- Twenty states and the District of Columbia tax a portion of global low intangible tax income (GILTI), although only 16 of those states have issued guidance on the matter more than three years after federal law went into effect.
- States that have not yet issued guidance on their treatment of GILTI should act quickly to provide clarity to taxpayers, and states currently taxing GILTI should exclude this from their tax base.
- Under the American Jobs Plan Act, President Joe Biden has proposed several key changes to GILTI, including reducing the value of the Section 250 Deduction, removing the 10 percent exemption for assumed returns for Qualified Business Asset Investment (QBAI), and taxation by GILTI on a country basis.
- If the proposed federal changes to GILTI are adopted, more U.S. companies will be subject to taxes on GILTI, and more income will be taxed by the federal government and states as GILTI.
- Several states pending laws this year that would change their tax treatment of GILTI. Proposals to tax GILTI are circulating for the first time in California, Illinois, and Minnesota, while a Massachusetts bill would tax GILTI at a much higher rate. Alabama, Iowa, and Kansas exempted GILTI from taxation last year, while policymakers in Nebraska considered but failed to enact such laws.
- 22 states correspond to the federal deduction for immaterial income from abroad (FDII), which would be eliminated as part of the Biden proposal.
Unless states act, the tax changes proposed by the Biden government will increase the amount of foreign income taxed in some states, undermine their competitiveness, and impose a tax hike never agreed by state lawmakers. A 2017 provision of the Tax Cut and Employment Act (TCJA) that was part of a shift to quasi-territorial taxation at the federal level had the opposite effect in some states, and President Joe Biden's Employment Plan Act would become state taxation further increase of activities that historically lay outside the jurisdiction of states.
While the TCJA represented a broader shift by the U.S. government away from taxing income outside of the U.S., certain anti-grassroots protections were put in place, including the Global Immaterible Low-Taxed Income (GILTI), to return some foreign income to the U.S. Tax base in certain circumstances. At the same time, the TCJA created an incentive for locating intangible assets in the United States, the Deduction for Foreign Intangible Income (FDII).
GILTI should discourage companies from parking their intangible assets in low-tax countries, while FDII should encourage domestic investments in intangible assets. Both cases were adjustments to a new regime that had turned away from global taxation. When GILTI and FDII were formed, many states automatically included these provisions in their own tax bases because of the way states comply with federal tax laws, even though states had historically taxed very little foreign income, leaving GILTI of a guard rail turned away at the federal level into an expansion of the tax base at the state level. There is little justification for states to include international income in their tax base.
GILTI's state taxation increases the tax burden on US multinational corporations for reasons unrelated to their activities in the state. States have never intended to tax international income, and this raises serious constitutional problems in many states. State taxation of GILTI is unconventional and economically uncompetitive and becomes even more so when the federal government takes a more aggressive approach to taxing GILTI, as outlined in the American Jobs Plan Act. Under the Biden government's proposal, the definition of GILTI would be expanded while a deduction would be reduced, both of which would go to some states.
Just as many states comply with the federal treatment of GILTI, many remain in compliance with the FDII deduction, which would be eliminated under the federal proposal. Continued compliance with both provisions would simultaneously lead to higher taxation of GILTI and at the same time exclude the benefit of foreign direct investment. This paper shows how states currently tax GILTI and FDII and how they would be affected by the federal tax changes proposed by President Biden. It also provides an overview of recent and upcoming government legislative measures related to GILTI.
A brief overview of GILTI
Prior to the TCJA, U.S. corporation tax applied to all global income of a resident company, but provided credits for taxes paid to other countries. However, with the entry into force of the TCJA in 2017, the US switched to a quasi-territorial tax system, with the US government largely withdrawn from taxing foreign income, with the exception of certain anti-erosion provisions that were introduced to discourage profit shifting and profit shifting Offshoring of intellectual property (IP) in low tax countries.
One of those guard rails is GILTI, a specific category of foreign income that is taxed by the US government but at a lower rate than the US corporate tax rate. GILTI was established by the TCJA in Section 951A of the Internal Revenue Code (IRC) and served as a proxy for U.S. multinational corporations' profits from overseas owned intangible assets, including patents, software, trademarks, copyrights and other forms of intellectual property from their foreign subsidiaries. The bottom line is that it's just a proxy: it doesn't directly tax income from intangible assets, but rather taxes high returns that the drafters of the law associate with license income from intangible assets. Determining whether such income is only subject to low foreign taxes – a possible sign of a profit shift – is complex and not always compatible with actually low foreign tax burdens.
