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Update on State Responses to Federal Tax Reform: Illinois and Oregon

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 [...]

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Tax Haven List Repealed by D.C. Council

After being in effect for only a week, the Council of the District of Columbia (Council) unanimously enacted legislation today that will repeal the list of tax haven jurisdictions specifically enumerated in the D.C. Code. The legislation, titled the Fiscal Year 2016 Second Budget Support Clarification Emergency Amendment Act of 2015 (Act), was introduced on September 22, 2015, after the list created an uproar from singled-out countries and the business community alike. The tax haven list was passed on August 11, 2015, as part of the Fiscal Year 2016 Budget Support Act of 2015 (BSA), which became effective on October 22, 2015. The inclusion of the tax haven list in the BSA was as a supplement to the tax haven criteria that already existed in the D.C. Code.

As passed today, Section 6 of the Act repeals the tax haven list (and accompanying language) added by the BSA in August and restores the relevant D.C. Code provisions to their pre-BSA state. Thus, effective immediately, the tax haven standard established by D.C. Code § 47-1801.04(49), as amended, is as follows:

“(A) ‘Tax haven’ means a jurisdiction that:

(i) For a particular tax year in question has no, or nominal, effective tax on the relevant income and has laws or practices that prevent effective exchange of information for tax purposes with other governments regarding taxpayers benefitting from the tax regime;

(ii) Lacks transparency, which, for the purposes of this definition, means that the details of legislative, legal, or administrative provisions are not open to public scrutiny and apparent or are not consistently applied among similarly situated taxpayers;

(iii) Facilitates the establishment of foreign-owned entities without the need for a local substantive presence or prohibits these entities from having any commercial impact on the local economy;

(iv) Explicitly or implicitly excludes the jurisdiction’s resident taxpayers from taking advantage of the tax regime’s benefits or prohibits enterprises that benefit from the regime from operating in the jurisdiction’s domestic market; or

(v) Has created a tax regime that is favorable for tax avoidance, based upon an overall assessment of relevant factors, including whether the jurisdiction has a significant untaxed offshore financial or other services sector relative to its overall economy.

(B) For the purposes of this paragraph, the term “tax regime” means a set or system of rules, laws, regulations, or practices by which taxes are imposed on any person, corporation, or entity, or on any income, property, incident, indicia, or activity pursuant to governmental authority.”

Practice Note

Because only the tax haven list provisions—and not the historic tax haven criteria—were repealed today, the criteria will be the sole determiners of whether a jurisdiction is a tax haven for District Income and Franchise Tax purposes. The legislation enacted today was done on an emergency basis, with an identical temporary bill unanimously advancing for a third reading. This means that the repeal will be effective immediately, but will require subsequent permanent legislation to continue its effect beyond the 90 and 225 day (if the temporary [...]

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