TEI Tax School 2018 Louisiana Update May 11, 2018
Introductions to LA and LDR
How Louisiana Got to Now Economics and displacement of Hurricane Katrina Louisiana Dixiecrats turn red in 2010 Presidential Politics on the Bayou Worldwide downturn in oil & gas 2015 Tipping Point: LA Gubernatorial Election 2015: Major changes to LA tax architecture 2016 and 2017: Regular Session and 2 Special Sessions Failed Business Tax Last Year HB 23 2018 1 st Extra. Sess.
Eat-What-You-Kill and More with Less Life at LDR FY09-10 FY10-11 FY11-12 FY12-13 FY13-14 FY14-15 FY15-16 FY16-17 FY17-18 FY18-19 General Fund 12,722,885 0 0 61,864 0 1,375,682 0 16,903,945 31,944,804 30,669,333 Fees and SGR 83,292,634 93,781,873 95,356,197 93,426,518 92,471,003 103,868,503 94,305,887 46,995,952 65,802,091 67,403,092 Other 2,552,338 1,639,928 1,483,899 1,935,348 2,352,235 1,781,599 1,299,260 871,583 786,583 835,000 98,567,857 95,421,801 96,840,096 95,423,730 94,823,238 107,025,784 95,605,147 64,771,480 98,533,478 98,907,425 FTE 857 820 802 792 733 726 727 700 693 690
Hot Topics
The Casino at N 3 rd St. and Spanish Town Road 2009: Rise of the Baton Rouge Tea Party (a lot like the one in Boston) 2010: Several Democrats switch parties bringing state house under Republican control 2015: Fall of John Vitter and unexpected rise of John Bell Edwards 2017 2018: Russian Roulette strategy of Starve the Beast
Dividends and Nexus: Autozone Autozone is a tax collection suit in which the taxpayer attempts to defeat collection with a defense of lack of personal jurisdiction Autozone holds that LA may tax the dividend but in dissent Calogero notes no court has ever held that Autozone may have conflated whether LA has authority to tax a taxpayer (Commerce Clause) and whether LA courts may exert jurisdiction over a taxpayer to collect the tax (Due Process Clause) - Commerce Clause not addressed in the case
Dividends: Apportionable or Allocable Income Historically dividends have been treated as allocable income because (like interest) they were exempt from income tax. Acts 2015, No. 123 1 changed the provisions of LA R.S. 47:287.738 related to Louisiana s 100% dividends received deduction and lowered the deduction for dividends to 72%. This change was effective beginning July 1, 2015 and shall remain effective through June 30, 2018. The effect of this change to LA R.S. 47:287.738 is that a portion of dividends is included in gross income for Louisiana corporation income tax purposes. LA R.S. 47:287.92(A) provides that: All items of gross income, not otherwise exempt, shall be segregated into two general classes designated as allocable income and apportionable income. dividends do not appear within the exhaustive list of allocable income. This means that dividends are apportionable income. LA R.S. 47:287.92(C) which provides: Apportionable income. The class of income to be designated as apportionable income shall include all items of gross income which are not properly includable in allocable income as defined in this Section. As dividends do not appear as one of the classes of allocable income they must, by default (and statute) be apportionable income.
ITE and ITC Louisiana Constitution Art. VII 21(F) (the Industrial Tax Exemption Program): the State Board of Commerce and Industry or its successor, with the approval of the governor, may enter into contracts for the exemption from ad valorem taxes of a new manufacturing establishment or an addition to an existing manufacturing establishment. LA R.S. 47:6006(B)(4): for a manufacturer, as defined in Subparagraph (C)(3)(b) of this Section, if the amount of the credit exceeds the amount of tax liability for the tax year, the excess credit may only be carried forward as a credit against subsequent Louisiana income or corporation franchise tax liability for a period not to exceed five years and shall not be refundable. The secretary shall promulgate rules to ensure that taxpayers included in one consolidated federal income tax return shall be considered one taxpayer for the purpose of the limitations on refundability provided for in this Paragraph. LA R.S. 47:6006(C)(3)(b) : A person who meets the definition of "manufacturer" as provided in Subparagraph (a) of this Paragraph and who has claimed the ad valorem exemption under Article VII, Section 21(F) of the Constitution of Louisiana during the taxable year in which the local inventory taxes were levied.
LA R.S.47:287.82 The New (Intercompany) Add-back LA R.S. 47:287.82(A)(1)...... a corporation shall add-back otherwise deductible interest expenses and costs, intangible expenses and costs, and management fees... 1. directly or indirectly paid, accrued, or incurred to, or in connection directly or indirectly with one or more direct or indirect transactions, with one or more related members, except 2. to the extent the corporation shows, upon request of the secretary of the Department of Revenue that the corresponding item of income was in the same taxable year either subject to a tax based on or measured by the related member's net income in Louisiana or any other state, or 3. was subject to a tax based on or measured by the related member's net income by a foreign nation which has an enforceable income tax treaty with the United States, if the recipient was a "resident" as defined in the income tax treaty with the foreign nation.... the term "subject to a tax based on or measured by the related member's net income" shall mean that 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. Any portion of an item of income that is not attributed to the taxing jurisdiction, as determined by that jurisdiction's allocation and apportionment methodology or other sourcing methodology, is not included in income for purposes of a tax on net income and, therefore, shall not be considered subject to a tax. That portion of an item of income which is attributed to a taxing jurisdiction having a tax on net income shall be considered subject to a tax even if no actual taxes are paid on the item of income in the taxing jurisdiction by reason of deductions or otherwise.