In essence, GILTI is a new category of foreign income from US multinational corporations that collects a minimum tax and remits it to the US Treasury Department, although the TCJA continues to move away from taxing international income. GILTI is designed to ensure that its overseas subsidiaries, regardless of where a US company operates worldwide, pay at least a minimum tax rate, if not to other countries, then to the United States. When a US company's controlled foreign corporations (CFC) owe less than the stated minimum rate to other countries, they owe US taxes on GILTI as a form of "top-up tax" (1).
Calculation of the GILTI tax liability
The GILTI calculation is very complex, but in its simplest form, GILTI is calculated by subtracting 10 percent of a CFC's Qualified Business Investment (QBAI) – or investment in machinery, equipment, and buildings – plus the interest expense. This amount is then deducted from the company's “Net Audited Income” or the net income of the US company's overseas subsidiaries. Any winnings in excess of this amount are considered "above average returns". (It is important to note that under applicable law, the tested net income of all CFCs is added together when calculating the GILTI liability, instead of the income and tax liability of each CFC being calculated separately or on a country-by-country basis.)
The rationale for the GILTI formula is that returns on investments in property, plant and equipment over time often do not exceed 10 percent of the depreciable value of the assets used to generate that income. This formula therefore assumes that for a CFC with foreign profits of more than 10 percent of the QBAI minus interest expenses, those profits are due to investments in intangible assets rather than tangible assets. (This is not always the case, however, so the GILTI formula is a rough approximation at best.)
After calculating the above-average returns, the US government taxable GILTI amount is calculated by first applying a deduction (the Section 250 deduction) that will tax GILTI at a lower rate than US income, as well a Foreign Tax Paid Credit, known as a Foreign Tax Credit (FTC).
The § 250 deduction – named after the section of the tax code in which it is located – excludes 50 percent of a company's GILTI from taxation every year until 2025. This deduction is expected to be less generous starting in 2026 if it only excludes 37.5 percent of GILTI from the U.S. corporate tax base. At the current US corporation tax rate of 21 percent, the 50 percent deduction results in an effective GILTI rate of 10.5 percent. Without further changes to applicable law, the effective tax rate for GILTI will increase to 13.125 percent if the deduction decreases to 37.5 percent from 2026, as 62.5 percent of a company's foreign supernatural returns are taxed at the current corporate tax rate of 21 percent .
After applying the Section 250 Deduction, a credit for foreign tax paid will be granted that will offset up to 80 percent of the company's non-US income tax liability. The value of the loan is capped at US tax liability multiplied by the company's overseas profits divided by worldwide profits. This formula can sometimes lead to GILTI taxable income, even if that foreign income is subject to high tax rates abroad. In general, however, the higher a company's foreign tax liability, the lower a company's remaining US tax liability.
When GILTI acts as intended, it prevents base erosion by imposing a minimum tax on foreign profits held in low-tax areas. It is important to note, however, that there are many instances where the scope of GILTI goes well beyond its intent and acts as an extra layer of US taxes on top of the taxes that CFCs pay overseas, even if those revenues are not on intangibles Assets are omitted in low-tax areas. (2)
For example, some US multinational corporations have significant domestic research or interest expenses, and current US FTC rules for cost-sharing typically require the allocation of some of a company's domestic expenses to its overseas revenue. This can limit the number of FTCs available to the company and increase its GILTI liability. (3) This unintended consequence of the current FTC cost sharing rules is just one example of how some US multinational corporations are making above average returns – and therefore owe taxes on GILTI. even if these so-called supernatural returns have nothing to do with offshoring intellectual property.
Government taxation of GILTI is complex and uncompetitive
After the TCJA went into effect, many states automatically included GILTI in their tax base because corporate tax codes are in line with the IRC. In general, states that comply with a post-TCJA version of the IRC can be expected to include GILTI in their tax base unless the state has specifically decoupled from GILTI or has determined that GILTI represents foreign dividend income that one Subject to 100 percent dividend deduction (DRD). (Even when GILTI is treated as foreign dividend income, state DRDs are often below 100 percent.)
Some states adhere to federal corporate income tax laws (line 28 of Form 1120) for credits or deductions, implying the inclusion of GILTI under Section 951A without the deduction of Section 250. The deduction according to § 250 is structurally necessary in order to achieve the lower rate that GILTI should be imposed, since it is structured as a minimum tax. Without the Section 250 deduction or an FTC, these states were on track to tax all of a company's so-called supernatural returns, not just that portion of GILTI that is taxed by the federal government. It is important that all states that would otherwise probably have been on the right track to tax 100 percent of GILTI – including Connecticut, Montana, and Utah, to name a few – are either decoupled from GILTI by law comply with the Section 250 deduction or in full or in full GILTI has been largely excluded by being classified as a foreign dividend eligible for the state's DRD.
