The 2019 National Multistate Tax Symposium State tax reboot The age of Multistate February 6-8, 2019
State treatment of federal Tax Cuts and Jobs Act s foreign income and GILTI Susan Courson-Smith, Pfizer Kenneth Jewell, Deloitte Tax LLP Alysse McLoughlin, McDermott Will & Emery February 6-8, 2019
Agenda Overview and General Concepts IRC Section 965 Deemed Repatriation IRC Section 951A GILTI Foreign Derived Intangible Income (FDII) Closing Thoughts 3
Overview and general concepts 4
2017 Tax Act multistate considerations for multinational entities Overview of Federal Tax Cuts and Jobs Act (2017 Tax Act) Tax reform legislation includes three major changes for federal taxation of multinational entities: Deemed Repatriation of Foreign E&P Tax on Global Intangible Low-Taxed Income (GILTI) Deduction for Foreign-Derived Intangible Income (FDII) 5
2017 Tax Act multistate considerations for multinational entities State corporate tax code conformity to IRC as of November 1, 2018 Rolling conformity to IRC currently in effect Conforms to IRC as of a specific date (as noted for each affected state) Selectively conforms (as noted for each affected state to IRC currently in effect, or to IRC as of a specific date. ) Not applicable b/c state does not levy an entity level tax with an IRC reference point Specific Date Conformity AZ - 1/1/17 FL - 1/1/18 GA 2/9/18 HI - 2/9/18 ID 12/21/17 or 12/31/17 IN - 2/11/18 IA - 1/1/15 KY - 12/31/17 ME 3/28/18 MI* - Current or 1/1/18 MN - 12/16/16 NH - 12/31/16 NC 2/9/18 SC 2/9/18 TX - 1/1/07 VA 2/9/2018 VT - 12/31/17 WI 12/31/17 WV - 12/31/17 State conformity to IRC references specific (and/or decouples from specific) 2017 Federal Tax Act provisions ID - 12/21/17 (2017 TY) or 12/31/17 (2018 TY) VA 2017 tax year conformity only GA 2/9/2018. Selective nonconformity FL 1/1/2018. Nonconformity to 100% bonus WI 12/31/2017. Selective nonconformity AZ 2017 tax year conformity only OR Selective nonconformity NY Selective nonconf. to deemed repatriation provs., eff. 1/1/17 IN 2/11/2018 (effective 1/1/2018). Nonconformity to 163j CT - Nonconformity to 163j OK 965(h) election is available NC 2/9/2018. Selective nonconformity HI 2/9/2018. Selective nonconformity NJ Selective nonconformity UT 965(h) election is available VT 12/31/2017. Limited nonconformity ME Selective nonconformity to 965 and GILTI MA Nonconformity to 245A, 250, and 965(c) deductions SC 2/9/18. Overall nonconformity. Selective Conformity AL - Current AR - Varies by *Contact a tax advisor for more information* IRC section CA - 1/1/15 MS - Current CA OR HI WA NV ID UT AZ AK MT WY CO NM ND SD NE KS OK TX MN IA MO AR LA WI IL MS MI* IN KY TN AL NY PA OH MD DC WV VA NC SC GA FL ME VT NH MA CT RI NJ DE Disclaimer: Slide to be used for illustrative purposes only. Not to be used as a substitute for research into application of rules. 6
2017 Tax Act multistate considerations for multinational entities Overall trends in state responses to 2017 Tax Act Select states have provided guidance to treat GILTI in a manner consistent with the treatment of Subpart F income A very select group of states have offered informal guidance on apportionment representation for GILTI Select states that otherwise adopt special deductions have specifically decoupled from the FDII deduction 2018 state legislative sessions ended without addressing GILTI or FDII by statute Too early to know the trends in what state administrative guidance will be in areas outside of deemed repatriation 7
IRC Section 965 Deemed Repatriation 8
Deemed Repatriation multistate tax considerations for multinational entities Continuing state complexity and open questions Applies for last tax year of controlled foreign corporation (CFC) beginning before January 1, 2018 IRC section 965(a) provides for addition to 10(+)% shareholder of CFCs equal to pro rata share of CFC s untaxed deferred E&P ( 965 inclusion ) 965 inclusion based on the greater amount of post-1986 deferred income as measured on: November, 2, 2017, or December 31, 2017 965 inclusion calculation allows for netting of E&P balance against E&P deficits IRC section 965(c) provides for deduction for corporations to impose effective tax rate of: 15.5% (to extent of US shareholder s pro rata share of CFC s cash & cash equivalents (the US shareholder s aggregate foreign cash position ); and 8% of the US shareholder s pro rata share of the remainder FTC eligible but reduced Election to pay tax over 8 years US corporations filing federal consolidated return to be treated as single US shareholder 9
