October 22, 2018 Federal proposed Section 951A GILTI regulations have state tax implications Recently proposed regulations (REG-104390-18) (the Proposed Regulations) provide important guidance on the "global intangible low-taxed income" (GILTI) regime, which was enacted under the "Tax Cuts and Jobs Act" (P.L. 115-97) (TCJA) as new Sections 951A and 250 and revised Section 960 of the Internal Revenue Code of 1986, as amended (IRC).1 The Proposed Regulations focus on the implementation of Section 951A (the determination of the GILTI inclusion amounts) and also include amendments and additions to the "subpart F income" and federal consolidated return regulations. Treasury has indicated that additional, forthcoming proposed regulations will address the GILTI aspects of Sections 250 and 960. Since nearly every state with a corporate or personal income tax relies upon the IRC in some manner, the Proposed Regulations will have important implications for reporting purposes for US state and local (collectively, state) personal, corporate and other business taxes. This Tax Alert focuses on the general effects of the Proposed Regulations on state corporate income taxpayers (i.e., C corporations), assuming the regulations are finalized in their current form. It does not address the state income or other business tax consequences of the Proposed Regulations on any other type of taxpayer, including individuals and pass-through entities (such as partnerships, limited liability companies, or S corporations). Readers are cautioned that the impact of the Proposed Regulations on state corporate income taxpayers as described in this Tax Alert may not necessarily be the same impact that applies to other types of state taxpayers. An overview of Section 951A and a more detailed analysis of the federal income tax impact of the Proposed Regulations is contained in Tax Alert 2018-1824. The proposed changes to the federal consolidated return regulations provided by the Proposed Regulations are further analyzed in Tax Alert 2018-1835. Background The TCJA includes a new anti-deferral regime that appears to be aimed at imposing a global minimum tax on certain excess returns of a controlled foreign corporation (CFC) on presumed "intangible" income. Section 951A requires a "United States shareholder" (US shareholder) of any CFC to include currently in gross income its GILTI inclusion amount for each tax year (computed based on the attributes of the US shareholder's CFCs). A GILTI inclusion amount will be treated "in the same manner" as subpart F income for purposes of certain enumerated sections, including (among others) Sections 959, 961, 1248(b)(1), and 1248(d)(1). Section 951A is effective for tax years of foreign corporations beginning after December 31, 2017, and for tax years of US shareholders in which or within which those tax years of foreign corporations end. The GILTI inclusion amount generally is computed at the US shareholder level on an aggregate basis, taking into account certain net "tested income" and "tested loss" of all of its CFCs. The GILTI inclusion amount is the excess, if any, of the US shareholder's aggregate "net CFC tested income" over a deemed return on its CFC's depreciable tangible assets used in the production of "tested income." For an in-depth discussion of the mechanics of Section 951A, see Tax Alert 2018-1824. Section 250 generally permits a corporate US shareholder a deduction (hereinafter referred to as the "GILTI deduction") equal to 50% of its GILTI inclusion amount (resulting in an effective US federal income tax rate of 10.5% for tax years beginning after 2017 and before 2026, and a lower deduction for tax years beginning after 2025, resulting in a federal effective tax rate of 13.125%). Section 960 generally treats a corporate US shareholder as paying itself a portion of the non-US income taxes paid by its CFCs — and therefore allows the corporate US shareholder to take those taxes as a credit against its GILTI tax liability under Section 901 (subject to certain other limitations). Proposed Regulations The Proposed Regulations include provisions:
