TO: FROM: SUBJECT: DATE: 5/15/18 Majority Leader John Flanagan Ken Pokalsky Additional TCJA Issues For many states, including New York, state-level business and personal income taxes are based on the federal tax code, so most states are considering options for respond2ing to the federal Tax Cut and Jobs Act of 2017, or TCJA. The recently adopted state budget included several provisions designed to avoid increased state-level tax liability for individual New York State taxpayers. And while the budget included several provisions that decouple from TCJA provisions that result in increased state-level tax increases for New York s business taxpayers, several significant issues still need to be addressed in the 2018 legislative session. If these other conformity issues are left unaddressed, they will will increase state tax liability for many business taxpayers. These include: - the TCJA imposes ongoing federal taxation of global intangible low tax income or GILTI, which is calculated based on a complex formula, and represents income earned abroad but not actually paid to a domestic parent company. Even so, this amount will be added to federal taxable income, and will flow through to state business tax returns. We are proposing an exemption for GILTI under the state and city business taxes. - the TCJA capped the deduction of business interest expenses at 30 percent of business income, but in exchange allowed a five year period where business could expense, rather than depreciate, most capital investments. New York is already decoupled from federal bonus depreciation, but New York business taxpayers will be subjected to increased state tax liability due to the interest deduction cap. New York should decouple from the federal cap - while the budget agreement confirmed and/or included an exemption for federal transition income under the state corporate franchise and insurance tax, and the NYC corporate tax, it did not address this issue for pass-thru entities (sub-s, partnerships, LLCs) that are shareholders in controlled foreign corporations. A similar exemption should be adopted for these unincorporated businesses under the state and NYC personal income taxes. - The influx of transition income and GILTI on state tax returns, and other TCJA provisions, could affect a taxpayer s status as a qualified New York manufacture, and therefore its eligibility for beneficial tax rates and real property tax credit. The state should decouple its definition of QNYA from federal changes, in order to avoid these adverse impacts. In general, the state had not projected or counted on any additional revenues from these provisions, so amendments adopted in the 2018 session should not impact the state s long term financial plans. However, these conformity issues will be seen as an economic competitiveness issue for New York and other states. Given the Administration and legislature s focus on avoiding unintended tax increases due to TCJA, these issues should also be addressed during the 2018 legislative session. The attached pages provide proposed legislation and addition information on each of these issues.
GILTI EXEMPTION BILL MEMO The final FY 2019 state budget adopted several measures to eliminate unintended increases in state-level income tax liability for New York s individual and business taxpayers resulting from recent federal reforms. Post-budget, the legislature needs to adopt several further technical amendments and reforms necessary to avoid similar unintended tax increases due to misalignment of federal and state tax laws. The 2017 federal Tax Cut and Jobs Act (TCJA) subjects a portion of undistributed earnings of foreign subsidiaries ( controlled foreign corporations, or CFCs) to ongoing federal taxation. Referred to as GILTI, or global intangible low-taxed income, this provision (IRC 951A) is intended to impose federal tax on income earned in low-tax foreign jurisdictions from intangible property, such as patents, copyrights, and trademarks. However, GILTI is actually a tax on the overall business income of foreign subsidiaries that is not distributed to the U.S. parent, and is calculated as a function of the taxpayer s foreign fixed assets, and not actual earnings from intangible assets in tax havens. At the federal level, a 50% deduction, plus tax credits for foreign taxes paid, have the effect of eliminating any additional federal tax liability on income attributed to nations with income tax rates at or above 13.125%. New York State s corporate franchise tax has always exempted this type of undistributed income of foreign subsidiaries. However, due to the way the federal law was drafted, GILTI is not included in New York s existing statutory exemption, therefore state tax law now requires that the federally taxable share of GILTI to be included in the tax returns of New York business taxpayers with ownership shares in CFCs. Without legislation to decouple from this federal provision, New York taxpayers will be subject to state-level tax on income that has not, and may never actually be, received by the New York taxpayer. In addition, the state tax levy is not