allowed & limitations computing the credits Allowed line 1 Enter the total liability due from Part I, Line 6. line 2 Enter the apportionment proportion used for the corporate net income tax from RCT-101, Schedule C-1, Line 1C or Line 2C, whichever is applicable. line 3 Multiply Line 1 by Line 2. computing the limitations to the credit line 4 Enter the total add-back for the intangible expenses and related interest expense or cost from Schedule C-6, Part I, Line 11. line 5 Enter the apportionment proportion used for the corporate net income tax from RCT-101, Schedule C-1, Line 1C or Line 2C, whichever is applicable. line 6 Multiply Line 4 by Line 5. line 7 Enter the PA corporate net income tax rate. line 8 Multiply Line 6 by Line 7. line 9 Enter the smaller of Line 3 or Line 8. REV-803 3

46 ATTACHMENT G INFORMATION NOTICE CORPORATION TAXES February 19, 2016 I. PURPOSE On July 9, 2013, the Pennsylvania General Assembly passed Act , 1 which contained an add-back provision (the Add-Back ) that disallows corporate income tax deductions for transactions between affiliated members for tax years beginning after December 31, Part II of this notice interprets, explains, and illustrates the application and scope of the Add-Back. Part III follows with a discussion of the exceptions to the Add-Back. Finally, Part IV explores the application of the credit mechanism. II. APPLICATION AND SCOPE OF THE ADD-BACK The Add-Back disallows deductions for royalties, licensing, or other fees paid, accrued, or incurred 2 by a corporation subject to Pennsylvania Corporate Net Income Tax ( CNIT ) 3 to an affiliated entity for tax years beginning after December 31, The Add-Back disallows all intangible costs or expenses paid by a PA Corporate Taxpayer to an affiliated entity unless an express statutory exception applies. While the relevant statutory language and this notice describe the Add-Back and its exceptions, the Add- Back does not limit the Department of Revenue s authority to deny deductions resulting from fraudulent or sham transactions. 4 A. Applicable Intangible Assets The Add-Back refers to direct or indirect costs or expense deductions claimed by a PA Corporate Taxpayer as a result of transactions with an affiliated entity (the definition of which is set forth in the statute 5 ) and expressly disallows costs or expense deductions incurred by a PA Corporate Taxpayer in connection with the following intangible assets: patents patent applications trade names trademarks 1 See H.B. 465, P.L. 270, 19, adding 72 P.S. 7401(3)1.(t). 2 For simplicity, this Notice refers to expenses or costs that are paid, accrued, or incurred as paid. 3 A corporation subjection subject to CNIT is referred to herein as a PA Corporate Taxpayer. 4 See 72 P.S. 7401(3)1.(t)(1) P.S. 7401(10)(defining affiliated entity ). Office of Chief Counsel 10 th Floor Strawberry Square Harrisburg, PA Page 1 of 14 service marks copyrights mask works 6 The list of intangible assets is not exhaustive. The Add-Back also applies to other similar expenses or costs. 7 Furthermore, the classification or label of a transaction is not determinative whether it be called a royalty, license, lease, franchise right, know how, trade secret, contract right, management fee, or otherwise. Rather, the substance of a transaction is determinative. The Add-Back applies whenever a PA Corporate Taxpayer pays an intangible expense to an affiliated entity to acquire, use, maintain, manage, sell, exchange, or otherwise acquire or dispose of an intangible asset. 8 B. Direct or Indirect Intangible Expense or Cost A direct intangible expense or cost arises from a transaction between a PA Corporate Taxpayer and an affiliated entity, whereby the PA Corporate Taxpayer obtains one or more legal rights to an intangible asset directly from an affiliated entity. 9 An indirect transaction with an affiliated entity occurs where the transaction is effectuated through one or more intermediaries. 10 Thus, a PA Corporate Taxpayer is subject to the Add- Back even where the PA Corporate Taxpayer and the affiliated entity are not parties to the same agreement with respect to acquisition, use, maintenance, sale, exchange or other acquisition or disposition of an intangible asset. The Add-Back disallows indirect intangible costs or expenses in at least two instances. First, as discussed in more detail below, the Add-Back disallows expenses or costs paid 6 72 P.S. 7401(8)(defining intangible expense or cost ). 