Even states that introduce the § 250 deduction – often using line 30 of the corporate income tax form as the starting point for their income – tax an oversized proportion of it compared to the federal government, since states by default do not have credits for foreign taxes paid. States do not offer such credits because the state tax codes were not designed to account for international income as they follow the long-established standard that state taxation ends at the water's edge and only applies to domestically earned income. Without the 80 percent credit for foreign taxes paid, state taxation on GILTI tends to be far more aggressive than federal taxation on GILTI and may potentially compete with or even exceed the federal tax rate.
State taxation is made even more difficult by the difficulty of determining how much GILTI is attributable to a particular state and how it should be included for apportionment purposes. Some states offer GILTI "factor relief" – they split it up as if they were splitting domestically generated revenue – but the split of GILTI has proven to be extremely complex. Some states refuse to present factors for GILTI, including GILTI in the numerator while excluding it from the denominator, or just a narrow definition of net GILTI instead of gross GILTI in the denominator, increasing the state's share and GILTI compared to discriminated against other forms of income.
Even with Section 250 deducted and attempted to split, GILTI's state taxation is extremely uncompetitive as it increases the state tax burden on multinational corporations for reasons unrelated to the company's activities in the state (or even in the U.S.) do have. . Hence, the most competitive and economically neutral approach is for states to avoid taxing GILTI altogether by either offering a subtraction for GILTI or by classifying GILTI as dividend income for states offering 100 percent DRD.
In many cases, states relied – at least initially – on administrative rules to interpret whether or how much GILTI they are taxing. For example, some states – including Kentucky, Louisiana, and Missouri, to name a few – have issued guidelines stating that GILTI is excluded from taxation because it is classified as a dividend or a dividend and is therefore eligible for the state's DRD. Other states, including Nebraska and Maryland, have issued guidelines that GILTI is not considered a dividend or dividend and is therefore not eligible for DRD.
There is a good justification for states classifying GILTI as a foreign dividend or a foreign dividend. States have long offered DRDs to exclude foreign income that might otherwise accidentally flow into the state from their tax base. For example, Part F income – a category of foreign income created by the federal government long before the TCJA that includes passive income from dividends, royalties, rent, or interest – is deductible under the state DRDs. While GILTI differs from the income in Subsection F, these categories of overseas intangible income are in the same part of the tax code – IRC Sections 951 and 952, respectively – and both types of income are attributable to (or are considered to be attributable to) intangible assets. Countries widening their DRD to include Part F income have good reasons to do the same for GILTI, a redesigned income category that did not exist until the TCJA.
The state taxation of GILTI raises constitutional questions
In addition to being extremely unusual and uncompetitive, government taxation of GILTI poses serious constitutional problems in states that treat GILTI less favorably than domestically earned income, which violates the dormant trade clause of the U.S. Constitution that it prohibits states from discriminating against foreign (both extra-state and international) trade.
Countries that use separate rather than combined reporting face a particularly precarious situation as such countries incorporate CFCs – but not US-based subsidiaries – into a consolidated group for tax purposes. This treats international income less favorably than US income. According to the foreign trade clause, Congress, not states, has sole power to regulate international trade. Therefore, a state's decision to tax international income more than domestic income is believed to be unconstitutional and contrary to the current Gen. Foods, Inc. v. Iowa Department of Revenue & Finance (1992). In this case, the US Supreme Court abolished a state business tax that gave domestic but non-foreign subsidiaries a deduction for dividends received. Given this precedent, it is particularly advisable for separate reporting states to remove GILTI from their tax bases.
Another way that states' taxation of GILTI can violate the U.S. Constitution is if GILTI is shared less favorably than other forms of income. Every state with corporate income tax has a system for determining the amount of corporate income of a company that is attributable to that state. The apportionment formulas vary, but consider either the company's sales in that state as a percentage of total sales or a weighted combination of factors (including sales, real estate, and payroll) in the state as a percentage of total sales in the United States.
