February 16, 2018 Proposed Oregon legislation would decouple state's income taxes from certain federal tax law changes and repeal its tax haven law The Oregon legislature is considering two bills (SB 1529 A and SB 1528 A) that, if enacted, would update the state's date of conformity to the Internal Revenue Code, decouple from certain changes contained in the federal Tax Cuts and Jobs Act (TCJA) (P.L. 115-97), and retroactively repeal the state's tax haven provisions. TCJA provisions targeted for Oregon modification by these bills include the so-called transition tax on accumulated foreign subsidiary earnings under IRC Section 965 and the 20% pass-through entity (PTE) deduction under IRC Section 199A. SB 1528 is currently being considered by the Senate, and SB 1529, as amended, was approved by the Senate on February 13, 2018 and is now being considered by the House. If the bills are approved, the governor will have five days to act on the measures or they will become law without her signature. (Under Oregon law, the governor has 30 days to act on the measures if the bills are sent to her during the last five days of the legislative session.) The following is a summary of these bills. SB 1529 A — IRC Section 965 transition tax, tax havens and IRC conformity date In determining "taxable income" for corporate income tax purposes, Oregon prospectively adopts any federal law changes by incorporating the IRC as in effect for the tax year of the taxpayer (i.e., rolling conformity), subject to disconnecting from specific IRC provisions. For tax items other than taxable income, Oregon adopts a fixed IRC conformity date (currently December 31, 2016). Legislation is required to adopt new IRC amendments. Provisions of SB 1529 A would update Oregon's date of conformity to the IRC to December 31, 2017 (for corporate and individual income tax and other tax provision purposes). This change would apply to transactions or activities occurring on or after January 1, 2018, in tax years beginning on or after January 1, 2018. While enactment of SB 1529 A would conform Oregon to many changes contained in the TCJA, in determining Oregon taxable income, a corporation would be required to add back to federal taxable income amounts deducted under IRC Section 965. This change would apply to tax years beginning on or after January 1, 2017. To prevent double payment of tax on income taxed under Oregon's tax haven laws, SB 1529 A would provide a credit against the corporate income and excise taxes for Oregon tax attributable to income repatriated under Section 965. The credit would not exceed the lesser of: (1) the amount of Oregon tax attributable to income repatriated under Section 965 for tax years beginning on or after January 1, 2017 and before January 1, 2018; or (2) the total amount of tax, in any, attributable to tax required to be included in a combined report under Oregon's tax haven law under ORS Section 317.716 and imposed for all tax years beginning on or after January 1, 2014 and before January 1, 2017. Further, the credit could not exceed the taxpayer's tax liability for the year, but unused credit could be carried forward for five years. This change would apply to tax years beginning on or after January 1, 2017 and before January 1, 2018. Further, Oregon's tax haven laws, which requires the income of a corporate member of a unitary business group that is incorporated in a tax haven jurisdiction to be included in the unitary business group's Oregon combined return, would be retroactively repealed effective for tax years beginning on or after January 1, 2017. SB 1528 A — PTE, credit for charitable contributions If enacted, provisions of SB 1528 A would require Oregon taxpayers to add back to federal taxable income the amount of the federal deduction for qualified business income (QBI) from a pass-through entity (e.g., a partnership, S corporation or sole proprietorship) allowed for federal income tax purposes under IRC Section 199A. Add-back of QBI would be required for tax years beginning on or after January 1, 2018. SB 1528 A also would expand the availability of the elective reduced tax rate for certain pass-through income to sole proprietors, effective for tax years beginning on or after January 1, 2018. Further, SB 1528 A would modify the "hour of employment" requirement under the reduced rate's eligibility rules to exclude the following sectors: (1) professional, scientific and technical services; and (2) health care and social assistance. In addition, SB 1528 A would establish the Opportunity Grant Fund and would allow a taxpayer to claim a credit against the individual income and corporate income and excise taxes for certified Opportunity Grant contributions the taxpayer made during the tax year to the fund. The credit would be allowed for tax years beginning on or after January 1, 2018 and before January 1, 2024. Taxpayers would be able to obtain a refund of contributions not certified for the credit, and would be able to carryforward otherwise allowable tax credits the taxpayer was unable to use in the tax year for two years. Lastly, SB 1528 A would increase the amount of the state personal exemption credit to $113 (from $90), effective for tax years beginning on or after January 1, 2018 and before January 1, 2026. Thereafter the amount of the exemption would revert back to $90. Implications These bills are actively being considered by the Oregon legislature. Because this is an even year, Oregon's 2018 legislative session, which started February 5, 2018, is short, lasting only 35 days (the session ends March 11, 2018). Thus, legislative activity on these bills will conclude within the next few weeks. If the bills are enacted as currently drafted, the income required to be added back under IRC Section 965 would be subject to Oregon's 80% DRD so that this foreign-source income is treated consistently under Oregon law with other types of dividends from subsidiaries. EY is monitoring this development and will issue additional Tax Alerts as necessary. ———————————————
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