Many of the rules provided by the Proposed Regulations merely implement the statute or clarify ambiguities and thus are neither surprising nor unanticipated. For example, the calculation of the GILTI inclusion amount in the Proposed Regulations is consistent with the statute, other than the clarification that members of a consolidated group generally calculate the GILTI inclusion amount on a consolidated basis. Brief summary of the Proposed Regulations General provisions. Prop. Reg. Section 1.951A-1 provides general rules regarding a US shareholder's GILTI inclusion amount; ensuing sections include specific rules as to the calculation of tested income, tested loss, QBAI, tested interest expense, and tested interest income (each, a CFC tested item). This section describes three important rules in Prop. Reg. Section 1.951A-1: (i) the relevant date for pro rata share determination; (ii) the calculation of a US shareholder's pro rata share of CFC tested items; and (iii) the definition of specified interest expense. Tested income and tested loss. Prop. Reg. Section 1.952-2, for purposes of computing tested income and tested loss, sets forth the rules for determining gross income and allowable deductions of a CFC. The Proposed Regulations provide that allowable deductions are allocated and apportioned to "gross tested income" under the same Section 954(b)(5) principles that apply in allocating and apportioning deductions for purposes of subpart F income, generally treating gross tested income that falls within a single separate Section 904(d) category as a single item of gross income for this purpose. QBIA. Prop. Reg. Section 1.951A-3 restates the codified definition of QBAI as the average of a tested income CFC's aggregate adjusted bases in "specified tangible property" that is used in the CFC's trade or business and is a type for which a deduction is allowed under Section 167. "Specified tangible property" generally means tangible property used in the production of gross tested income. The Proposed Regulations explicitly provide that none of the tangible property of a tested loss CFC is specified tangible property for purposes of Section 951A. Tested interest expense and tested interest income. Prop. Reg. Section 1.951A-4 defines a CFC's tested interest expense and tested interest income for purposes of determining a US shareholder's specified interest expense. In general, tested interest expense means interest expense paid or accrued by a CFC that is taken into account to determine the tested income or tested loss of that CFC, and tested interest income means interest income included in a CFC's gross tested income. Domestic partnerships and their partners. Prop. Reg. Section 1.951A-5 provides rules for the treatment of a domestic partnership that is a US shareholder of one or more CFCs (a US shareholder partnership), adopting a hybrid approach (i.e., neither a pure entity approach nor pure aggregate approach). The Proposed Regulations provide different rules for partners of the US shareholder partnership that are also themselves US shareholders (as defined in Section 951(b)) of a CFC owned by the partnership and partners that are not US shareholders with respect to the CFC. Treatment of GILTI inclusion amount and adjustments to earnings and profits (E&P) and basis related to test loss CFCs. Prop. Reg. Section 1.951A-6 restates the statutory provision that GILTI is treated as subpart F income for certain specified IRC provisions, such as Sections 959 and 961. Additionally, the Proposed Regulations provide that a GILTI inclusion amount is treated in the same manner as an amount included under Section 951(a)(1)(A) for purposes of applying Section 1411 (tax on net investment income). For purposes of these rules, the Proposed Regulations use the statutory formula to allocate the GILTI inclusion amount back to individual CFCs with tested income taken into account in determining a US shareholder's GILTI inclusion amount. The portion of the GILTI inclusion amount allocated to a tested income CFC is translated into the functional currency of the tested income CFC using the average exchange rate for the CFC inclusion year of the tested income CFC. Prop. Reg. Section 1.951A-6 also includes other miscellaneous rules, including a complex regime set of rules in Prop. Reg. Section 1.951A-6(e) that are generally intended to recapture "used tested losses" upon the taxable disposition of a CFC's stock. Applicable dates. Prop. Reg. Section 1.951A-7 provides that the Proposed Regulations, when finalized as final regulations, are generally effective for tax years of foreign corporations beginning after December 31, 2017, and to tax years of US shareholders in which or within which such tax years of foreign corporations end. For a more in-depth federal income tax discussion of the Proposed Regulations, see Tax Alert 2018-1824. Proposed changes to the federal consolidated return regulations From a state income tax perspective, one important area of interest in the Proposed Regulations provisions is the treatment of GILTI for members of a federal consolidated group. The following discussion highlights selected provisions of the Proposed Regulations that affect members of a federal consolidated group and likely will have important disconnects from a state income tax perspective, since many states, including not only separate return reporting states but also many combined or consolidated reporting states, generally do