7 Id. 8 See 72 P.S. 7401(8). The Add-Back applies to royalties, licenses or fees paid for the acquisition, use, maintenance, management, ownership, sale, exchange or other disposition of an intangible asset. Property rights are often described through a metaphor as a bundle of rights or a bundle of sticks. The bundle or rights or a bundle of sticks is an abstract notion that describes property as a collection of rights. It is a legal construct that explains each legal right with respect to property is a separate and distinct right. Thus, all property whether it be tangible or intangible has (or could hypothetically have) numerous legal rights, such as a bundle of sticks, where each stick is a separate legal right. For example, the right to use and the right to sublicense are separate legal rights. See Denise R. Johnson, Reflection on Bundle of Rights, 32 VT. L. REV. 247, 247 (2007) (discussing of the bundle of rights). 9 Royalties paid pursuant to a trademark licensing agreement between a PA Corporate Taxpayer and an affiliated entity are an example of a direct intangible expense or cost as the PA Corporate Taxpayer and the affiliated entity are both parties to the same agreement. 10 Unlike a direct cost or expense, an indirect intangible cost or expense deduction arises where the PA Corporate Taxpayer and the affiliated entity are not parties to the same contractual agreement with respect to an intangible asset. Office of Chief Counsel 10 th Floor Strawberry Square Harrisburg, PA Page 2 of 14

47 by a PA Corporate Taxpayer to an affiliated entity to acquire or use an intangible asset if the PA Corporate Taxpayer amortizes the expenses or costs of the intangible asset. Second, the Add-Back disallows indirect expenses or costs that are not themselves royalty or licensing expenses per se, but are included in other costs, such as cost of goods sold. The second category of intangible costs or expenses is often referred to as embedded costs. A more detailed discussion of embedded costs is included below. 1. Amortization of Intangible Property The Add-Back disallows deductions of the purchase price of an intangible asset that was acquired by a PA Corporate Payer from an affiliated entity. While all or part of the purchase price of an intangible asset is amortized for federal income tax purposes, the acquisition of an intangible asset from an affiliated entity results in indirect expenses that are disallowed by the Add-Back. 11 The amortization expenses are disallowed for CNIT because they are intangible expenses or costs... paid, accrued or incurred... indirectly in connection with one or more transactions with an affiliated entity Embedded Intangible Costs Embedded intangible costs are included within the definition of an intangible expense or cost and are, therefore, subject to the Add-Back. 13 Embedded intangible costs are expenses paid to acquire, use, maintain, manage, sell, exchange, or otherwise dispose of (or otherwise acquire) an intangible asset, where the purported cost or expense is included in deductions or expenses that are called something other than [r]oyalties, licenses or fees paid, 14 such as cost of goods sold or a separate service charge (e.g., management fees). Example 1: Corporations B and C are affiliated entities with respect to Corporation A. Corporation A is subject to CNIT, while Corporation B and C are not subject to CNIT. Corporation A purchases products from Corporation B, and Corporation B licenses trademarks from Corporation C and, as such, incurs costs or expense deductions with respect to Corporation C. 15 The diagram depicting the transactions contemplated in 11 The Internal Revenue Code allows an amortization deduction of certain intangible assets over a 15-year period, beginning in the month the intangible was acquired. I.R.C. 197(a). That section permits the amortization of, among other things, goodwill, a patent, and knowhow. 12 This is consistent with other state add-back provisions. See, e.g., Ga. Comp. R. & Regs. r (3)(c); see also, Kimberly-Clark Corp. v. Commissioner of Revenue, 981 N.E.2d 208 (Mass. Ct. App. 2013) (holding that the Massachusetts s statute covered an embedded or indirect royalty payment). 13 See 72 P.S. 7401(8)(defining intangible expense or cost ). 14 See 72 P.S. 7401(8). 