On January 1, 2020, the Iowa Department of Revenue (Department) published proposed amendments to its administrative rules (proposed rule) addressing the treatment of global intangible low taxed income (GILTI) under IRC Section 951A and the corresponding GILTI deduction under IRC Section 250 for determining the sales factor for Iowa apportionment purposes.¹ The proposed rule incorporates much of the same guidance the Department issued in December 2019 (see Tax Alert 2019-2137).²

In the proposed rule's purpose and summary statement, the Department indicates that GILTI does not neatly fit into any of Iowa's existing apportionment rules because it is a new category of income. The proposed rule would amend Iowa Admin. Code r. 701-54.2(422) to provide a formula for apportioning GILTI within and outside Iowa. The proposed rule also provides additional guidance about when investment income must, or by election may be, included in the Iowa apportionment factor.

The public comment period for the proposed rule ends on January 21, 2020.

General provisions

The existing administrative rule requires interest, dividends, rents, royalties, and other investment income to be apportioned as business income to the extent earned as part of a corporation's unitary business, if a portion of that business is conducted in Iowa. The proposed rule would require investment income derived from intangible property that has become an integral part of some business activity occurring regularly within or outside Iowa to be apportioned under the existing categories for such income (e.g., interest from accounts receivable, interest from other than accounts receivable, dividends, rental income, royalty and licensing fees, gains or losses).

The proposed rule would permit, at the taxpayer's election, all other investment income to be included in the apportionment factor if the election would not result in an understatement of income reasonably attributable to Iowa. Accordingly, a taxpayer could not elect to include some investment income in, and exclude other investment income from, the apportionment factor. The election must be made with the taxpayer's return in the first year in which the taxpayer has such income. Taxpayers wishing to change an election must request permission from the Department at least 90 days before the due date of the return for which the change in election is sought. Permission will be granted only when the Department determines that the change will more accurately reflect income reasonably attributable to Iowa.

Treatment of GILTI

The proposed rule would require net GILTI³ to be included in the numerator of the apportionment factor if the income arises from the taxpayer's ownership of controlled foreign corporations (CFCs) that are an integral part of some business activity occurring regularly in Iowa. To the extent the net GILTI is not part of some business activity regularly occurring inside or outside Iowa and the election is made, then the net GILTI will be assigned to the numerator of the apportionment factor if the taxpayer's commercial domicile is in Iowa.

In the December 2019 guidance, the Department indicated that taxpayers may request alternative apportionment under Iowa Admin. Code r. 701-54.9 if they believe the proposed apportionment method would tax a greater portion of their income reasonably attributable to Iowa.

Implications

If the CFC is part of the same unitary business with the taxpayer, the proposed rule appears to say that the total amount of net GILTI must be included in the numerator. It is also possible, however, that the Department intends for only some proportionate amount of GILTI to be included in the numerator. Such intent is not expressly stated in the proposed rule and may need clarification from the Department.

Taxpayers will need to consider this rule, if promulgated, in preparing their 2019 corporate income tax returns, with special attention to the unique apportionment method for GILTI.

EY will continue to monitor developments in this area.

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ENDNOTES

¹ The proposed rule (to be codified as amendments to Iowa Admin. Code r. 701-54.2(422) and adding Iowa Admin. Code r. 701-59.2(p)) is available here.

² In the guidance, 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 § 422.35(21).

³ Defined as GILTI under IRC Section 951A, less the deduction allowed under IRC Section 250.