In a significant reversal of prior policy, on June 20, 2019, the New York State Assembly and New York State Senate passed Senate Bill 6615, which will exclude 95% of a corporate franchise taxpayer’s gross global intangible low-taxed income (GILTI) from the taxpayer’s New York State franchise tax business income base.1 Governor Cuomo is expected to sign the legislation.
Background
The Federal Tax Cuts and Jobs Act (TCJA) created a new category of income known as GILTI under Internal Revenue Code (IRC) § 951A. This provision imposes a tax on U.S. shareholders based on income from controlled foreign corporations (CFCs), to the extent that this income is in excess of a nominal 10% return on a CFCs’ tangible assets. GILTI is taxed at the regular federal tax rates, but a federal tax deduction is allowed for up to 50% of the amount of GILTI included in a taxpayer’s federal gross income under IRC § 250(a)(1)(B). Federal taxpayers may apply foreign tax credits (if available) to offset the federal income tax imposed on GILTI, with credits limited to 80% of the amount of foreign taxes paid.
New York State’s Prior Treatment of GILTI
New York adopts changes to the IRC on a “floating” basis. In April 2018, New York passed legislation that responded to some provisions of the TCJA, notably decoupling from the foreign-derived intangible income (FDII) deduction in IRC § 250(a)(1)(B). However, this legislation did not address GILTI – resulting in New York State conforming to GILTI – but not FDII. While legislation to decouple from the federal treatment of GILTI was introduced and passed in the New York State Senate in June 2018, it did not pass in the New York State Assembly (see our previous legal alert: New York bill introduced to exempt GILTI).
Earlier this year, the New York State Department of Taxation and Finance (Department) issued guidance addressing how to reflect GILTI in a corporate taxpayer’s apportionment formula (see our previous legal alert: New York instructs taxpayers on GILTI apportionment).
Legislation to Decouple from GILTI
Under S6615, 95% of GILTI will be included in the definition of “exempt CFC income” – which is excludable from the New York State business income base.2 Further, the legislation will eliminate the 50% GILTI deduction in IRC § 250 and amend the apportionment rules so that only 5% of a taxpayer’s GILTI (instead of the net GILTI amount) will be included in the denominator of the taxpayer’s apportionment factor. The legislation also adds similar provisions to Article 33 of the New York Tax Law (the insurance franchise tax).
The new provisions addressing GILTI will apply (if signed by the Governor) to tax years beginning on or after January 1, 2019.
Eversheds Sutherland Observations
- With this legislation New York State is taxing 5% (rather than 50%) of GILTI. Before this legislation, the Department estimated that the inclusion of the net GILTI amount in the business income base would generate approximately $30 million in tax annually for the State.
- While the legislation largely reverses the treatment of GILTI for New York State franchise tax purposes, it leaves the New York City treatment of GILTI unchanged. Without a corresponding change to New York City taxation, 50% of GILTI will be subject to tax.
- The legislation is not retroactive to the 2018 tax year. New York State franchise taxpayers will be required to calculate taxable GILTI under the previous rules (i.e., 50% inclusion) on their 2018 returns.
- New York State’s change of its treatment of GILTI is reminiscent of Georgia’s GILTI treatment. In February 2018, Georgia passed legislation that required taxpayers to include their net GILTI amounts in their Georgia taxable income. About one month later, Georgia passed legislation excluding all of GILTI from Georgia taxable income (see our previous legal alert: Georgia passes legislation to provide deduction of GILTI from the state tax base).
|
_____
1 S6615 is an omnibus bill, addressing diverse subjects in addition to GILTI.
2 In 2018, New York expanded the definition of “exempt CFC income” to include IRC § 965 income.
[View source.]