15 This example is conceptually identical to one contained in the Alabama and Georgia regulations discussed in the comments to the Multistate Tax Commission's "Model Statute Requiring the Addback of Office of Chief Counsel 10 th Floor Strawberry Square Harrisburg, PA Page 3 of 14 Example 1 is set forth below. In Example 1, Corporation A s deductions are disallowed to the extent they compensate or reimburse Corporation B for the use of trademarks, which Corporation B licensed from Corporation C. Corporation A s deductions for payments to Corporation B are subject to the Add-Back to the extent the amount Corporation A paid for the goods purchased included costs or fees for Corporation B s use of the trademarks. In other words, Corporation A indirectly paid intangible costs or expenses from intangible assets licensed from an affiliated entity. Example 2: Assume the same facts of the previous example, except Corporation A does not acquire products from Corporation B, but rather pays a management fee to Corporation B. The label of the transaction between Corporation A and B as a management fee is not determinative. As in the previous example, the management fee is disallowed to the extent it compensates or reimburses Corporation B for the cost of using a trademark. C. Interest Expenses In addition to disallowing intangible expenses or costs, the Add-Back also disallows Certain Intangible and Interest Expenses," adopted by the MTC on August 17, See Ga. Comp. R. & Regs. r (3)(a). Office of Chief Counsel 10 th Floor Strawberry Square Harrisburg, PA Page 4 of 14

48 interest expenses that are directly related to an intangible expense or cost. 16 Interest paid to an affiliated entity is presumed directly related to the acquisition or use of an intangible asset where the PA Corporate Taxpayer and the affiliated entity engage in any intangible transaction during the tax year in which the interest was paid. It is not necessary to trace the source and application of funds among the affiliated entities. Example 3: Corporation B is an affiliated entity with respect to Corporation A. Corporation A acquires trademarks from Corporation B in exchange for an interestbearing promissory note. The interest paid by Corporation A is disallowed by the Add- Back as the interest expense is incurred as a result of obtaining an intangible asset from an affiliated entity. (The face value or principal of the note also reflects the cost of the trademarks that are disallowed by the Add-Back to the extent such costs are amortized by Corporation A.) Example 4: Same facts as Example 3, except Corporation A does not obtain the trademarks from Corporation B in exchange for an interest-bearing promissory note. Rather, Corporation A obtains a loan from a third-party bank. Corporation A subsequently repays the loan to the bank periodically over a number of years and incurs interest expense with respect to its loan from the bank. The diagram depicting the transactions contemplated in Example 4 is set forth below. 16 See 72 P.S. 7401(9)(defining interest expense or cost ). Office of Chief Counsel 10 th Floor Strawberry Square Harrisburg, PA Page 5 of 14 As determined in the previous example, the expenses or costs paid by Corporation A in exchange for trademarks acquired from an affiliate entity are disallowed. Additionally, the interest expenses or costs paid by Corporation A on the loan from the bank are deductions directly related to an intangible property transaction with an affiliated entity. Furthermore, the interest deductions are presumed to be directly related to an intangible property transaction because the PA Corporate Taxpayer (Corporation A) engaged in an intangible property transaction with an affiliated entity during the tax year in which the PA Corporate Taxpayer claimed the interest deduction. Example 5: Corporation A and B are affiliated entities. Corporation A desires to purchase real estate in State X. Corporation A borrows funds from Corporation B to acquire the real estate. The loan is subject to interest at 1% above the prime interest rate. Is the interest paid by Corporation A to Corporation B subject to the Add-Back? The interest paid by Corporation A is disallowed, unless Corporation A substantiates that the interest paid was not directly related to the acquisition, use, or disposition of an intangible asset. Corporation A rebuts the presumption if it demonstrates that the loan proceeds it received from Corporation B were used to acquire the real estate (i.e., the proceeds were not used to acquire an intangible asset). The PA Corporation demonstrates it did not use the proceeds to acquire an intangible asset where the loan documents and the purchase agreement demonstrate the funds borrowed from Corporation B were used to acquire the real estate. III. Add-Back Exceptions The Add-Back identifies exceptions that, if satisfied, override the disallowance of intangible expenses paid to an affiliated entity. The Add-Back exceptions are: Principal Purpose/Arm s Length Foreign Treaty Conduit A PA Corporation that asserts an exception to the Add-Back must maintain contemporaneous documentation to support the exception and produce the requested documentation upon the Department of Revenue s request. A. Principal Purpose and Arm s Length Exception An exception to the Add-Back applies for PA Corporate Taxpayers that establish that (i) the transaction did not have a principal purpose of avoiding CNIT and (ii) the transaction was conducted at arm s length rates and terms. Office of Chief Counsel 10 th Floor Strawberry Square Harrisburg, PA Page 6 of 14