not follow the federal consolidated return regulations. It remains to be seen whether states will in fact conform — even among those states that generally incorporate some or all of the federal consolidated return regulations into the administration of their state income or franchise tax laws. Unlike Section 951(a), which computes the subpart F income inclusion for a particular CFC solely by reference to that CFC's items, a US shareholder's GILTI inclusion under Section 951A is determined based on the items of all of the US shareholder's CFCs. As a result, a strict, separate-return application of Section 951A to federal consolidated group members could distort measurement of the group's consolidated federal tax liability because the ownership of CFCs within the group could be intentionally or inadvertently segregated in a manner that alters the group's total GILTI inclusion without otherwise being relevant to the group's consolidated tax liability. Accordingly, although the overall computational framework of Section 951A applies to federal consolidated groups, to minimize the impact when more than one member of a federal consolidated group owns interests in a CFC, Prop. Reg. Sections 1.951A-1(c)(4) and 1.1502-51 provide a limited form of (or pseudo) "single-entity" treatment that requires the aggregation of certain GILTI-related items of members of a federal consolidated group and then the allocation of the aggregate amounts back to the members in a manner prescribed by the Proposed Regulations. The Proposed Regulations recognize that each member has its own GILTI inclusion amount. To calculate such GILTI inclusion amounts, however, they generally provide for aggregating tested loss, QBAI and specified interest expense, and then allocating these group GILTI attributes "back out" to the individual members of the federal consolidated group based on their respective "stand-alone" shares of aggregate tested income. The consolidated group allocation processes for these group GILTI attributes generally result in the reallocation of such amounts in a way that disregards which member actually owns the CFCs that generated them.2 The consolidated group allocation processes can also affect basis adjustments to the stock of the federal consolidated group members (and the stock of CFCs that those members own). See Tax Alert 2018-1835 for a more detailed discussion of Prop. Reg. Section 1.1502-51, as well as proposed amendments to the federal consolidated return regulations, including to Reg. Section 1.1502-32 regarding basis adjustments. What's not addressed in the Proposed Regulations? In addition to Sections 250 and 960, the Proposed Regulations do not address many of the questions left open under Section 951A regarding the interplay between the GILTI rules and other sections of the IRC, although some of these questions are raised in the preamble to the Proposed Regulations. For example, Treasury specifically notes that taxpayers have raised questions on the application of the dividends received deduction (DRD) under Section 245A, the anti-hybrid rules of Section 267A and the interest limitation in Section 163(j) to the calculation of tested income and tested loss that are critical to the computation and application of the GILTI rules. Treasury noted that these items will be addressed in future guidance. Treasury further noted in the preamble to the Proposed Regulations that it is "anticipated" that future proposed regulations will be issued assigning the Section 78 gross-up attributable to the foreign taxes deemed paid to the GILTI foreign tax credit basket. However, Treasury did not indicate that future guidance will address other foreign tax credit-related issues. For example, the preamble does not indicate whether the look-through rule in Section 904(d) will apply to GILTI. Neither the Proposed Regulations nor the preamble address whether withholding taxes on GILTI previously taxed income (PTI) distributions will be included in the GILTI basket and subject to the 20% "haircut" in Section 960(d). The Proposed Regulations and preamble are also silent on the treatment of taxes that are "properly attributable" to tested income and are paid in a year other than the year in which the tested income is included in the US shareholder's GILTI inclusion amount. State responses to GILTI State approaches to the taxation of GILTI inclusion amounts vary broadly. These state approaches have been influenced or evidenced by legislative action and administrative guidance since the enactment of the TCJA. In evaluating these approaches, the question is not merely whether a state conforms to Sections 951A and 250, but also how the state conforms. Such conformity considerations include:3