reduced by the foreign tax credits allowed at the federal level, nor by the federal rate reductions. There are compelling reasons why New York should adopt legislation to exempt GILTI from state-level taxation under the state s corporate franchise and insurance taxes, and the New York City corporate tax: - Exemption is consistent with New York s long-standing policy to not tax the earnings of foreign subsidiaries. Moreover, in enacting federal reforms, Congress made clear that GILTI income was to be treated as subpart F (CFC) income in most circumstances, supporting like-treatment at the state level as well. - GILTI income was not included in federal returns prior to 2018, so it likewise would not have been reported to or taxed by New York State, which uses federal taxable income as the starting point for calculating state corporate franchise tax liability. Providing a state exemption would not impact the state s projected future tax receipts. - Imposing state taxes on foreign earnings would adversely impact New York s business climate, and change its long-standing tax policy. It will be contrary to the state s efforts to retain and attract multinational businesses, and will likely set New York apart from the majority of states. A number of other states already exempt GILTI from state-level taxation. - Under the state s corporate franchise tax, income is apportioned to New York based on the share of a taxpayer s total receipts earned within the state. However, the state s current apportionment statute does not specifically address GILTI. A lack of apportionment relief will both exacerbate the impact of state-level taxation of GILTI, will result in uncertain and complex compliance obligations for taxpayers, and would likely be the subject of legal challenge. - Federal and state-level taxation of GILTI could actually provide an unintended incentive to locate tangible business assets overseas, which would be a strategy to reduce the level of calculated GILTI income. Since GILTI provisions apply to tax years beginning on or after January 1, 2018, this issue needs to be addressed in the 2018 legislative session to avoid unintended, adverse impact on New York business taxpayers. Page 2 of 10
This decoupling legislation will support and enhance the Administration s focus on avoiding unintended tax increases for New York taxpayers due to federal reforms. GILTI decoupling was also included in the Senate s proposed revenue bill and budget resolution. Corporate Franchise Tax Amendments Section 208.6-a(b) is amended to read as follows: (b) Exempt CFC income means (i) except to the extent described in subparagraph (ii) of this paragraph, the income required to be included in the taxpayer s federal gross income pursuant to subsection (a) of section 951 of the internal revenue code, received from a corporation that is conducting a unitary business with the taxpayer but is not included in a combined report with the taxpayer, and (ii) such income required to be included in the taxpayer s federal gross income pursuant to subsection (a) of such section 951 of the internal revenue code by reason of subsection (a) of section 965 of the internal revenue code, as adjusted by subsection (b) of section 965 of the internal revenue code, and without regard to subsection (c) of such section, received from a corporation that is not included in a combined report with the taxpayer, and (iii) such income required to be included in the taxpayer s federal gross income pursuant to subsection (a) of section 951A of the internal revenue code, without regard to the deduction under section 250 of the internal revenue code, received from a corporation that is not included in a combined report with the taxpayer, less, (iii) (iv) in the discretion of the commissioner, any interest deductions directly or indirectly attributable to that income. In lieu of subtracting from its exempt CFC income the amount of those interest deductions, the taxpayer may make a revocable election to reduce its total exempt CFC income by forty percent. If the taxpayer makes this election, the taxpayer must also make the elections provided for in paragraph (b) of subdivision six of this section and paragraph (c) of this subdivision. If the taxpayer subsequently revokes this election, the taxpayer must revoke the elections provided for in paragraph (b) of subdivision six of this section and paragraph (c) of this subdivision. A taxpayer which does not make this election because it has no exempt CFC income will not be precluded from making those other elections. The income described in subparagraph subparagraphs (ii) and (iii) of this paragraph shall not constitute investment income. Section 208.9(b) is amended by adding new subparagraph (25) to read as follows: (25) The amount of any federal deduction allowed pursuant to section 250(a)(1)(B)(i) of the internal revenue code. Effective Date: These amendment shall take effect immediately and shall apply to taxable years beginning on or after January 1, 2018. Page 3 of 10