Importantly, using a typical state's breakdown formula for U.S. sources of income, the presence of a multi-state company in that state (measured by a single sales factor or a multi-factor breakdown) is included in both the numerator and denominator of the formula so that the denominator shows the overall presence of the company in all states. For the purposes of GILTI taxation, however, some states tax GILTI without proper apportionment, either by including GILTI in the numerator but excluding it from the denominator, or by including only net GILTI instead of gross GILTI in the denominator. (The net GILTI is the taxable amount, not the amount of international income from which that tax liability arises, although the US sales factor is based on gross sales.) This increases the portion of GILTI compared to the portion of domestic income – that will taxed by the state. This unequal treatment also violates the trade clause.
Current status of the taxation of GILTI by the states
Despite the decision of many states to stop taxing GILTI, some states continue to strive to tax GILTI, while uncertainty remains elsewhere – although in many cases companies are already paying it.
More than three years after the TCJA went into effect, a handful of states comply with sections of federal tax law that contain GILTI, but have never issued guidance officially setting out the state's approach to taxation. As a result, some companies could assume GILTI liability in a state without their knowledge, while others make a remittance without clear guidance on their tax obligations. Such a lack of clarity years after the entry into force of the TCJA cannot be justified. States that have not yet issued guidelines should act quickly to provide clarity to taxpayers and ultimately to codify the legislative language that excludes GILTI from taxation.
Figure 1 shows the current state of taxation of GILTI by states and whether each state has issued guidelines for its approach. For countries that tax GILTI, the card shows the percentage of the pro-rata GILTI that is taxed after applying the § 250 deduction or, if applicable, the DRD. However, the calculation does not take into account how a state divides GILTI. In countries where GILTI does not offer any factor relief, companies can be subject to significantly higher tax liabilities.
To date, 20 states and the District of Columbia have taxed GILTI, but only 16 of those states have issued guidelines on the matter. Currently, 11 states and the District of Columbia tax 50 percent of GILTI, while other states levy less taxes, including four states that tax just 5 percent of it.
The State Impact of the Biden Government's Proposed Federal Changes to GILTI
In April 2021, President Biden unveiled the tax rules of his proposed American Employment Plan Act, entitled "Made in America Tax Plan," which set goals to "reduce profit shifting and remove incentives for offshore investment" (4) The Plan provides, among other things, several changes to the tax treatment of GILTI. These include increasing the GILTI rate to 21 percent, eliminating the 10 percent exemption for accepted returns to QBAI and taxing GILTI on a country basis. If adopted, these changes would not only increase the GILTI tax liability for US multinational corporations at the federal level, but also the state income tax liability of corporations in the states currently taxing GILTI.
While President Biden's draft tax plan does not provide details on how to increase the tax rate for GILTI, it is generally believed that this will be achieved by reducing the section 250 deduction from 50 percent to 25 percent below the new proposed by the plan Corporate tax rate is lowered by 28 percent. (Taxing 75 percent of GILTI below a higher corporate income tax rate of 28 percent would result in an effective tax rate of 21 percent for GILTI.) It should be noted, however, that some Senate Democrats have raised concerns about this significant rate hike and have since proposed one Aim for a corporate tax rate of 25 percent. (5) Although the increase in the federal rate would not flow into the states, a reduced deduction would be made under Section 250.
In addition to significantly increasing the federal income tax liability of multinational corporations, as well as increasing the number of corporations with income classified as GILTI, a reduction in the Section 250 deduction would increase the tax liability of multinational corporations in the nine states and the District of Columbia directly bringing this deduction in their own tax code. Some of these states – Colorado, Delaware, Maryland, Nebraska, and New Jersey, as well as the District of Columbia – comply with federal law so that changes to the deduction are made automatically, increasing the amount of GILTI taxing them from 50 percent to 75 percent. The other four states that are introducing the Section 250 Withholding – Idaho, New Hampshire, Vermont, and West Virginia – use static compliance and would only introduce proposed changes with proactively passing laws to update their compliance dates.
President Biden's other two proposed changes – removing the exemption for accepted returns to QBAI and introducing GILTI on a country basis – would automatically increase the amount of foreign revenue that goes to all states that tax GILTI.
First, removing the exemption for accepted returns to QBAI would violate any sense in which GILTI acts as a proxy for intangible income parked in low-tax areas. Instead, GILTI would become a much broader and more aggressive approach to foreign income taxation by the US government, regardless of its source. If the federal base were expanded to include additional income under Section 951A as GILTI, then all states compliant with this section would automatically tax that additional income without taking legislative action or even updating their compliance data.