For example, Hawaii tax law has historically provided that Subchapter N of the IRC (i.e., the international tax provisions of the IRC located in Sections 861 to 999) is not operative for Hawaii income tax purposes.4 So even after recently updating its IRC conformity date to that in effect on December 31, 2017, GILTI is not included in the Hawaii tax base since Section 951A falls within the existing cross-referenced series.5 This cross-referenced series issue similarly applies to Wisconsin since the state specifically excludes income determined under Sections 951 to 965 for purposes of calculating its income tax base.6 Likewise, California does not conform to Section 951A simply because of the manner in which the state tax law conforms to the IRC. The California Franchise Tax Board has explained that the current California corporate tax law does not incorporate by reference, and the state's water's-edge unitary combined reporting provisions do not specifically refer to, Section 951A. Accordingly, the GILTI inclusion amount is not considered in the computation of California taxable income, nor is it considered in the inclusion ratio for a water's-edge return. It should be noted, however, that more than a dozen states include at least a portion of the GILTI inclusion amount in the calculation of state taxable income simply by virtue of how they impose their corporate income tax on income inclusions determined under Subpart F of the IRC.7 Remember that a GILTI inclusion is not a Section 951(a) inclusion and instead is a separate inclusion under Section 951A. In fact, the new law specifically indicates that a GILTI inclusion "shall be treated in the same manner as an amount included under [Section] 951(a)(1)(A) for purposes of applying [only certain specific sections of the IRC]." Despite this federal income tax nuance, many of these states treat the GILTI inclusion amount as actual or deemed dividend income (similar to subpart F income). For example, the Michigan Department of Treasury issued guidance explaining that it has preliminarily determined that GILTI is included in federal taxable income (FTI) but can be deducted as a dividend received from a foreign entity (similar to other subpart F income) when calculating the Michigan corporate income tax base. Thus, every state must similarly evaluate the question, "What is GILTI?" and determine if it should be subject to tax under its existing regime as if it were a dividend, subpart F income or foreign-source income — or, possibly, not subject to tax at all. The following are notable examples of how states have grappled with these and other key questions from both a legislative and an administrative standpoint. The Connecticut Department of Revenue Services (CT DRS) published informal guidance indicating that it will generally treat GILTI in the same manner it treats subpart F income — as dividend income that a corporation can offset with a DRD. A corporation claiming the state's DRD must add back 5% of its expenses relating to its dividend income on its Connecticut return. The addback should equal 5% of the gross amount of GILTI before any corresponding federal deduction. Further, because GILTI is treated as a dividend for Connecticut Corporation Business Tax (CBT) purposes, it is excluded when calculating the CBT apportionment factor (i.e., it will not appear in either the numerator or denominator of the corporation's CBT sales or receipts factor). Georgia initially enacted legislation (HB 918, enacted March 2, 2018) that effectively subjected GILTI to Georgia corporate income taxation. Within a few weeks, however, the "proposed" new law in HB 918 was reversed by the enactment of a second bill (SB 328, enacted March 26, 2018) that specifically deducts GILTI (as described in Section 951A) from the Georgia corporate income tax base. It also clarifies how the corresponding GILTI deduction provided by Section 250(a)(1)(B) intersects with this new GILTI subtraction modification. Under Indiana tax law, corporate taxpayers generally must include GILTI inclusion amounts in their FTI starting point. For purposes of calculating apportionable income, they are also generally required to add back GILTI deductions under Section 250(a)(1)(B). GILTI inclusion amounts, however, are eligible for the state's foreign DRD. Corporate taxpayers generally must also report GILTI inclusion amounts less the state's foreign DRD as receipts in the denominator of their apportionment formulas, and Indiana-domiciled companies generally will include such resulting net amounts as receipts in the numerator of their apportionment formula. The Kentucky Department of Revenue said in published guidance that it considers GILTI to be nontaxable income. As such, the GILTI deduction under Section 250(a)(1)(B) is not allowed, and any expenses related to GILTI must be added back to