49 1. Principal Purpose Analysis The first element of the exception requires proof that the principal purpose of the transactions that generated the intangible expense was not to avoid CNIT. Technically, the statute uses the phrase "a principal purpose" to explain the exception. Whether the statute says "a principal purpose," "the principal purpose," or the primary purpose is irrelevant as all these phrases have the same meaning. 17 That is, there can be only one principal purpose and that is the single and most significant reason for which a transaction was conducted. The principal purpose must be a valid business purpose, other than the avoidance of CNIT, that was, either alone or in combination with one or more other business purposes, the primary motivation for entering into a transaction. The principal purpose is determined by evaluating the taxpayer s proffered reasons for the original and any subsequent transaction that produced the tax deduction. The non-tax business purposes for conducting a transaction must be supported by contemporaneous documentation. Mere statements or assertions that a transaction was intended to allow for better management or greater utilization of intangible assets, or similarly unsubstantiated claims are not sufficient to establish a principal non-tax business purpose. The avoidance of CNIT is presumed for transactions between or among affiliated entities that generate intangible expenses or deductions that did not change the overall economic position of the PA Corporate Taxpayer and its affiliated entities (other than tax effects) in a meaningful way. 2. Arm s Length Analysis The Principal Purpose/Arm s Length Exception also requires PA Corporate Taxpayers to substantiate that the intangible expenses were at arm's length rates and terms. The terms are considered arm s length where the terms of the transaction under consideration are such as would have been arrived at in independent transactions with or between unrelated parties under similar circumstances. 3. Substantiation Requirements PA Corporate Taxpayers have the burden of substantiating that the transactions giving rise to the expense deductions satisfy both the principal purpose and arms-length rates 17 See Nathan Giesselman, A Significant Problem Defining a 'Significant Purpose' and the Significant Difficulties that Result, 111 Tax Notes 1119 (June 5, 2006) (discussing the varying meaning of principal purpose under the I.R.C.). Office of Chief Counsel 10 th Floor Strawberry Square Harrisburg, PA Page 7 of 14 requirements. The documentation supporting an intangible expense deduction must demonstrate that the principal purpose of the transaction was to improve the economic position of the corporation apart from tax effects. In addition, other evidence may be required to show that: (i) the transaction, in fact, conformed to the documentation and (ii) the transaction was necessary for and had a reasonable chance of accomplishing the proffered principal purpose. B. Foreign Treaty Exception 1. Scope and Applicability The Add-Back provides an exception for transactions between a PA Corporate Taxpayer and an affiliated entity domiciled in a foreign nation which has in force a comprehensive income tax treaty with the United States providing for the allocation of all categories of income subject to taxation, or the withholding of tax, on royalties, licenses, fees and interest for the prevention of double taxation of the respective nations' residents and the sharing of information. 