Second, GILTI is currently calculated based on a company's profits, losses and taxes in all other countries combined, rather than the company's profits, losses and taxes in each individual country. If net foreign income is the basis for GILTI taxation, losses made by a company in one country can offset profits in another. Calculating GILTI on a country basis would mean that some companies would be taxed under GILTI if they were doing a highly profitable business in one country, even if the company had several unprofitable operations elsewhere. (6) This would increase the amount of income taxed by the US as GILTI, meaning that a larger portion of that income would also be taxed by all states that tax GILTI.
Table 1 shows the states currently taxing GILTI and indicates which states have issued guidelines on this. In addition to the display of whether each state offers the deduction according to § 250 or classifies GILTI as dividend income that is eligible for the state's DRD, the table shows the percentage of GILTI that each state taxes. The table also includes a column that shows the percentage of GILTI that each state would tax if President Biden's proposal to reduce the § 250 deduction to 25 percent were accepted.
|State taxation of GILTI under current law and Biden's proposal|
|Status||GILTI inclusion||§ 250||DRD||Guidance|
|Current law||Biden suggestion|
|New Hampshire (c)||50%||75%||Yes||0%||✓|
|North Dakota (d)||30%||30%||No||70%||✓|
|West Virginia (c)||50%||75%||Yes||0%||✗|
|District of Columbia||50%||75%||Yes||0%||✗|
|(a) Separate reporting state with sensible involvement of GILTI, which in turn raises constitutional questions.|
|(b) The deduction will be reduced to 80 percent if the taxpayer chooses not to submit domestic disclosure calculations.|
|(c) The state uses static conformity so that changes to the deduction under Section 250 by the federal government are not carried out automatically.|
|(d) Der 70-prozentige Abzug für ausländische Dividenden steht Unternehmen zur Verfügung, die ihre Renditen nach der Water-Edge-Methode einreichen, während GILTI (100-prozentiger Abzug) als Duplikat für Unternehmen, die eine weltweite kombinierte Berichtsmethode verwenden, eliminiert wird.|
|Hinweis: In der Spalte „Angebot unterbreiten“ wird ein auf 25 Prozent reduzierter Abzug gemäß Abschnitt 250 angenommen. Kalifornien entspricht einer Vor-TCJA-Version des IRC und besteuert daher GILTI derzeit nicht, könnte es jedoch bei Aktualisierung seines Konformitätsdatums besteuern.|
|Quellen: Staatsstatuten und Leitlinien; Bloomberg Tax; Forschung der Steuerstiftung.|
Ein kurzer Überblick über FDII
Eine der TCJA-Bestimmungen, die in Verbindung mit GILTI erlassen wurden, war die Einführung eines Abzugs für ausländische Direktinvestitionen. Während GILTI die Besteuerung des ausländischen immateriellen Einkommens ausländischer Unternehmen durch die US-Regierung beinhaltet, reduziert der FDII-Abzug den effektiven Steuersatz für inländische Investitionen in immaterielle Immobilien, die Einnahmen aus Exporten in ausländische Märkte generieren. Wenn es um die Wechselwirkung zwischen diesen beiden Richtlinien geht und GILTI die Peitsche ist, ist FDII die Karotte. (7) GILTI reduziert den Anreiz für US-Unternehmen, immaterielle Vermögenswerte in Niedrigsteuerländer zu verlagern, während FDII einen Anreiz für die Verortung von geistigem Eigentum schafft in den USA Die GILTI- und FDII-Abzüge sind beide im IRC § 250 enthalten, aber die beiden Abzüge sind unterschiedlich und sollten von politischen Entscheidungsträgern als solche behandelt werden.
Ebenso wenig wie es für Staaten gerechtfertigt ist, GILTI zu besteuern, gibt es auch wenig Grund für Staaten, den FDII-Abzug anzubieten, obwohl Staaten den besonders aggressiven Ansatz der Besteuerung von GILTI vermeiden sollten, während sie FDII ablehnen. Auf Bundesebene arbeiten GILTI und FDII zusammen, um den Anreiz für das Offshoring von geistigem Eigentum zu verringern. Auf Landesebene haben diese besonderen Anreize jedoch viel weniger Gewicht. Die staatliche Besteuerung von GILTI hat wahrscheinlich keinen Einfluss darauf, ob ein Unternehmen sein geistiges Eigentum verlagert, aber die Besteuerung von GILTI durch einen Staat hat wahrscheinlich Auswirkungen darauf, ob ein Unternehmen in einem bestimmten Staat eine erhebliche Präsenz von Eigentum oder Mitarbeitern unterhält, da die Besteuerung von GILTI durch einen Staat einen Anreiz schafft für Unternehmen, um ein unnötiges Risiko der Einkommensteuer dieses Staates zu vermeiden.