Deemed Repatriation multistate tax considerations for multinational entities Continuing state complexity and open questions IRC Section 965(a) Inclusion in Separate vs. Combined States Even though the IRC Section 965 regulations treat consolidated group as a single taxpayer for certain purposes IRC Section 965 by statute allows netting of E&P deficits among affiliates as defined in Section 1504. Thus netting would generally be allowed in separate company states too Deductibility of IRC Section 965(c) participation deduction Considerations in states that have not legislatively decoupled from IRC Section 965(c) Double deduction rules Reporting guidance that both IRC Section 965(a) and (c) should be excluded from the state return if not in Line 28 Adoption by more states of expense allocation disallowance related to untaxed dividends Apportionment factor representation Non-conformity to payment due date and installment election under IRC Section 965(h) IRC Section 961 basis adjustments 10
IRC Section 951A GILTI 11
GILTI multistate considerations for multinational entities What is GILTI? GILTI is a new broad residual basket of deemed income from CFC s that is not limited to income from intangibles GILTI is not a dividend as defined at IRC Section 316 GILTI is not Subpart F income as defined, though IRC Section 951A is included in Subpart F of the Internal Revenue Code 12
GILTI multistate considerations for multinational entities Federal taxation of GILTI GILTI inclusion (Section 951A) CFC Gross Income Expenses attributable to CFC income under Section 954(b)(5) Exclusions (ECI, Subpart F, related party dividends, foreign oil and gas extraction income) 10% x Qualified Asset Base ( QBAI ) GILTI deduction (Section 250) 2018 2026: 50% x (GILTI + Section 78 Gross Up) 2026 and after: 37.5% x (GILTI + Section 78 Gross Up) Foreign Tax credits 80% of Foreign Tax Credits in GILTI basket allowed 13
GILTI multistate considerations for multinational entities State tax issues raised by GILTI Conformity, including state treatment of federal special deductions Scope of state DRDs and/or state treatment of certain foreign income GILTI is codified in IRC Section 951A within Subpart F of the IRC (i.e., Sections 951 965), but is separate and distinct from Subpart F Income, as defined in Section 952. Because there are generally no foreign tax credits for state tax purposes, GILTI may result in additional state tax even if no additional federal income tax Due to Federal-state filing group differences, a given member of a federal consolidated filing group can have a GILTI inclusion even of the consolidated group is in a net tested loss position, and vice versa Due to the consolidated netting rules applicable to tested losses, QBAI and specified interest, a given member of a federal consolidated filing group can have a GILTI inclusion for state tax purposes even if the consolidated group is in a net tested loss position, and vice versa Benefits and burdens of worldwide combined reporting greater certainty on the tax base (including intergroup eliminations) and full apportionment representation versus multi-year lock-in periods and the uncertainty of legislation/case law on the state taxability of GILTI and/or apportionment representation 14
GILTI multistate considerations for multinational entities Calculation considerations More federal/state tax basis differences to track A consideration for both basis in the stock of CFC s and the stock of US shareholders of CFC s in both non-conforming states and conforming states that do not follow the federal consolidated return regulations Interaction with IRC Section 163(j) limitation on business interest expense deduction Tested income under GILTI is calculated with regard to the IRC 163(j) limitation For states that include GILTI in the tax base, but decouple from the new IRC 163(j) interest expense limitation rules, CFC tested income may need to be recalculated without regard for new IRC 163(j) limitation. However, this may be a limited population of states 15
GILTI multistate considerations for multinational entities Calculation of GILTI under Proposed regulation 1502-51 Proposed Treasury Regs. Sec. 1.1502-51 would treat tested losses of a CFC as a group asset in the first instance that is allocated to all members with positive tested income based on each member s share of total positive tested income of the consolidated group*. US Parent 100% US sub. 1 US sub. 2 100% 100% CFC 1 $100 Tested Income CFC 2 CFC 3 $100 Tested Income $100 Tested Loss CFC1 has $100 of tested income. CFC2 has $100 of tested income. CFC3 has $100 of tested loss. Under the proposed regulation, S2 does not net the tested loss of CFC3 against the tested income of CFC2 resulting in $0 net tested income for S2. Rather, the regulations require that the $100 tested loss of CFC3 be allocated to S1 and S2 based on a ratio of tested income of each member over consolidated tested income. Accordingly, S1 and S2 are each allocated $50 of CFC3 s $100 tested loss, resulting in S1 and S2 each having net tested income of $50. *This same allocation methodology also applies to consolidated QBAI and specified interest expense. 16