18 The Add-Back does not define the phrases "foreign nation" or "comprehensive income tax treaty." For purposes of the Add-Back, "foreign nation" is an established sovereign government that is recognized as such by the United States Department of State. "Comprehensive income tax treaty" means a convention or agreement, entered into by the United States and approved by Congress, with a foreign government for the allocation of all categories of income subject to taxation or the withholding of tax on interest, dividends, and royalties for the prevention of double taxation of the respective nations' residents and the sharing of information. Example 6: Corporation A, a foreign corporation domiciled in a jurisdiction that is a party to a comprehensive income tax treaty with the United States, owns directly or indirectly 100 percent of the outstanding shares of three United States domestic subsidiaries (Corporation B, Corporation C, and Corporation D). Corporation B and Corporation C utilize certain technology developed by Corporation A in their daily operations of manufacturing products for resale. Corporation D holds the legal rights to such technologies within the United States. Corporation B and Corporation C pay royalties to Corporation D for the right to use the technology developed by Corporation A in its daily operations. Corporation D pays annual royalties to Corporation A based on the amount of royalties it receives from Corporation B and Corporation C. Intangible expenses paid to Corporation D by Corporation B and C as well as the intangible expenses paid by Corporation D to Corporation A qualifies for the foreign treaty exception P.S. 7401(3)1.(t)(3)(foreign nation treaty exception). Office of Chief Counsel 10 th Floor Strawberry Square Harrisburg, PA Page 8 of 14

50 2. Substantiation Requirements for Claiming the Foreign Treaty Exception PA Corporate Taxpayers that seek the foreign treaty exception must provide the following information to the Department of Revenue upon request: the name and federal identification number of the foreign affiliated entity; the country of domicile of the foreign affiliated entity; and the amount of the intangible expense or interest expense. C. Conduit Exception The Add-Back does not disallow intangible expenses or costs where, and to the extent that, the affiliated entity pays expenses to an unaffiliated entity for the same intangible asset. A PA Corporate Taxpayer that seeks to claim the conduit exception must substantiate its claim. IV. Application of the Credit Mechanism The Add-Back provides a credit, in certain situations, to PA Corporate Taxpayers subject to the Add-Back (the credit is referred to herein as the Add-Back Credit ). The Add-Back Credit is determined in accordance with the following statutory provision: In calculating taxable income... when the taxpayer is engaged in one or more transactions with an affiliated entity that was subject to tax in this Commonwealth or another state or possession of the United States on a tax base that included the intangible expense or cost, or the interest expense or cost, paid, accrued or incurred by the taxpayer, the taxpayer shall receive a credit against tax due in this Commonwealth in an amount equal to the apportionment factor of the taxpayer in this Commonwealth multiplied by the greater of the following: (A) the tax liability of the affiliated entity with respect to the portion of its income representing the intangible expense or cost, or the interest expense or cost, paid, accrued or incurred by the taxpayer; or (B) the tax liability that would have been paid by the affiliated entity under subparagraph (A) if that tax liability had not been offset by a credit. The credit issued... shall not exceed the taxpayer's liability in this Commonwealth attributable to the net income taxed as a result of the Office of Chief Counsel 10 th Floor Strawberry Square Harrisburg, PA Page 9 of 14 [Add-Back] A. Add-Back Credit Limitation The Add-Back Credit is limited to the increase in the payor corporation s CNIT liability due to the application of the Add-Back. The Add-Back Credit limitation, therefore, is determined by the excess of the PA Corporate Taxpayer s CNIT liability determined with the Add-Back in excess of its CNIT liability without the Add-Back. See the examples below for illustrations of the Add-Back Credit limitation. B. Applicability to Non-Income Taxes The Add-Back Credit applies only to the net income taxes paid by the affiliated entity with respect to amounts received from the payor that were disallowed by the Add- Back. The Add-Back Credit does not apply to taxes based upon capital, gross receipts taxes, or business and occupational taxes. C. Taxes Paid to Combined Reporting States In general, the Add-Back Credit does not apply to state income taxes paid in combined reporting states. The state income taxes paid by the affiliated entity is excluded in the computation of the Add-Back Credit if the PA Corporate Taxpayer and the affiliated entity file on a combined, consolidated, or unitary basis in a manner whereby the intangible expenses of the PA Corporate Taxpayer and the corresponding income of the affiliated entity are eliminated in determining the aggregate state net income tax of both entities. Disregarding state income taxes paid by the affiliated entity in a combined reporting state is required by the Add-Back because the inclusion of both the PA Corporate Taxpayer s expense and the affiliated entity s income eliminates the income subject to tax in such tax jurisdictions. 