determine apportionable income. If actual expenses cannot be determined, estimation may be used to calculate the amount of expenses related to the nontaxable income. Further, GILTI is not included in the sales factor for corporate income tax purposes or in the calculation of gross receipts for a limited liability entity tax that is based on the sales factor. In Maine, as a result of GILTI being included in FTI, GILTI is generally included in the state tax base starting point. Legislation recently enacted in Maine requires an addback for the GILTI deduction under Section 250(a)(1)(B), but it also provides a 50% DRD for the GILTI inclusion amount, net of related expenses and other related deductions deducted in computing FTI. For apportionment factor purposes, 50% of the GILTI inclusion amount is generally included in the sales factor denominator. In North Carolina, legislation enacted in June 2018 amends the state's income tax law to include a subtraction modification in calculating the state corporate income tax base for any amount included in FTI under Section 951A, net of related expenses. Further, an addition modification is required for the GILTI deduction taken on the federal return under Section 250(a)(1)(B). The North Dakota State Tax Commissioner generally considers GILTI to be a foreign dividend includable in FTI. Since the GILTI inclusion amount under Section 951A, as well as the GILTI deduction under Section 250(a)(1)(B), are reflected in FTI, which is used as the starting point for computing apportionable income, the state generally treats the GILTI deduction the same as other federal deductions for dividends received and requires the GILTI deduction be added back. Taxpayers filing a worldwide unitary combined return generally may deduct as an intercompany dividend elimination GILTI inclusion amounts attributable to a CFC that is included in the combined report. Those taxpayers that have joined in filing a waters-edge unitary combined return generally may deduct as foreign dividends 70% of their GILTI inclusion amounts and include the remaining 30% of their GILTI inclusion amounts in their sales factors. The Vermont Department of Taxes (VT Department) issued guidance to tax practitioners explaining that, as a result of GILTI being included in FTI, GILTI is automatically included in the Vermont tax base. In addition, Vermont tax law does not specifically reference Section 951A, nor does it appear to provide a foreign-source income deduction or exclusion that applies to the GILTI inclusion amount. In the guidance, the VT Department also notes that the GILTI deduction under Section 250(a)(1)(B) is available for corporate income tax purposes. Since all of these state responses generally occurred before the release of the Proposed Regulations and before the finalization of the 2018 federal income tax forms specifying the lines on which to report relevant amounts under Sections 951A and 250,8 and in many cases before the state legislature even acted, such initial guidance from the state revenue departments may be superseded by subsequently enacted law or additional administrative action. For more on how states have responded to the TCJA, see the State Income and Franchise Tax Quarterly for the first three quarters of 2018, available through Tax Alert 2018-0758, Tax Alert 2018-1382 and Tax Alert 2018-1987. State corporate income tax implications of the Proposed Regulations We have previously highlighted a number of state corporate income tax considerations related to the state taxation of GILTI under Section 951A (see Tax Alert 2017-2171). The Proposed Regulations illuminate additional considerations regarding the state corporate income tax treatment of Section 951A in addition to the concerns we previously raised to the similarly situated Section 965 transition tax regime (see Tax Alert 2018-1602), among which, as a threshold matter, is the potential for significant differences between the federal and state corporate income tax computation of GILTI. For example, just as for Section 965 amounts, there could be differences between consolidated versus separate return treatment or even between consolidated and combined returns in which the membership of the state combined group could significantly differ from that of the corresponding federal consolidated group (which we refer to as "disconnects"). A significant disconnect may arise from the pseudo single-entity approach required under Prop. Reg. Sections 1.951A-1(c)(4) and 1.1502-51. Specifically, for purposes of Section 951A and the Proposed Regulations, a member of a consolidated group (as defined in Reg. Section 1.1502-1(h)) determines its GILTI inclusion amount under the rules provided in Prop. Reg. Section 1.1502-51, which aggregates certain GILTI-related items of