Letztendlich sollten Staaten vermeiden, sich in internationale Angelegenheiten einzumischen, und gegenüber den Aktivitäten von Unternehmen im Ausland agnostisch bleiben, da die Aktivitäten eines Unternehmens im Ausland in der Vergangenheit keinen Einfluss darauf hatten, wie dieses Unternehmen von einem bestimmten Staat besteuert wird. Einige Staaten zögerten weiterhin, GILTI von der Besteuerung auszuschließen, da die zusätzlichen Einnahmen attraktiv sind. Von allen Möglichkeiten, einen Dollar an Einnahmen zu erzielen, ist die Besteuerung von GILTI ein besonders nicht neutraler, komplexer und wirtschaftlich schädlicher Ansatz.
Umgekehrt haben einige Staaten gezögert, sich vom FDII-Abzug abzukoppeln, da dies die Steuerschuld einiger Unternehmen erhöhen würde. Es ist jedoch wichtig zu berücksichtigen, dass die Einnahmen aus dem Angebot eines staatlichen FDII-Abzugs effizienter für die Reduzierung des Körperschaftsteuersatzes verwendet werden, der für alle Unternehmen gilt, da der FDII-Abzug wenig zur Förderung des Wirtschaftswachstums beiträgt und nur dazu beiträgt für einige Firmen verfügbar. Die Verweigerung dieses Abzugs ohne Ausgleich, insbesondere bei gleichzeitiger Erhöhung der Besteuerung von GILTI, ist lediglich eine Steuererhöhung für multinationale Unternehmen mit staatlichen Aktivitäten.
Kurz gesagt, die wirtschaftlich neutralste Position für einen Staat besteht darin, die Besteuerung von GILTI zu vermeiden und die Einhaltung des FDII-Abzugs zu vermeiden. Für Staaten, die GILTI derzeit nicht besteuern, gibt es wenig wirtschaftliche Rechtfertigung dafür, den FDII-Abzug anzubieten.
Aktueller Stand der Behandlung des FDII-Abzugs und der Auswirkungen der von der Biden-Administration vorgeschlagenen Änderungen
Derzeit entsprechen 22 Staaten dem FDII-Abzug. Von den neun Bundesstaaten und dem District of Columbia, die GILTI besteuern, aber dem GILTI-Abzug entsprechen, entsprechen alle außer New Hampshire und dem District of Columbia auch dem FDII-Abzug. Von allen Staaten, die GILTI besteuern, verfolgen einige den besonders aggressiven Ansatz, GILTI zu besteuern, während sie den FDII-Abzug ablehnen: Massachusetts, Maine, New Hampshire, New York, Oregon, Tennessee, Utah sowie der District of Columbia. Inzwischen entsprechen neun Staaten trotz Entkopplung von GILTI dem FDII-Abzug.
Zusätzlich zur Erhöhung der Steuern auf GILTI hat die Biden-Regierung vorgeschlagen, den FDII-Abzug zu streichen, wodurch der Anreiz für „Karotten“ beseitigt wird, und beabsichtigt, den „Peitschenstock“ durch eine aggressivere Besteuerung von GILTI stärker abzuschrecken. Vierzehn der 22 Staaten, die derzeit dem FDII-Abzug entsprechen, stimmen fortlaufend mit dem IRC überein oder würden diese Änderung auf andere Weise automatisch einbringen, sodass die FDII-Abzüge dieser Staaten automatisch aufgehoben würden, wenn der Bundesabzug beseitigt würde. Abbildung 2 zeigt den aktuellen Status der Konformität der Staaten mit dem FDII-Abzug und die Staaten, in denen die Aufhebung des GILTI-Abzugs durch den Bund automatisch in den Staat fließen würde.
Jüngste Änderungen in der steuerlichen Behandlung von GILTI und FDII durch die Staaten
Given the constitutional issues, complexity, and negative economic effects of taxing GILTI, several states have eliminated or reduced their taxes on GILTI over the past couple years. In January 2019, 30 states and the District of Columbia were poised to tax GILTI.(8) As of January 2020, that number had dropped to 23 states and the District of Columbia.(9) Today, only 20 states and the District of Columbia still tax GILTI.