Amendments to the Administrative Code of the City of New York: Section 11-652.5-a(b) is amended to read as follows: (b) Exempt CFC income means (i) except to the extent described in subparagraph (ii) of this paragraph, the income required to be included in the taxpayer s federal gross income pursuant to subsection (a) of section 951 of the internal revenue code, received from a corporation that is conducting a unitary business with the taxpayer but is not included in a combined report with the taxpayer, and (ii) such income required to be included in the taxpayer s federal gross income pursuant to subsection (a) of such section 951 of the internal revenue code by reason of subsection (a) of section 965 of the internal revenue code, as adjusted by subsection (b) of section 965 of the internal revenue code, and without regard to subsection (c) of such section, received from a corporation that is not included in a combined report with the taxpayer, and (iii) such income required to be included in the taxpayer s federal gross income pursuant to subsection (a) of section 951A of the internal revenue code, without regard to the deduction under section 250 of the internal revenue code, received from a corporation that is not included in a combined report with the taxpayer, less, (iii) (iv) in the discretion of the commissioner of finance, any interest deductions directly or indirectly attributable to that income. In lieu of subtracting from its exempt CFC income the amount of those interest deductions, the taxpayer may make a revocable election to reduce its total exempt CFC income by forty percent. If the taxpayer makes this election, the taxpayer must also make the elections provided for in paragraph (b) of subdivision five of this section and paragraph (c) of this subdivision. If the taxpayer subsequently revokes this election, the taxpayer must revoke the elections provided for in paragraph (b) of subdivision five of this section and paragraph (c) of this subdivision. A taxpayer which does not make this election because it has no exempt CFC income will not be precluded from making those other elections. The income described in subparagraph subparagraphs (ii) and (iii) of this paragraph shall not constitute investment income. Section 11-652.8(b) is amended by adding new subparagraph (22) to read as follows: (22) The amount of any federal deduction allowed pursuant to section 250(a)(1)(B)(i) of the internal revenue code. Effective Date: These amendment shall take effect immediately and shall apply to taxable years beginning on or after January 1, 2018. Insurance Tax Amendments Proposed amendment to Tax Law 1503: Page 4 of 10
1503 (b) Modifications. In computing entire net income, the following modifications shall be made: (1) Entire net income shall not include: (T) To the extent not excluded from income pursuant to subparagraph (A) of paragraph one of this subdivision, the income required to be included in the taxpayer s federal gross income pursuant to subsection (a) of section 951A of the internal revenue code, without regard to the deduction under section 250 of the internal revenue code, that is generated by a corporation that is not included in a combined report with the taxpayer. (2) Entire net income shall be determined without the exclusion, deduction or credit of: (Y) The amount of the federal deduction allowed pursuant to subparagraph (B)(i) of paragraph one of subsection (a) of section 250 of the internal revenue code. Proposed amendment to Tax Law 1503(b)(2)(H) (H) in the discretion of the commissioner, any amount of interest directly or indirectly and any other amount directly attributable as a carrying charge or otherwise to subsidiary capital or to income, gains or losses from subsidiary capital, or to the income described in subparagraphs (S) and (T) of paragraph one of this subdivision; Effective Date: These amendment shall take effect immediately and shall apply to taxable years beginning on or after January 1, 2018. Page 5 of 10
PIT EXEMPTION FOR TRANSITION INCOME BILL MEMO - In general terms, the starting point for calculating New York s personal income tax (PIT) under Article 22 is a taxpayer s adjusted gross income (AGI). The federal Tax Cut and Jobs Act (TCJA) made numerous changes that expanded the Internal Revenue Code s (IRC) definition of income, and/or limited deductions and credits. Subsequently, the state s Executive Budget proposed, and the legislature approved, several measures to decouple from TCJA provisions in order to avoid significant state-level tax increase on for New York PIT taxpayers. However, significant concerns remain for some taxpayers. In particular, absent additional state action, certain undistributed foreign earnings would be included in state AGI for the owners of pass through businesses such as partnerships and LLCs, which pay tax on their business earnings at the individual level through the state s PIT. This so-called transition or deemed repatriated income was made taxable at the federal level under the newly adopted IRC 965. This provision requires taxpayers to pay a one-time federal tax on accumulated foreign profits regardless if such profits are actually repatriated to U.S. taxpayers. Importantly, this