members (i.e., tested loss, QBAI and specified interest expense) and then allocates those aggregate amounts back to the members based on their respective shares of aggregate tested income. Most separate reporting states (and some unitary combined reporting states) do not incorporate federal consolidated return concepts into their law. Moreover, oftentimes, the state combined reporting group members may not even be the same as that of the federal consolidated group. It is uncertain whether or how states could incorporate Prop. Reg. Section 1.1502-51. And, even if a state does or generally will follow federal income tax amounts, states often require the recalculation of federal income tax amounts affected by the filing of federal consolidated returns or affected by the corresponding application of the federal consolidated return regulations for state income tax purposes. For example, some separate company reporting states have enacted strict statutes requiring corporate taxpayers to use as their starting point FTI that has been calculated as if the taxpayer filed a federal income tax return on a stand-alone basis; others have enacted statutes or regulations specifically decoupling from the federal consolidated return regulations. Although few states affirmatively address the federal consolidated return regulations, it is likely that some states will interpret the Proposed Regulations under their state tax regimes as requiring the recalculation of relevant federal amounts without application of the provisions contained in Prop. Reg. Section 1.1502-51. Many states that generally conform to TCJA provisions beginning in 2018 have yet to address the applicability of Section 951A, and none have addressed the implications of the Proposed Regulations for members of a federal consolidated group to their methods of separate entity, combined or consolidated reporting. Regarding the Proposed Regulations' adjustments to stock basis under Reg. Section 1.1502-32, taxpayers should further be aware that many federal/state differences may arise in computing E&P or stock basis for state income tax purposes, given disconnects between federal and state tax law due to a state's general IRC conformity date or specific conformity rules (or both). Taxpayers should recognize that these federal/state disconnects could result in disparate federal and state income tax treatment of future transactions for domestic companies that have reported GILTI within a federal consolidated group, and those differences could be significant. Looking beyond state conformity As GILTI is an entirely new federal income tax concept, new state tax considerations continue to emerge beyond simply state conformity to the IRC. At the outset, taxpayers should question whether states can even tax GILTI in light of US Constitutional limitations, especially under the Foreign Commerce Clause, which the US Supreme Court has said prohibits, among other acts, discriminatory state taxation against investments in foreign corporations (including CFCs) compared to domestic corporations.9 Similarly, taxpayers should ask the following questions:
Assuming the states can impose tax in this way, questions arise regarding the nature of Section 951A and other inclusions under Subpart F of the IRC, generally, for state corporate income tax purposes. For example, similar to the query in our Tax Alert addressing the state taxation of Section 965 transition tax income (see Tax Alert 2018-1602), do GILTI inclusion amounts constitute so-called deemed dividends that states should treat as dividends actually distributed, and is such income treated as allocable or apportionable?10 Also recall that states provide little, if any, statutory or administrative guidance regarding the sales apportionment factor implications — including factor representation (in the sales factor denominator) and sourcing (to the sales factor numerator) — for actual dividends or "deemed dividends" like subpart F income that constitute apportionable business income. The policy conversation around the state taxation of GILTI evolves daily, and taxpayers have significant opportunity to participate in that conversation — for instance, through a board of trade or legislative committees. EY can work with businesses that want to get involved in policy action on these and similar significant state tax issues. We will continue to follow state legislative sessions in which state lawmakers, often with the help of state taxing authorities and industry representatives, are considering conformity to the TCJA provisions, and we will provide updates on these state responses as they become available. ———————————————