Over the past year, three states (Iowa, Alabama, and Kansas) have newly excluded GILTI from taxation, and Utah codified its taxation of only 50 percent—rather than 100 percent—of GILTI. In Iowa, House File 2641 was signed into law in June 2020, excluding GILTI from the state’s corporate income tax base, retroactive to tax year 2019, by adopting a subtraction modification. Similar legislation (House Bill 170) was adopted in Alabama in February 2021, decoupling from GILTI retroactive to tax year 2018 by allowing a deduction for any GILTI included in the taxpayer’s federal taxable income.(10) In Kansas, legislators overrode Gov. Laura Kelly’s (D) veto of Senate Bill 50, thereby allowing a subtraction from federal adjusted gross income equal to 100 percent of GILTI beginning in 2021.(11)
Utah previously theoretically taxed 100 percent of GILTI by neither conforming to the § 250 deduction nor classifying GILTI as dividends income, though state tax officials had operated under an assumption of 50 percent taxability. House Bill 39, enacted in March 2021, codified that determination by expressly classifying GILTI as dividends income, eligible for the state’s 50 percent DRD, retroactive to tax year 2018.
In Maine, L.D. 220 was adopted in March 2021, denying the FDII deduction, effective retroactively to January 1, 2020. The law does, however, direct Maine Revenue Services to conduct a study regarding the deduction to help inform whether policymakers might consider conforming to the deduction again in the future.
State Legislative Proposals Related to GILTI
During their 2020 and 2021 legislative sessions, several states that had not yet excluded GILTI from taxation debated legislation to do so, while some states that do not tax GILTI are considering newly taxing it.
California does not tax GILTI because the state conforms to the IRC as it existed on January 1, 2015. During the 2021 legislative session, Assembly Bill 71 was introduced, a bill that would tax GILTI for businesses that file using the state’s water’s edge election.
Specifically, beginning January 1, 2022, for businesses that do not use combined reporting in which the income of foreign affiliates is brought into the state tax base, AB-71 would bring into the state’s tax base 50 percent of any Section 951A income (not by conforming to the § 250 deduction). Further, the bill would tax 40 percent of deemed repatriated income. AB-71 is undergoing committee consideration and has not received a vote on the Assembly floor.
Illinois excludes GILTI from its tax base by treating it as an eligible foreign dividend subject to the state’s 100 percent DRD. However, Gov. J.B. Pritzker’s (D) executive budget for fiscal year 2022 proposes denying the application of the DRD to GILTI while denying the § 250 deduction, which would result in Illinois becoming the only state to tax 100 percent of GILTI.(12)
Massachusetts taxes 5 percent of GILTI, since the state treats GILTI as a dividend that is eligible for the state’s 95 percent DRD. However, legislation has been introduced to tax a larger amount. Companion bills H.2826 and S.1812 would deny the application of the state’s DRD to GILTI and would instead bring 50 percent of § 951A income into the tax base beginning January 1, 2021. This bill was referred in March 2021 to the Joint Committee on Revenue.
Minnesota excludes GILTI from taxation by giving it the benefits of the state’s 100 percent DRD. However, one proposal, House File 2114 (and its companion bill, Senate File 2459), would require CFCs that generate GILTI to be included in a combined filing group for purposes of apportioning income attributable to and taxed by Minnesota. Minnesota uses water’s edge filing, whereby only the income of domestic corporations is included in the state tax base.
LB347 was introduced and received a hearing in the Unicameral’s Revenue Committee but did not advance in its original form to the Unicameral floor. This bill would exclude GILTI from taxation by giving GILTI the benefit of the state’s 100 percent DRD both prospectively and retroactively.
In 1984, legislation was adopted in Nebraska fully excluding the dividends and deemed dividends of foreign corporations from the state’s tax base and limiting the income included in the numerator of the state’s apportionment formula to income from businesses that are subject to the IRC.(13) Despite this historical decision of the legislature that the state not tax foreign income, the Nebraska Department of Revenue issued guidance in December 2019 determining that GILTI is not considered a foreign dividend or a deemed foreign dividend and is therefore ineligible for the state’s DRD.(14) Because the state conforms to the IRC on a rolling basis, Nebraska automatically brings GILTI and the § 250 deduction into its tax base despite the lack of any proactive decision by the legislature to tax foreign income.
While LB347 as introduced did not advance to the Unicameral floor, an amendment was considered (AM774 to LB432) that would have excluded GILTI from the tax base starting in 2022, but that amendment fell just shy of the majority vote needed for adoption into the underlying bill, which was sent to the governor on May 21, 2021.