20 D. Mathematics of the Add-Back Credit The amount of the Add-Back Credit is determined through a formula, calculated by multiplying the Pennsylvania apportionment percent of the PA Corporate Taxpayer by the aggregate state corporate net income tax liability of the affiliated entity in states P.S. 7401(3)1.(t) (emphasis added). 20 See e.g., Connecticut Special Notice, No. 2003(22) (July 8, 2004); see also, Ga. Code Ann (d)(1)(B) ( such combined income tax report or return, consolidated income tax report or return, or other report or return results in the elimination of the tax effects from transactions directly or indirectly between the taxpayer and the related member ); Ala. Admin Code (3)(e)( Subject to a tax based on or measured by the related member's net income means that the receipt of the payment by the recipient related member is reported and included in income for purposes of a tax on net income, and not offset or eliminated in a combined or consolidated return which includes the payor. ). Office of Chief Counsel 10 th Floor Strawberry Square Harrisburg, PA Page 10 of 14

51 for which the PA Corporate Taxpayer and the affiliated entity filed on a combined basis, but the total tax liability of the affiliate entity is determined without regard to any income tax credits the affiliated entity used to reduce its state income tax liability. 21 The Add-Back Credit is calculated with the following formula: %. ( ) The application of the formula is demonstrated in the illustrations included in the next section. As the formula demonstrates, the Add-Back Credit is a function of the aggregate amount of corporate net income taxes paid by the affiliated entity (without regard to tax credits) on the income paid to it by a PA Corporate Taxpayer for the acquisition, use, maintenance, management, ownership, sale, or exchange of an intangible asset. If the affiliated entity does not have any corporate state net income tax liability in separate company states, the PA Corporate Taxpayer does not receive an Add-Back Credit. 22 The Add-Back Credit is based on the affiliated entity s actual state corporate net income tax liability (but only in separate company states), ignoring tax credits, but including any applicable net operating loss deductions. E. Illustrations of the Add-Back Credit Example 7: Corporation A, a PA Corporate Taxpayer, licenses trademarks from Corporation B, an affiliated entity. Corporation A had $6,000,000 of gross income, and incurred $3,000,000 in expenses, including $1,000,000 of royalties expense to Corporation B, for which it claimed deductions. Corporation A filed corporate income tax reports in several states, including Pennsylvania, and apportioned 75% of its net taxable income to Pennsylvania. Corporation B had $3,000,000 of gross income, including $1,000,000 of royalty income from Corporation A. Company B had $750,000 of expenses. Corporation B was subject to corporate income tax in State 1 and State 2 and had a 25% apportionment factor for State 1. Corporation B s corporate net income tax liability to State 1 was $36, If the affiliated entity receives one or more credits against its state income taxes, the affiliated entity s corporate net income tax liability is determined without regard to such credit. 22 For a numerical illustration see Example 8. Office of Chief Counsel 10 th Floor Strawberry Square Harrisburg, PA Page 11 of 14 In addition, Corporation B received a $20,000 jobs credit from State 1, which decreased Corporation B s State 1 income tax liability from $36,563 to $16,563. Corporation A and B were included in a combined state income tax report in State 2, where Corporation A s royalty expense was eliminated by Corporation B s royalty income. Assuming a 6.5% corporation net income tax rate in State 1 and State 2, Corporation A has a $9,141, Add-Back Credit, which is determined as follows: %. ( ) 75% 36,563 3,000,000 1,000,000 = $9,141 The detailed calculations for Example 7, both for Corporation A and Corporation B, are included in Exhibit A. Example 8: Assume the same facts as Example 7, except Corporation B had $3,500,000 of expenses (rather than $750,000 as it had in Example 7), which caused Corporation B to have a $500,000 net operating loss for the year. Corporation A does not receive an Add-Back Credit because Corporation B did not have any state income tax liability as it had an operating loss. Corporation A s Add-Back Credit is determined as follows: %. ( ) 75% 0 3,000,000 1,000,000 = 0 The detailed calculations for Example 8 are included in Exhibit B. Office of Chief Counsel 10 th Floor Strawberry Square Harrisburg, PA Page 12 of 14