change in federal tax law was accompanied by a significant reduction in tax rates and other reforms that limited its impact at the federal level changes that do not flow through to state tax law. In addition, New York now exempts from tax this income for businesses set up as C-corps under Article 9A. We are proposing a legislative amendment to eliminate state tax liability for owners of unincorporated businesses due to these undistributed foreign earnings. Under this proposed change, these taxpayers state PIT liability would continue to be calculated in the same manner as it was prior to federal reforms, so that the state would see neither an increase nor decrease in tax revenues relative to pre-tcja levels. Moreover, once these foreign earnings were actually paid out to New York taxpayers, they would become fully taxable under the state s PIT, so this legislative change affects the timing, rather than just the taxability, of these foreign earnings. Our proposed language is presented below. Note, to effectuate the same outcome under the NYC income tax, a similar amendment would have to be made to NYC Administrative Code 11-1712. This proposed state change would automatically be reflected in the Yonkers city income tax surcharge, which is calculated as a percentage of state PIT liability. Proposed amendment to Tax Law 612: 612. New York adjusted gross income of a resident individual. (c) Modifications reducing federal adjusted gross income. There shall be subtracted from federal adjusted gross income: (44) 100% of the income required to be included in the taxpayer's federal gross income pursuant to subsection (a) of section 965 and subsection (a) of section 951A of the internal revenue code. # Page 6 of 10
DECOUPING FROM FEDERAL CAP ON DEDUCTION OF BUSINESS INTEREST BILL MEMO -- Under federal tax reform, the deduction for a business net interest expense will be limited to 30% of a taxpayer s federal adjusted taxable income (IRC section 163(j)), effective for the 2018 and future tax years (taxpayers with gross receipts under $25 million are exempt.) This cap was adopted by Congress along with bonus depreciation, which allows a taxpayer to immediately expense 100% of the cost of qualified property in the year the expense was incurred, effective for 2018 through 2023 (and phased down thru 2027). The reason for the federal limit on interest deductions was to prevent a double tax benefit based on property the cost of which is deducted in the year in which it is placed in service and not depreciated. Under current NYS tax law, this new federal cap on business interest deductions would flow through to businesses subject to the state s corporate franchise tax (Article 9A), as it is a component of federal taxable income which is the starting point for calculating Article 9A entire net income tax liability. However, New York State tax law is already decoupled from federal bonus depreciation, and the Cuomo administration is not proposing to adopt the federal immediate expensing regime. As a result, without technical amendments, New York taxpayers would be hit with increased tax liability due to the cap on interest deductions, while also being deprived of the state-level benefit of asset expensing. To address this one-sided outcome, the state should also decouple from the federal cap on business interest deductions for Article 9A taxpayers. Since Section 163 also provides that disallowed interest is carried forward and can be deducted in future tax years, to avoid a double-deduction, Article 9A amendments should also provide that any amount deducted from federal taxable income pursuant to a carry-forward of disallowed business interest should be added back to Article 9A entire net income. Without this amendment, businesses in New York would be subject to increased annual state tax liability of $45 million per year or more (according to NYS DTF estimates.) Proposed Amendments to NYC Corporate Tax of 2015: 208. Definitions. As used in this article: 9. The term "entire net income" means total net income from all sources, which shall be presumably the same as the entire taxable income, which, except as hereinafter provided in this subdivision (i) the taxpayer is required to report to the United States treasury Department... (a) Entire net income shall not include: (20) the amount disallowed as a deduction pursuant to clause (1) of subsection (j) of section 163 of the internal revenue code. (21) any amount deducted by reason of a carry forward of disallowed business interest pursuant to section 163(j)(2) of the internal revenue code. Page 7 of 10