Addback Exceptions LA R.S. 47:287.82(A)(2)... The adjustments required in Paragraph (1) of this Subsection shall not apply to that portion of interest expenses and costs, intangible expenses and costs, and management fees if the corporation establishes that the transaction giving rise to the interest expenses and costs, the intangible expenses and costs, or the management fees between the corporation and the related member did not have as a principal purpose the avoidance of any Louisiana tax. If the transaction giving rise to the interest expenses and costs, intangible expenses and costs, or the management fees has 1. a substantial business purpose and 2. economic substance and 3. contains terms and conditions comparable to a similar arm's length transaction between unrelated parties, the transaction shall be presumed to not have as its principal purpose tax avoidance, subject to rebuttal by the secretary of the Department of Revenue.
The proposed regulation LAC 61:I.1115...things to consider B. Exceptions. The taxpayer shall make the add-back unless:... 3. the transaction giving rise to the expense, cost, or fee between the taxpayer and the related member did not have as a principal purpose the avoidance of any Louisiana tax; or (Upon request of the secretary of the Louisiana Department of Revenue, the exception described in Paragraph B.3 of this Section (non-tax business purpose for conducting a transaction) must be supported by contemporaneous documentation. Documentation shall be considered contemporaneous if the documentation is in existence and compiled before the due date (including extensions) for the filing of a return containing the transaction(s). 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. )... 5. the add-back is unreasonable. The add-back will be considered unreasonable if the taxpayer establishes that, based on the entirety of the taxpayer's particular facts and circumstances, the add-back adjustments would increase the taxpayer's Louisiana income tax liability to an amount that bears no reasonable relation to the taxpayer s Louisiana presence.
LDR Audit Strategy
Aesop s LDR Audit Strategery No act of kindness, no matter how small, is ever wasted. Aesop
Allocable Interest Expense Overview Allocable Interest Expense Ratio: Avg. Allocable Assets 0ver Avg. Total Assets Allocable Interest Expense: 1120, Line 18 X Allocable Interest Expense Ratio
LA R.S. 47:287.92 and LAC 61:I.1130(B) LA R.S. 47:287.92(B)(1) Interest and dividend creating assets. Rents and royalties from immovable or corporeal movable property. Royalties or similar revenue from the use of patents, trademarks, copyrights, secret processes, and other similar intangible rights. Income from estates, trusts, and partnerships. Income from construction, repair, or other similar services.
Pension Benefit Assets and Surplus A taxpayer sponsors non-contributory defined benefit pension plans covering its employees. The monies the taxpayer owes to fund these pension benefit obligations are fixed and determinable based on the each covered employee s relevant characteristics (e.g., age, years of service, and final average compensation). LAC 61:I.305(B)(1)(a)-(d) provides: There must be included in the franchise taxable base determined in the manner heretofore described, all reserves other than those for: a. definitely fixed liabilities; b. reasonable depreciation (or amortization), but only to the extent recorded on the books of the taxpayer, except as noted in the following Paragraphs with respect to taxpayers subject to regulations of governmental agencies controlling the books of such taxpayers; c. bad debts; and d. other established valuation reserves. Emphasis mine. In LDR Revenue Ruling No. 02-002 (August 30, 2002), it is stated that "A definitely fixed liability implies an existing, unconditional, and legally enforceable obligation to pay in all events." Because the pension benefit obligations are within a US tax-qualified defined benefit pension plan, Internal Revenue Code Section 411 prohibits any decrease to a participant's accrued benefit (i.e., the amount earned to-date under the benefit plan formula). As such, the pension obligation is an existing and legally enforceable obligation. Similarly, LDR Revenue Ruling No. 02-006 (May 17, 2002) concludes that because there is a risk of loss of the vacation accrual in the situation being reviewed (because the employee does not take the vacation pay that was earned, and loses it at the end of the year or upon termination of employment), it cannot be thought of as a fixed liability. But, again, once a benefit is accrued and vested in a taxqualified pension plan, there really is no "risk of loss" at that point, just a question of how and when it will be paid. The Ruling provides: However, if accrued vacation pay is accounted for by employee, debited and credited as each employee uses and earns vacation and an employee is certain to be compensated for the accrued vacation pay in addition to the employee s regular pay when the employee fails to take an earned vacation, such accrued vacation pay should properly be considered a definitely fixed liability and therefore indebtedness. If the accrued vacation pay is indebtedness, then the provisions of La. Rev. Stat. Ann. 47:603 (West 2001) must be employed to determine to what extent it is included in taxable capital. Emphasis mine.
Transfer Pricing LDR maintains a cynical attitude toward transfer pricing and intercompany transactions, especially in instances were Louisiana in not treated fairly. And it is not alone. The MTC has supported greater scrutiny in this area first with the defunct Arm s-length Adjustment Service ( ALAS ) Project and then the State Intercompany Transaction Advisory Service ( SITAS ) project. Louisiana is actively engaged in information sharing with the federal government and other state departments of revenue. Louisiana works with other states and outside consultants on addressing perceived abuses with base erosion planning through non-organic structures involving utilizing base erosion planning. Presentations made at conferences such as Southestern Association of Tax Administrators ( SEATA ) state: Complex tax strategies shift income from separate company states to combined return jurisdictions via related-party transactions reducing liabilities in separate company states and not impacting combination states.
Penalties... The hits just keep on comin LA R.S. 47:1602.1(A)(1) Delinquent Filing 5%, plus 5% a month until 25%* LA R.S. 47:1602(A)(2) Late Payment - 5%, plus 5% a month until 25%* *LA R.S. 47:1602(A)(1) and (2) together may not exceed 25% LA R.S. 47:1604.1(A) Negligence 10% LA R.S. 47:1604.1(C) Understated Tax 20%
The Little Things... Like the mailroom How does your mailroom work why you should know Addresses Green Cards Deadlines