52 EXHIBIT A Details for Example 7 Example 7 Corporation A (without the Add-Back) PA CNIT TAX LIABILITY Corporation A (with the Add-Back) Tax Liability of Affiliated Entity Corporation B (Subject to Tax on State 1) Income from Intangibles 1,000,000 Other Income 6,000,000 6,000,000 2,000,000 Total Income 6,000,000 6,000,000 3,000,000 E Expenses Royalty Expense (1,000,000) 0 0 Other Expenses (2,000,000) (2,000,000) (750,000) Net Income Before Apport. 3,000,000 4,000,000 2,250,000 Apportionment % 75% 75% C 25% Net Income Subject to Tax 2,250,000 3,000, ,500 Tax Rate 9.99% 9.99% 6.50% Tax (Before Add-Back Credit) 224,775 A 299,700 B 36,563 D Add-Back Credit 9,141 (C X F) Add-Back Credit Limitation 74,925 (B- A) Effective Tax Rate of Affiliated Entity 1.219% (D/E) Intangible Income from Payor 1,000,000 Affiliated Entity Tax on Intangibles 12,188 F Note that the amount used in the (D/E) calculation is Corporation B s State 1 income tax liability without reduction for the State 1 jobs credit. Office of Chief Counsel 10 th Floor Strawberry Square Harrisburg, PA Page 13 of 14 EXHIBIT B Details for Example 8 Example 8 Corporation A (without the Add-Back) PA CNIT TAX LIABILITY Corporation A (with the Add-Back) Tax Liability of Affiliated Entity Corporation B (Subject to Tax on State 1) Income from Intangibles 1,000,000 Other Income 6,000,000 6,000,000 2,000,000 Total Income 6,000,000 6,000,000 3,000,000 E Expenses Royalty Expense (1,000,000) 0 0 Other Expenses (2,000,000) (2,000,000) (3,500,000) Net Income Before Apport. 3,000,000 4,000,000 (500,000) Apportionment % 75% 75% C 25% Net Income Subject to Tax 2,250,000 3,000,000 (125,000) Tax Rate 9.99% 9.99% 6.50% Tax (Before Add-Back Credit) 224,775 A 299,700 B - D Add-Back Credit - (C X F) Add-Back Credit Limitation 75,000 (B- A) Effective Tax Rate of Affiliated Entity 0.00% (D/E) Intangible Income from Payor 1,000,000 Affiliated Entity Tax on Intangibles - F Add-Back Credit Limitation - (B- A) Office of Chief Counsel 10 th Floor Strawberry Square Harrisburg, PA Page 14 of 14

53 REV -803 Schedule C-7 Credit for tax paid by affiliated entities Must be completed and submitted by the taxpayer who is claiming a credit for taxes paid by an affiliate. The form is used to calculate the credit and allows the taxpayer to provide all items needed to verify the credit. It should only be completed if Line 13 page 2 RCT-101 is greater than zero If needed we can correspond for items to verify their calculation or check reports filed by affiliated entities on our records when applicable If the department inquires about a possible addback, it will also request calculation of the credit (provided Line 13 page 2 RCT-101 would result in a figure greater than $0), if not provided the Department can deny the credit or try to calculate the credit with any available information (especially if the affiliates file in Pennsylvania) Completed form must be ed to ra-rvintngbladbac@pa.gov The credit can not exceed the liability in PA attributed to the net income tax as a result of the addback OR the credit can reduce tax to -0-, no refund can be created The credit cannot be applied to non-income based taxes The credit can only be applied to the year in question, there is no carry back or forward The credit does not apply to taxes paid in combined reporting states, where the expense to the corporation is income to the affiliate and these cancel out each other during consolidation A credit is allowed when taking the addback in certain situations as detailed in statute have transactions with affiliated entity to tax in PA or outside PA AND that tax is based on/includes intangible costs/expense The corporation has a Corporate Net Income Tax (no credit for Loss years) The credit is the apportionment factor of the taxpayer in PA multiplied by the greater of: The tax liability of the AFFILIATED entity w/respect to the portion of its (net) income representing the intangible expense/cost OR interest expense/cost paid accrued or incurred by the taxpayer OR The tax liability that would have been paid as noted above IF that tax liability had not been offset by a credit