States are moving to advance different solutions in their efforts to address federal tax reform. Illinois recently introduced legislation to addback the new deduction for foreign-derived intangible income (a topic we’ve previously covered), and its Department of Revenue has issued its position on other aspects of federal reform. Oregon, after resolving a controversy between its senate and house, is about to pass legislation addressing deemed repatriation income and repealing its tax haven inclusion provisions.

Illinois Issues Guidance on Federal Tax Reform

On March 1, the Illinois Department of Revenue (Department) issued guidance explaining its position with respect to how various law changes made in the 2017 federal tax reform bill, known as the Tax Cuts and Jobs Act (Act), will impact taxpayers in Illinois.

While, for the most part, the pronouncement provides a cursory analysis of the provisions of the Act and a conclusory statement as to whether each provision will result in an increase or decrease in a taxpayer’s adjusted gross income (for individuals) or federal taxable income (for corporations), there are a few items that do warrant some specific mention.

With respect to Illinois’ treatment of the Act’s new international tax provisions, the Department provides some insight into treatment of deemed repatriated foreign earnings and global intangible low-taxed income (GILTI). For purposes of both the deemed repatriated foreign earnings and the GILTI, the Act provides that a taxpayer computes its taxable income by including an amount in income and taking a corresponding deduction to partially offset the inclusion. The Illinois guidance indicates that the inclusion in Illinois will be net, with both the income inclusion and the deduction taken into account in determining a taxpayer’s tax base. This is consistent with the provisions of the Illinois corporate income tax that provide that the Illinois tax base is a corporation’s “taxable income,” which is defined as the amount of “taxable income properly reportable for federal income tax purposes for the taxable year under the provisions of the Internal Revenue Code.” 35 ILCS 5/203(b)(1), (e).

Mitigating the tax impact of these provisions, the Department also takes the position that the amount included as deemed repatriated foreign earnings or as GILTI will be treated as a foreign dividend eligible for Illinois’ 100 percent dividend-received deduction. See 35 ILCS 5/203(b)(2)(O), (b)(2)(G). This rationale is in accordance with the provisions in the Illinois statute that provide a dividend-received deduction for dividends received or deemed received under Internal Revenue Code sections 951 through 965. Thus, because the deemed repatriated foreign earnings are included pursuant to section 965 and the new GILTI is included pursuant to section 951A, those amounts should both be dividends eligible for the dividend-received deduction.

In addition, the Department has specified that the new provision limiting the use of federal net operating losses (NOLs) in an amount equal to 80 percent of the taxpayer’s taxable income is a change that could provide an increased tax base or increased tax revenue to Illinois. Corporate taxpayers should not get confused, however. Illinois allows use of the federal NOL only for individuals. Corporate taxpayers, however, have to add back any federal NOL and then compute a separate NOL for purposes of the Illinois corporate income tax. Thus, neither the 80 percent limitation nor the change to unlimited carryforwards will impact the ability of a corporate taxpayer to use its NOL for purposes of the Illinois corporate income tax.

Nail Biting Success in Oregon on Tax Haven Repeal Following Federal Tax Reform

While drama surrounded Oregon’s legislation addressing aspects of federal tax reform, the end result provides clarity and relief for taxpayers with international affiliates. Oregon has now addressed the repatriation provisions of federal tax reform and is in the process of repealing its (hated) tax haven inclusion provision.

Oregon Senate Bill 1529-A addresses several elements of how the state will conform to federal tax reform. Oregon decided it needed to address reform rapidly because of the risk of a perceived windfall to taxpayers if the state did not change its existing dividend-received deduction statute. Absent the legislation, Oregon would have included both the repatriation addition and the deduction in its tax base and allowed its 80 percent dividend-received deduction against the gross, not the net. The adopted legislation changes this calculation. The legislation requires that amounts deducted for income repatriated under section 965 must be added back in calculating Oregon taxable income. This provision is added to ORS 317.267, the provision decoupling from the federal dividend-received deduction. The tax on the remaining amount would be due in year one, as there is no provision in the bill similar to the federal 8-year payment allowance. It is estimated that the state will receive approximately $160 million from the one-time deemed repatriation. Absent the change, the state would have lost $100 million.

The legislation provides additional relief from the tax on repatriated income. Oregon is one of the states that had adopted tax haven legislation, requiring income of the taxpayer’s affiliates incorporated in certain listed countries to be included in the taxpayer’s taxable income. ORS 317.716. As a result, Oregon may have already taxed some of the income now deemed repatriated. To alleviate any double taxation, new Section 33 in the bill allows a credit for taxes attributable to this income. The credit is limited to the lesser of the tax attributed to the repatriated income or the tax on the income included under ORS 317.716. Unused credits may be carried over five years.