GILTI multistate considerations for multinational entities Calculation of GILTI without application of the consolidated return regulations Same structure as the previous slide; however, in this example the consolidated return regulations do not apply. In states that do not adopt the federal consolidated return regulations, a US shareholder would need to determine its net tested income or loss based on its ownership of any CFC (directly or indirectly) within the meaning of IRC section 958(a) and would not be able to benefit from any affiliate s tested loss. US Parent 100% US sub. 1 US sub. 2 100% 100% CFC 1 $100 Tested Income CFC 2 CFC 3 $100 Tested Income $100 Tested Loss In this case, S1 would have $100 of net tested income and S2 would have $0 of net tested income. It would also follow that absent the application of the consolidated allocation principles in the proposed regulation, it is possible for individual members of the consolidated return group to have tested income for state tax purposes notwithstanding the consolidated group is in a net tested loss position. This is a plausible fact pattern that can trigger large differences between federal and state net GILTI inclusion in separate reporting states and group return states that don t conform to federal consolidated return regulations 17
GILTI multistate considerations for multinational entities Basis Adjustments GILTI tax basis adjustments in the shares of CFC s and their US corporate shareholders under the consolidated return regulations The proposed regulations amend Treasury Regs. Sec. 1502-32 to require: A reduction in basis in the stock of a US group member owning a tested loss CFC to the extent such tested loss is used by other members of the consolidated group to off-set tested income Proposed regulation 1502-51 would require: A reduction in basis in the stock of a CFC to account for the amount of tested loss generated by that CFC that off-set tested income produced by other CFC s owned by members of the same consolidated filing group Such basis reductions are not limited to the US shareholders basis in the shares of the tested loss CFC (similar to ELA concept) Accordingly, additional federal/state tax basis differences will arise in states that do not conform to the 2017 Tax Act and states that do conform but do not generally adopt the federal consolidated return regulations 18
GILTI multistate considerations for multinational entities State tax issues raised by GILTI How will GILTI income be sourced for apportionment purposes? Potential state approaches to factor representation: Include the factors of the CFCs attributable to generating the GILTI income ( Detroit Formula ) Include the Gross IRC Section 951A amount in the sales factor Include the GILTI amount net of the 50% deduction pursuant to IRC Section 250 (in states that allow) Exclude GILTI from the sales factor New Jersey s approach based on a taxpayer specific proportional GDP approach 19
GILTI multistate considerations for multinational entities Potential statutory and Constitutional issues Tax base If a state includes GILTI income in its tax base, potential taxpayer responses may include: GILTI should be considered a dividend similar to Subpart F under state statutes Massachusetts Guidance Taxing GILTI discriminates against interstate commerce and/or foreign commerce clause 505 U.S. 71 (1992) Kraft case: Discrimination against foreign source income under the Foreign Commerce Clause Application of the Kraft holding to GILTI in separate company filing states Application of the Kraft holding to GILTI in unitary combined filing states GILTI cannot be taxed without proper apportionment factor representation 20
GILTI multistate considerations for multinational entities Potential Constitutional issues Apportionment 445 U.S. 425 (1980): The linchpin of apportionability is the unitary business principal Are the CFC s and the US shareholder s engaged in a unitary business? If GILTI is apportionable income derived from a unitary business, it should get factor representation In a unitary combined reporting state, factor representation for GILTI should be on par with factor representation afforded to income generated by unitary domestic affiliates gross receipts of the CFC, and not limited to the gross or net GILTI inclusion amount In addition to Constitutional arguments, there may be distortion arguments available under state statute, regulations, administrative guidance and/or case law 21
