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Legislative Memo

Ken Pokalsky
Vice President, Government Affairs
T 518.694.4460
www.bcnys.org

BILL:

S.8991 (Flanagan)

Support

SUBJECT:

Federal Tax Decoupling

 

DATE:

June 13, 2018

 

The Business Council supports this legislation, which would avoid an increase in tax liability for New York businesses resulting from the federal “Tax Cuts and Jobs Act” of 2017. Its intent is to simply maintain elements of the state’s business tax code as they were pre-TCJA. In doing so, this bill is consistent with provisions adopted with bipartisan support as part of the state’s FY 2019 budget. 

In general, New York starts with federal taxable income in calculating state business and personal income taxes. Therefore, most changes to the definition of taxable income adopted at the federal level automatically flow-through to state tax law, unless the state “decouples” from them. In the FY 2019 state budget, the legislature approved decoupling measures for both personal and business taxpayers.

Specifically, this legislation decouples from a federal tax law change that imposes ongoing federal taxation on businesses with an ownership share in foreign corporations, even if the foreign earnings are not actually paid to or received by the New York business.

Referred to as “GILTI,” or “global intangible low taxed income,” this federal provision was intended to tax profits from intangible assets such as trademarks or patents earned in foreign nations with relatively low business taxes. However, the tax is based on a formula, rather than an actual determination of earnings in tax haven nations. This means that a business can be subject to this tax even if it has few if any overseas intangible assets. Moreover, the tax is imposed on overseas earnings, even if those earnings are never actually paid to a domestic business taxpayer. Finally, at the federal level, GILTI is offset by federal tax rate reductions and tax credits that do not flow through to New York State business tax law.

Like most states, New York has historically applied a territorial business tax system, meaning that it only imposes tax on income earned in the U.S., and has not taxed the earnings of foreign subsidiaries. In the FY 2019 budget, Governor Cuomo proposed, and the legislature approved, language decoupling from another TCJA provision imposing a one-time tax on pre-2017 “deemed repatriated” earnings, applicable to the state corporate franchise tax and insurance tax, and the New York City corporation tax.

This bill maintains the state’s long-standing business tax policy, and restores the state’s treatment of foreign earnings to its pre-TJCA status. Several states have already acted on, or are considering, similar decoupling legislation, while others avoid these types of issues by not automatically conforming to federal changes.

To avoid unintended tax increases caused by federal tax reform, and to avoid a competitive disadvantage for businesses subject to New York’s business taxes, The Business Council strongly supports adoption of S.8991 (Flanagan).