On February 26, 2020, the Iowa Department of Revenue (Department) published approved amendments to its administrative rules addressing the treatment of global intangible low taxed income (GILTI) under IRC Section 951A and the corresponding GILTI deduction under IRC Section 250 for purposes of determining the sales factor for Iowa apportionment purposes. The amended rule becomes effective on April 1, 2020.

In the purpose and summary statement for the amended administrative rule (amended rule), the Department stated that GILTI does not neatly fit into any of the existing apportionment rules under Iowa law because it is a new category of income. The amended rule provides guidance in apportioning GILTI within and outside Iowa. The amended rule also provides additional guidance about when investment income must, or by election may be, included in the Iowa apportionment factor.

General provisions

The 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 amended rule requires 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) as reflected in the administrative rule.

The amended rule permits all other investment income, at the taxpayer's election, to be included in the apportionment factor when such an election would not result in an understatement of income reasonably attributable to Iowa. Such an election applies to all other investment income of the taxpayer. Accordingly, a taxpayer cannot 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 amended rule requires net GILTI¹ 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.

Proposed legislation to decouple from GILTI and IRC Section 163(j)

On March 3, 2020, House Study Bill (HSB) 708 was introduced. A study bill is a preliminary step in the legislative process when a bill is sponsored for committee consideration. If approved by a committee, a study bill is refiled as a legislative bill. HSB 708 has been assigned to the Iowa House Ways & Means Committee for consideration.

HSB 708 would amend the foreign dividend deduction in Iowa Code  Section  422.35(21). The amendment would continue to allow a deduction for foreign dividend income but directs the deduction to be on the "net foreign dividend income" and based on the percentage of ownership set forth in IRC Section 243. The deduction would also be expanded to include a similar deduction for net GILTI.

HSB 708 also would amend Iowa Code  Section  422.35 by adding a new subsection (Iowa Code  Section  422.35(26)), which would effectively decouple Iowa's tax law from the IRC Section 163(j) limitations on the deduction for business interest. To the extent a taxpayer's income increased or decreased due to the application of IRC Section 163(j), the taxpayer would have to recompute its Iowa taxable income under rules to be prescribed by the Iowa Director of Revenue. In addition, the legislation is drafted so that the decoupling from IRC Section 163(j) would not apply during any tax year in which the additional first-year depreciation allowance under IRC Section 168(k) applies. Except for one period from 2003 to 2004, Iowa has always decoupled from federal bonus depreciation and is anticipated to continue doing so in the future.

If enacted as currently drafted, HSB 708 would take immediate effect and apply retroactively to January 1, 2019.² HSB 708 would need to be reported out of the House subcommittee by March 20, 2020, to be considered by the full legislature. The Iowa legislative session ends on April 21, 2020.

Implications

The adopted administrative rule must be considered by any Iowa taxpayer preparing its 2019 Iowa corporate income tax returns if the proposed decoupling in HSB 708 is not enacted.

EY will continue to monitor developments in this area.

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ENDNOTES

¹ Defined as GILTI under IRC Section 951A less the deduction allowed under IRC Section 250(a)(1)(B).

² For 2018, Iowa conforms to the Internal Revenue Code of 1986, as amended (IRC) as of January 1, 2015. Accordingly, GILTI is not a consideration for Iowa tax returns filed for the 2018 tax year. For 2019, Iowa conforms to the IRC as of March 24, 2018, and as such, incorporates GILTI into its state income computation. Starting in 2020, Iowa moves to rolling conformity to the IRC (i.e., as the IRC changes, so will Iowa law, unless legislation is enacted to decouple from new provisions of the IRC).