——————————————— 1 Except as otherwise indicated, "Section" refers to the relevant section or sections of the IRC, and "Reg. Section" and "Prop. Reg. Section" refer to the relevant section or sections of the Income Tax Regulations promulgated by Treasury under the IRC. 2 This means, for example, that there is no tracing of the QBAI or interest expense of a CFC owned by one member of the federal consolidated group to affect the GILTI inclusion amount of that member before affecting the GILTI inclusion amounts of other members. This allocation methodology is important because group GILTI attributes affect the determination of each member's GILTI inclusion amount. 3 While this Tax Alert focuses primarily on the Section 951A inclusion, its state analysis also addresses the Section 250(a)(1)(B) GILTI deduction in order to best describe the potential state tax impact of the federal GILTI system. Future Tax Alerts will address Treasury's proposed regulations and guidance on Section 250, as well as their state income tax implications. 4 These non-operative provisions, however, do not include the foreign currency transactions provisions located in Sections 985 to 989. 5 At the time of updating its IRC conformity date, Hawaii did add Section 250 to the list of non-operative income tax provisions. 6 When Wisconsin's IRC conformity date was recently updated to that in effect on December 31, 2017, the state also specifically decoupled from Sections 951A and 250 in its statutory definition of "Internal Revenue Code." 7 We must distinguish between "Subpart F" of the IRC and "subpart F income" because this federal income tax nuance might affect some, but not necessarily all, states when determining the state corporate income tax treatment of Sections 951A and 250. Specifically, Subpart F refers to the subpart that generally focuses on the federal income tax treatment of CFCs and falls under Part III of Subchapter N of Chapter 1 of Subtitle A of the IRC. By contrast, subpart F income is a specific type of income inclusion under Subpart F of the IRC that is specifically defined in Section 952 and included in the US shareholder's gross income under Section 951(a) (remember that the TCJA also considers "transition tax" income under Section 965(a) as subpart F income). Thus, subpart F income is a type of income inclusion under Subpart F, and GILTI under Section 951A is another type of income inclusion under Subpart F. 8 The Internal Revenue Service recently released the draft 2018 Form 1120. Subject to change upon being finalized, the draft form appears to indicate that the GILTI inclusion amount under Section 951A will be reported on Schedule C, "Dividends, Inclusions, and Special Deductions," and then flow up to Page 1, Line 4, as "Dividends and inclusions." In addition, it appears that the single deduction under Section 250 (which includes the GILTI component and the FDII component) will also be reported on Schedule C and then flow up to Page 1, Line 29b, as a "Special deduction." This federal reporting methodology for the 2018 tax year has implications in at least some states based on how their specific tax law and relevant definitions are worded, particularly for the state treatment of "Special deductions." Moreover, it is unclear whether this potential federal reporting for the 2018 tax year will cause any states to re-evalute any guidance they have already provided to impacted taxpayers. 9 In Kraft General Foods, Inc. v. Iowa Dept. of Rev. & Fin., 505 U.S. 71 (1992), the US Supreme Court held that Iowa violated the Foreign Commerce Clause of the US Constitution and unconstitutionally discriminated against foreign commerce by simply conforming to the federal DRD, which resulted in its taxing dividends received from foreign subsidiaries differently than dividends received from domestic subsidiaries. (But see, however, E. I. du Pont de Nemours & Co. v. State Tax Assessor, 675 A.2d 82 (Maine, 1996) and Appeal of Morton Thiokol, Inc., 864 P.2d 1175 (Kansas, 1993) in which the highest courts of these two states distinguished the differential treatment of foreign corporate dividends within a unitary group. Neither case was ever appealed to the US Supreme Court.) 10 While it might be appropriate to consider and treat subpart F income as a "deemed dividend" for state purposes, GILTI might not deserve similar treatment, particularly since GILTI is not distributed, nor is it limited to E&P. Cf. Section 952(c)(1)(A) (providing that the subpart F income of any CFC for any tax year shall not exceed the CFC's E&P for that tax year). Moreover, for purposes of a particular state's subpart F income subtraction modification statute or its own DRD statute, does it matter that a GILTI inclusion is a separate inclusion under Section 951A rather than a regular subpart F income inclusion under Section 951(a)? | |||||||||||||||||||||||||||||||
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