GILTI multistate considerations for multinational entities GILTI Types of State Responses Types of state response Apply subtraction to GILTI Apply subtraction to GILTI Exclude GILTI No legislation, but released administrative guidance treating GILTI as taxable No legislation but released guidance that GILTI is deductible Example state IL GA WI NY KY Language of response the Illinois subtraction modification for foreign dividends will exclude a portion of the increase from Illinois base income related to the GILTI inclusion. Georgia expanded the provision for the state s subtraction for subpart F income to include income specified in Section 951A of the Internal Revenue Code of 1986. For Wisconsin tax purposes, conformity to the Internal Revenue Code does not include Section 951A. Although this new GILTI income is treated similarly to Subpart F income, it is specifically not characterized as Subpart F income under the IRC and therefore would not qualify as other exempt income. Thus, the income would flow through to New York, be treated as business income, and be subject to tax. For federal purposes, GILTI is treated similarly to Subpart F income, therefore, GILTI is considered nontaxable income for Kentucky income tax purposes. 22
GILTI multistate considerations for multinational entities State tax issues raised by the federal taxation of GILTI If, and how, a state decouples from GILTI is important Excluding GILTI income vs. subtraction for GILTI income If GILTI income is included in gross income: Increase to basis (IRC Section 961) Treated as previously taxed income (PTI) (IRC Section 959) Not included in the tax base when cash is distributed If GILTI income is excluded from gross income: May not result in increase to basis May not be treated as PTI Included in the tax base when cash is distributed 23
Foreign Derived Intangible Income (FDII) 24
FDII multistate considerations for multinational entities Federal treatment of FDII FDII Deemed Intangible Income ( DII ) Foreign Derived Deduction Eligible Income ( FDDEI ) Deduction Eligible Income ( DEI ) Deduction = 37.5% x FDII 25
Gross income Deduction eligible income Deemed intangible income FDII multistate considerations for multinational entities Federal treatment of FDII LESS: Subpart F, GILTI, Financial Services Income, CFC Dividends, Domestic Oil and Gas, Foreign Branch Income LESS: 10% x Qualified Business Asset Investment ( QBAI ) of US company LESS: Portion of DII that is not derived in connection with sales of property intended for foreign use or services provided to any person or with respect to any property not in the US FDII 26
FDII multistate considerations for multinational entities State tax issues raised by the federal taxation of FDII State tax issues include: Conformity, including state treatment of federal special deductions Apportionment Are sales related to FDII excluded from sales factor to the extent of deduction? FDII data may allow for favorable sourcing positions Market source services to foreign customers Source sales of TPP offshore Federal rules for determining foreign deduction eligible income may be different than state apportionment rules Deduction is still available for entities with no GILTI inclusion as long as it has FDII 27
FDII multistate considerations for multinational entities Issues with IRC Section 250 deduction (GILTI and FDII) Section 250 Deduction = 37.5% x FDII + 50% x (GILTI + Sec. 78 Gross Up) Deduction is limited to taxable income after NOL, any excess will result in reductions to FDII and GILTI State Considerations States typically provide an exclusion or subtraction from taxable income for the amount included in gross income pursuant to Section 78. Should the state deduction be reduced to 50% of GILTI income only? Some states allow the GILTI deduction but not the FDII deduction, or vice versa. If a deduction was reduced by the federal income limitation, should they be recalculated for state purposes? Most states have their own NOL provisions and start with federal taxable income before NOL. Should the limitation be calculated with respect to state taxable income? 28
Closing thoughts 29
2017 Tax Act multistate tax considerations for multinational entities Future of state tax policy and multinationals Are states ready for the Constitutional challenges to GILTI? How long will it take to achieve clarity? How will states compete for repatriated cash with C&I? Do states need tax haven rules if they tax GILTI? What would be left to tax? Can state budgets afford decoupling from base broadeners and/or allowing FDII deduction? Will the states allow foreign factor representation for GILTI income? If not, will we see more worldwide filers? 30
Contact information Susan Courson-Smith Pfizer Susan.Courson-Smith@pfizer.com Kenneth Jewell Deloitte Tax LLP kjewell@deloitte.com Alysse McLoughlin McDermott Will & Emery LLP Amcloughlin@mwe.com 31
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