Proposed Amendments to Insurance Tax: 1503. Computation of entire net income. (a) The entire net income of a taxpayer shall be its total net income from all sources which shall be presumably the same as... (b) Modifications. In computing entire net income, the following shall be made: modifications (1) Entire net income shall not include: (T) the amount disallowed as a deduction pursuant to clause (1) of subsection (j) of section 163 of the internal revenue code. (U) any amount deducted by reason of a carry forward of disallowed business interest pursuant to section 163(j)(2) of the internal revenue code. Proposed Amendments to NYC Corporate Tax of 2015: 11-652 Definitions. 8. The term "entire net income" means total net income from all sources, which shall be presumably the same as the entire taxable income, which, except as hereafter provided in this subdivision, (a) Entire net income shall not include: (16) the amount disallowed as a deduction pursuant to clause (1) of subsection (j) of section 163 of the internal revenue code. (17) any amount deducted by reason of a carry forward of disallowed business interest pursuant to section 163(j)(2) of the internal revenue code. Page 8 of 10
QUALIFIED NEW YORK MANUFACTURERS BILL MEMO - Recent federal tax law changes could inadvertently disqualify manufacturers from beneficial treatment under New York s corporate franchise tax (Article 9A) and personal income tax (Article 22), with regard to the Article 9A manufacturers ENI tax rate, and eligibility for the manufacturer s real property credit under both articles. First, the inclusion of transition and/or GILTI income (new categories of foreign income addressed in federal tax reform) in a taxpayer s federal gross receipts could impact the principally engaged test to qualify as a manufacturer (the test is 50% of gross receipts from manufacturing activities, a calculation that could be altered by the inclusion of foreign-generated income from non-manufacturing activities.) Second, even if NYS remains decoupled with the recently enacted federal bonus depreciation set forth in IRC 168(k), its impact on a manufacturers federal adjusted property basis could likewise result in a taxpayer being disqualified as a NY manufacturer, by reducing their federal adjusted (after depreciation) basis of manufacturing property below applicable NYS thresholds. These inadvertent effects could be addresses with limited amendments to the Tax Law. There would be no impact on state revenues, as these changes simply preserve the intended effect of these Tax Law provisions as adopted by the state legislature. Our proposed amendments to Section 210 are presented below. Note, these changes will also impact the manufacturing RPT credit in Tax Law 210-B( 43) and 606(xx), both of which refer to the definition of qualified New York manufacturer in 210.1(a)(vi). 210. Computation of tax. 1. The tax imposed by subdivision one of section two hundred nine of this chapter shall be: (a) Business income base. (vi) for taxable years beginning on or after January first, two thousand fourteen, the amount prescribed by this paragraph for a taxpayer which is a qualified New York manufacturer, shall be computed at the rate of zero percent of the taxpayer's business income base. The term "manufacturer" shall mean a taxpayer which during the taxable year is principally engaged in the production of goods by manufacturing, processing, assembling, refining, mining, extracting, farming, agriculture, horticulture, floriculture, viticulture or commercial fishing. However, the generation and distribution of electricity, the distribution of natural gas, and the production of steam associated with the generation of electricity shall not be qualifying activities for a manufacturer under this subparagraph. Moreover, in the case of a combined report, the combined group shall be considered a "manufacturer" for purposes of this subparagraph only if the combined group during the taxable year is principally engaged in the activities set forth in this paragraph, or any combination thereof. A taxpayer or, in the case of a combined report, a combined group shall be "principally engaged" in activities described above if, during the taxable year, more than fifty percent of the gross receipts (excluding any receipts that would be included pursuant to subsection (a) of section 965 and subsection (a) of section 951A of the internal revenue code) of the taxpayer or combined group, respectively, are derived from receipts from the sale of goods produced by such activities. In computing a combined group's gross receipts, intercorporate receipts shall be eliminated. A "qualified New York manufacturer" is a manufacturer which has property in New York which is Page 9 of 10
described in clause (A) of subparagraph (i) of paragraph (b) of subdivision one of section two hundred ten-b of this article and either (I) the adjusted basis of such property for federal state income tax purposes at the close of the taxable year is at least one million dollars or (II) all of its real and personal property is located in New York. A taxpayer or, in the case of a combined report, a combined group, that does not satisfy the principally engaged test may be a qualified New York manufacturer if the taxpayer or the combined group employs during the taxable year at least two thousand five hundred employees in manufacturing in New York and the taxpayer or the combined group has property in the state used in manufacturing, the adjusted basis of which for federal state income tax purposes at the close of the taxable year is at least one hundred million dollars. Page 10 of 10