The drama over passage of the bill revolved around a provision that repealed the tax haven inclusion provisions of ORS 317.716. The bill that passed the senate unanimously included the repeal of the tax haven provision. When it reached the house, however, Amendment –A9 removed the repeal. A hearing on the bill included testimony both for and against the repeal. Proponents argued that it was too soon to determine whether repeal was necessary and the tax haven provision should be maintained until the Department of Revenue completed a study to determine whether there was truly overlap between the tax haven inclusion and the GILTI provisions. McDermott provided written comments explaining why maintaining the tax haven provision was duplicative of the policy behind the new GILTI provision and would require complex computations to avoid double taxation when a taxpayer was subject to both GILTI and the tax haven inclusion. COST and the Tax Foundation also provided comments supporting the bill as passed by the senate that included the tax haven repeal language. The house ultimately passed a bill repealing the tax haven provisions, and the senate agreed in conference. The bill is awaiting the governor’s signature.

Under amendments to the bill, the Department of Revenue will have an opportunity to evaluate the efficacy of GILTI, but it is not clear whether the pending budget bill will provide funding for this study.

Please contact us to join McDermott’s multi-state coalition, the STAR Partnership, which will address state business tax ramifications raised by federal tax reform. Further information is available here.

 

Earlier this month, Connecticut Governor Dan Malloy released his Governor’s Bill addressing the various state tax implications of the federal tax reform bill enacted by Congress in December 2017, commonly referred to as the “Tax Cuts and Jobs Act.” Among other things, the Governor’s Bill addresses Connecticut’s treatment of the foreign earning deemed repatriation tax provisions of amended section 965 of the Internal Revenue Code (IRC). While the Governor’s Bill does not explicitly provide that the addition to federal income under IRC section 965 is an actual dividend for purposes of Connecticut’s dividend received deduction, the bill does protect Connecticut’s ability to tax at least part of the income brought into the federal tax base under the federal deemed repatriation tax provisions by defining nondeductible “expenses related to dividends” as 10 percent of the amount of the dividend. Continue Reading Connecticut Responds to the Federal Repatriation Tax

Last year, Illinois enacted a mid-year income tax rate increase. Effective July 1, 2017, Illinois increased the income tax rate for individuals, trusts and estates from 3.75 percent to 4.95 percent, and for corporations from 5.25 percent to 7 percent. The Illinois Personal Property Replacement Tax (imposed on corporations, partnerships, trusts, S corporations and public utilities at various rates) was not changed.

As we previously reported, the Illinois Income Tax Act contains a number of provisions intended to resolve questions regarding how income should be allocated between the two income tax rates applicable in 2017. 35 ILCS 5/202.5(a). The default rule is a proration based on the number of days in each period (181/184). For taxpayers choosing this method, the Department of Revenue (Department) has recommended the use of a blended tax rate to calculate tax liability. A schedule of blended rates is included in the Department’s instructions for the 2017 returns. The blended rate is 4.3549 percent for calendar year individual taxpayers and 6.1322 percent for calendar year C corporation taxpayers. Continue Reading Choices for Illinois Taxpayers in Implementing the 2017 Income Tax Rate Increase

Yesterday afternoon, after months of wrangling and a marathon 4th of July weekend session, the Illinois House of Representatives voted to override Governor Bruce Rauner’s veto of Senate Bill (SB) 9, the revenue bill supporting the State’s Fiscal Year (FY) 2017-2018 Budget. The vote ended Illinois’ two year budget impasse and may avoid a threatened downgrade of Illinois bonds to junk status. The key tax components of the bill as enacted Public Act 100-0022 (Act) are as follows:

Income Tax

Rate increase. Income tax rates are increased, effective July 1, 2017, to 4.95 percent for individuals, trusts and estates, and 7 percent for corporations.

Income allocation. The Act contains a number of provisions intended to resolve questions regarding how income should be allocated between the two rates in effect for 2017.

  • Illinois Income Tax Act (IITA) 5/202.5(a) provides a default rule, a proration based on the days in each period (181/184), for purposes of allocating income between pre-July 1 segments and periods after the end of June when rates increase. Alternatively, IITA 5/202.5(b) provides that a taxpayer may elect to determine net income on a specific accounting basis for the two portions of their taxable year, from the beginning of the taxable year through the last day of the apportionment period, and from the first day of the next apportionment period through the end of the taxable year.

Continue Reading Tax Changes Implemented As Part of Revenue Package Supporting Illinois Budget