At the federal level, GILTI and FDII work in tandem—albeit imperfectly—to discourage the offshoring of IP into low-tax countries, but regulation of international commerce is the job of the federal government, not states. State taxation of GILTI not only raises serious constitutional issues, but it also creates an uncompetitive business climate for multinational companies. States that have not already done so should exclude GILTI from their tax base, especially in light of the Biden administration’s proposed federal changes to GILTI that would flow through to states and make state taxation of GILTI even more aggressive and uncompetitive. Additionally, while state FDII deductions provide tax relief to some firms, their economic effects are modest, and the forgone revenue would be better used in structural reforms that benefit all firms.
Most states never set out to tax international income, which is why so many state legislatures have acted to either exempt or substantially reduce the inclusion of GILTI in their tax base. Now, with the Biden administration proposing the transformation of GILTI from a poorly structured minimum tax into something closer to the reimposition of a worldwide approach to taxation, it is particularly important that states respond, lest they slide into the creation of a worldwide tax system of their own—something states were never meant to do, and for which their existing tax codes are wholly inadequate.
(1) Daniel Bunn, “U.S. Cross-border Tax Reform and the Cautionary Tale of GILTI,” Tax Foundation, Feb. 17, 2021, 12, https://www.taxfoundation.org/gilti-us-cross-border-tax-reform/.
(3) Richard Rubin, “New Tax on Overseas Earnings Hits Unintended Targets,” The Wall Street Journal, Mar. 26, 2018, https://www.wsj.com/articles/new-tax-on-overseas-earnings-hits-unintended-targets-1522056600.
(4) U.S. Department of the Treasury, “The Made in America Tax Plan,” April 2021, https://www.home.treasury.gov/system/files/136/MadeInAmericaTaxPlan_Report.pdf.
(5) Christina Wilkie, “Biden Open to 25% Corporate Tax Rate as Part of An Infrastructure Bill Compromise,” CNBC, May 6, 2021, https://www.cnbc.com/2021/05/06/biden-says-corporate-tax-rate-should-be-between-25percent-and-28percent.html.
(6) Daniel Bunn, “GILTI by Country Is Not as Simple as it Seems,” Tax Foundation, May 18, 2021, https://www.taxfoundation.org/gilti-by-country/.
(7) Linda Pfatteicher, Jeremy Cape, Mitch Thompson, and Matthew Cutts, “GILTI and FDII: Encouraging U.S. Ownership of Intangibles and Protecting the U.S. Tax Base,” Bloomberg Tax, Feb. 27, 2018.
(8) Jared Walczak, “Toward a State of Conformity: State Tax Codes a Year After Federal Tax Reform,” Tax Foundation, Jan. 28, 2019, 35, https://www.taxfoundation.org/state-conformity-one-year-after-tcja/.
(9) Jared Walczak and Erica York, “GILTI and Other Conformity Issues Still Loom for States in 2020,” Tax Foundation, Dec. 19, 2019, 7, https://www.taxfoundation.org/gilti-state-conformity-issues-loom-in-2020/.
(10) EY, “Alabama Modifies Its Corporate Income Tax, Exempts Certain COVID-19-Related Payments from State Tax, Extends Various Tax Credits,” Feb. 16, 2021, https://taxnews.ey.com/news/2021-0360-alabama-modifies-its-corporate-income-tax-exempts-certain-covid-19-related-payments-from-state-tax-extends-various-tax-credits.
(11) Katherine Loughead, “Outlier No More: Kansas Adopts Tax Reform with Wayfair Safe Harbor, GILTI Exclusion,” Tax Foundation, May 4, 2021, https://www.taxfoundation.org/kansas-tax-override/.
(12) Gov. JB Pritzker, Illinois State Budget Fiscal Year 2022, 49, https://www2.illinois.gov/sites/budget/Documents/Budget%20Book/FY2022-Budget-Book/Fiscal-Year-2022-Operating-Budget.pdf.
(13) EY, “Nebraska Department of Revenue Limits Application of Its Dividends Received Deduction on Subpart F Income,” Feb. 22, 2021, https://taxnews.ey.com/news/2021-0404-nebraska-department-of-revenue-limits-application-of-its-dividends-received-deduction-on-subpart-f-income.
(14) EY, “Nebraska Department of Revenue Issues Guidance on Treatment of GILTI and FDII,” Dec. 12, 2019, https://taxnews.ey.com/news/2019-2193-nebraska-department-of-revenue-issues-guidance-on-treatment-of-gilti-and-fdii.