The Business Council strongly supports this legislation that decouples from a provision of 2017 federal tax reform that, left alone, would result in increased state-level business tax liability on New York State employers. This builds upon legislation approved in 2018 that addressed other federal tax reform decoupling issues under the state’s personal and business income tax statutes.
The 2017 federal Tax Cut and Jobs Act (TCJA) subjects a portion of undistributed earnings of foreign subsidiaries (“controlled foreign corporations,” or CFCs) to ongoing federal taxation. Referred to as “GILTI”, or “global intangible low-taxed income,” this provision (IRC §951A) is intended to impose federal tax on income earned in low-tax foreign jurisdictions from “intangible” property, such as patents, copyrights, and trademarks. However, GILTI is actually a tax on the overall business income of foreign subsidiaries that is not distributed to the U.S. parent, and is calculated as a function of the taxpayer’s foreign fixed assets, and not actual earnings from intangible assets in “tax havens.” At the federal level, a 50% deduction, plus tax credits for foreign taxes paid, have the effect of eliminating any additional federal tax liability on income attributed to nations with income tax rates at or above 13.125%.
New York State’s corporate franchise tax already exempts this type of undistributed income of foreign subsidiaries. However, due to the way the federal law was drafted, GILTI is not covered by New York’s existing statutory exemption, therefore State tax law – left unamended – will require that GILTI to be included in the tax returns of New York business taxpayers.
Without legislation to “decouple” from this federal provision, New York taxpayers will be subject to state-level tax on income that has not, and may never actually be, received by the New York taxpayer. In addition, the State tax levy is not reduced by the foreign tax credits allowed at the federal level, nor by the federal rate reductions.
There are compelling reasons why New York should adopt legislation to exempt GILTI from state-level taxation under the state’s corporate franchise and insurance taxes, and the New York City corporate tax:
- Exemption is consistent with New York’s pre-existing policy to not tax the earnings of foreign subsidiaries. Moreover, in enacting the TCJA, Congress made clear that GILTI income was to be treated as subpart F (CFC) income in most circumstances, supporting like-treatment at the state level as well.
- GILTI income was not included in federal returns prior to 2018, so it likewise would not have been reported to or taxed by New York State, which uses federal taxable income as the starting point for calculating state corporate franchise tax liability. Providing a state exemption would have limited impact on the State’s projected future tax receipts.
- Imposing State taxes on foreign earnings would adversely impact New York’s business climate, and change its long-standing tax policy. It will be contrary to the State’s efforts to retain and attract multi-national businesses, and will likely set New York apart from the majority of states. A number of other states already exempt GILTI from state-level taxation.
- Under the State’s corporate franchise tax, income is apportioned to New York based on the share of a taxpayer’s total receipts earned within the State. However, the State’s current apportionment statute does not specifically address GILTI. A lack of apportionment relief will both exacerbate the impact of state-level taxation of GILTI, will result in uncertain and complex compliance obligations for taxpayers, and would likely be the subject of legal challenge.
- Federal and state-level taxation of GILTI could actually provide an unintended incentive to locate tangible business assets overseas, which could reduce the level of calculated GILTI income.
This decoupling legislation will support and enhance New York State’s focus on avoiding unintended tax increases for New York taxpayers due to federal reforms.
For these reasons, The Business Council supports adoption of A.5962.