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The Iowa Department of Revenue (Department) recently updated its guidance on Iowa's treatment of global intangible low taxed income (GILTI) and foreign derived intangible income (FDII).¹ The updated guidance was necessary due to changes in Iowa's conformity to the Internal Revenue Code (IRC). For tax years beginning before January 1, 2019, Iowa conformed to the IRC in effect on January 1, 2015, so the international tax provisions of the Tax Cuts and Jobs Act (TCJA) (which first enacted both the GILTI and FDII provisions) were not incorporated into Iowa's tax law. For tax years beginning on or after January 1, 2019, Iowa's tax law conforms to the IRC in effect on March 24, 2018, which would have included the TCJA provisions. For tax years beginning on or after January 1, 2020, Iowa's tax law will transition to rolling conformity to the IRC (i.e., as changes occur to the IRC they will be immediately incorporated into Iowa's tax law unless otherwise decoupled).

The Iowa legislature did not decouple from certain provisions of the TCJA, such as GILTI, FDII, and the limitations on the deductibility of business interest imposed under IRC Section 163(j). The Department's guidance only addresses Iowa's tax treatment of GILTI and FDII and does not address conformity to the new limitations on the deductibility of business interest under IRC Section 163(j).

GILTI

The Department notes in the updated guidance that beginning in tax year 2019, both GILTI (as described in IRC Section 951A) and the corresponding GILTI deduction (set forth in IRC Section 250) (to the extent a taxpayer is eligible for the deduction for federal income tax purposes) are incorporated into the computation of Iowa taxable income. The Department stated it does not consider GILTI to be a dividend or subpart F income and, as such, it is not eligible for the deduction for certain foreign-source income provided in Iowa Code Section 422.35(21).

A corporate taxpayer, if eligible for the GILTI deduction, will include the "net" GILTI amount in its Iowa income. Corporate taxpayers that file separately and not as a member of a federal consolidated group will generally not have to make any Iowa adjustments to their IA 1120. A corporation included in a federal consolidated return and filing either as a separate company Iowa taxpayer or as an elective nexus-consolidated Iowa taxpayer will need to compute its own net GILTI in the same manner as it would have for federal income tax purposes but using only the income of the separate entity or of the nexus-consolidated Iowa group of which it is a member.

The Department indicated that it intends to promulgate rules categorizing GILTI as a new category of investment income for apportionment purposes. The Department's updated guidance is intended to reflect the substance of what these rules will be. A taxpayer will include net GILTI in its apportionment factor if the taxpayer's ownership in controlled foreign corporations (CFCs) are an integral part of some business activity occurring regularly within or outside Iowa. The net GILTI will be included in the denominator of the apportionment factor and in the numerator to the extent the income arises from the taxpayer's ownership of a CFC that is integral to some business activity of the taxpayer occurring regularly within or outside Iowa.

Other net GILTI that is investment business income under Iowa Admin Code r. 701 - 54.2 (generally excluded from the apportionment factor) may be included in the apportionment factor upon the taxpayer's election. Such an election applies to all business investment income. A taxpayer that has an existing election in place will have that election apply to GILTI and all other investment income. A taxpayer wishing to change an election from a prior year must request permission from the Department at least 90 days prior to the due date of the return. Taxpayers having such an election in place, will have to include the net GILTI in the denominator of the apportionment factor and in the numerator if the taxpayer's commercial domicile is in Iowa.

FDII

For tax years beginning on or after January 1, 2019, Iowa conforms to the FDII deduction. Separate entity taxpayers that are not filing as part of a federal consolidated group will generally not need to make any Iowa adjustments on the IA 1120. Taxpayers that file as part of a federal consolidated group will have to compute the FDII deduction in the same manner as they would for federal income tax purposes but using only the income of the separate entity or the Iowa nexus-consolidated group of which it is a member.

Implications

Taxpayers will need to consider the Department's revised guidance in preparing Iowa returns for 2019 tax years, particularly corporations that are included in a federal consolidated return but file separately in Iowa or as part of an Iowa nexus-consolidated group. Such corporations will need to compute net GILTI and FDII using only the income of the separate entity or the Iowa nexus-consolidated group.

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¹ Iowa Dept. of Rev., Reform Guidance — GILTI & FDII, (undated) (available on the internet here. (last accessed Dec. 3, 2019)).