June 20, 2018 New Jersey Assembly Bill proposes changes to Corporation Business Tax Act On June 18, 2018, the New Jersey Assembly introduced Assembly Bill 4202 (AB 4202), which would impose a temporary "surtax" on corporation business tax (CBT) liability (effectively, an incremental increase in the nominal CBT rate), decouple the state's CBT law from certain provisions of the Internal Revenue Code (IRC), and impose a temporary separate tax on certain dividends received by corporations. AB 4202, if enacted, would represent the most significant overhaul of the CBT Act since 2002. The provisions of AB 4202 are summarized below. AB 4202, through enactment of the "surtax," would temporarily increase the existing CBT rate for tax years 2018 and 2019. The new rates would be as follows: — 6.5% to 9% for taxpayers with New Jersey-apportioned entire net income (ENI) of under $1 million — 11.5% for taxpayers with New Jersey-apportioned ENI of over $1 million but under $25 million — 13% for taxpayers with New Jersey apportioned ENI over $25 million The CBT rate increase would not apply to public utilities. Regarding conformity to certain federal provisions enacted under the federal Tax Cuts and Jobs Act (P.L. 115-97) (TCJA), AB 4202 would: — Adopt IRC Section 965 (the transition tax) without the participation exemption — Decouple from IRC Section 199A, which permits a special deduction of 20% for qualified business income (the decoupling would apply to income under both the CBT and Gross Income Tax Acts) — Adopt the IRC Section 163(j) interest deduction limitation but apply it on a "pro rata" basis (the meaning of "pro rata" is unclear under the current legislative language) Provisions of AB 4202 also would impose a special two-year tax of 9% on dividends received or deemed to have been received in tax years 2017 and 2018. This is critical: If enacted, the provision is retroactive to returns for tax year 2017. Under this provision, all dividends received will be sourced to New Jersey and subject to tax not based upon the recipient's or payor's apportionment to the state but on the basis of New Jersey gross domestic product (GDP) divided by federal GDP. A credit would be available to the extent that the taxpayer already paid CBT on the dividends. The tax would not apply if barred by federal law, or if the dividends received by the taxpayer are under $1 million. It would also apply to insurance companies subject to premiums tax. In addition, AB 4202 would reduce the state's the dividends received deduction (DRD) from 100% to 95% for 80%-or-more-owned companies. AB 4202 would require inclusion into ENI of income effectively connected to a US trade or business that is exempt from federal taxation under a US international income tax treaty. Income excluded by a treaty that specifically applies to the states is not required to be included. A provision in the bill would also amend New Jersey's current addback rules for payments made to related parties to narrow the treaty addback exception for interest and intangible expenses only when payments are made to a related member in a country in which the US tax treaty expressly exempts the income of the foreign member from state tax. (The US model tax treaty has never included such a provision, so adoption of this rule would effectively eliminate the treaty exception to New Jersey's addback rules.) Lastly, the provisions of AB 4202 would be severable from one another (in case any provision is found to be unconstitutional) and the Director of the Division of Taxation would be empowered to adopt regulations related to the proposed law changes. Implications In enacted, AB 4202 would dramatically restructure the CBT landscape. The CBT rate increase would significantly increase the CBT obligations of many taxpayers and make New Jersey's corporate tax rate the highest in the nation, even beyond the combined New York/New York City corporate tax rate. The bill would also decouple from the sections of the TCJA that provide relief to taxpayers, while reducing the DRD and applying the federal interest limitation on a "pro rata" basis (without any clear guidance as to what the state has in mind). Combined with the base-broadening effect of the TCJA, it is likely that these CBT changes would result in a large increase in corporate tax revenue. The special 9% tax on dividends would likely have a significant effect on companies that include substantial accumulated foreign earnings and profits in their federal tax bases as a result of the TCJA. Further, the use of an apportionment based on New Jersey GDP over federal GDP would likely result in significant apportionment distortion, which may negatively affect many taxpayers while benefiting a small number. Moreover, this apportionment measure could be unconstitutional on its face under the US Constitution and will likely be challenged. Taxpayers facing a substantially higher apportionment than under single sales factor should evaluate the possibility of challenging an assessment based on this apportionment methodology. In disallowing any exclusions, exemptions, deductions, or credits related to federal tax treaties, unless they specifically apply to the states, the provisions of AB 4202 would effectively overturn the New Jersey Tax Court ruling in Infosys Limited of India, Inc. v. Director, Div. of Taxation.1 AB 4202 would result in the imposition of CBT on companies that have a taxable presence in New Jersey, but are exempt as a result of a lack of permanent establishment as defined by the relevant tax treaty, unless that treaty is specifically applicable to the states. The bill does not contain combined reporting provisions that had appeared in the Governor's earlier proposals. EY is closely monitoring this development and will issue additional Alerts as warranted. ———————————————
——————————————— 1 N.J. Tax. Unpub. LEXIS 72 (November 28, 2017); modified, 2018 N.J. Tax Unpub. LEXIS 39 (March 19, 2018). | |||||||
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