January 11, 2019
New Jersey Division of Taxation releases guidance related to corporation business tax overhaul — addresses GILTI and other topics
The New Jersey Division of Taxation (DOT) recently issued two technical bulletins (TB-84 and TB-85 (collectively, the technical bulletins) in which it provides its interpretations of key aspects of the July 1 and October 4, 2018 legislative amendments to the Corporation Business Tax (CBT) Act (the CBT overhaul). The technical bulletins address aspects of New Jersey's transition from separate to combined reporting, a newly-imposed temporary surtax, the CBT impact of various provisions of the federal Tax Cuts and Jobs Act (P.L. 115-97) (TCJA), including the CBT treatment of the repatriation tax (IRC Section 965), global intangible low-taxed income (GILTI) (IRC Sections 250 and 951A), foreign derived intangible income (FDII) (IRC Section 250), and the limitations on the deductibility of business interest expense (IRC 163(j)).
On December 10, 2018, the DOT issued TB-84, addressing several CBT overhaul topics. In its guidance, the DOT included information that differed from, or is in addition to, information previously provided in EY Tax Alerts 2018-1342and2018-1977, which summarized the CBT overhaul statutory changes enacted in July and October of 2018. The following summarizes some of these key topics covered in TB-84.
Effective for tax years beginning on and after January 1, 2017
IRC Section 965 (the Repatriation Tax) — No deductions, exemptions or credits are allowed in reporting repatriation income (IRC Section 965(a)) for CBT purposes.
Dividend-received deduction (DRD) — The DRD for dividends from 80%-or-more-owned subsidiaries are reduced from 100% to 95% for tax years beginning after December 31, 2016.
Dividend factor relief — For dividends paid or deemed paid from 80%-or-more-owned subsidiaries, taxpayers may apply a special allocation formula, which is the lower of (1) the average of taxpayer's average New Jersey apportionment reported in tax years 2014 through 2016, or (2) 3.5%. This special dividends allocation formula applies to tax years beginning on or after January 1, 2017, but before January 1, 2019.
Tiered dividend exclusion — Certain dividends received from subsidiaries that paid New Jersey CBT are excluded from a taxpayer's CBT base.
Effective for tax years beginning on and after January 1, 2018
The surtax, which is imposed on CBT liability, is not imposed on returns filed by New Jersey S corporations or partnerships. If, however, an S corporation is included in a CBT combined return, its income is subject to the surtax.
A corporate partner's share of partnership income is subject to the surtax if the corporate partner's allocated taxable net income meets the threshold for the surtax.
GILTI and FDII
As discussed in greater detail later, the DOT does not consider GILTI and FDII to be treated as actual or deemed dividends eligible for a DRD. Instead, the DOT views GILTI and FDII as a type of business income includable in the CBT base of a New Jersey taxpayer, which reports such income for federal income tax purposes.
The treaty exceptions for the related-party addbacks of interest and intangible expenses have been amended to require that (1) the related member was subject to tax in the treaty nation on a tax base that included the amount paid, accrued or incurred, and (2) the related member's income received from the transaction was taxed at an effective tax rate equal to or greater than 6%.
IRC Section 163(j) limitation method
The 30% business interest expense deduction limitation set forth under IRC Section 163(j), applies on a "pro-rata" basis as between the total categories of related party and unrelated party interest. Additional information will be posted to the DOT's website as soon as it becomes available.
Miscellaneous major changes
Taxpayers must add back all income that is exempt under any US law to their entire net income (ENI). (The DOT guidance appears to go beyond the statutory computation of ENI.)
On December 24, 2018, the DOT issued revised TB-85, which addresses the taxability and apportionment of income under IRC Section 951A (GILTI) and the treatment IRC Section 250 (GILTI and FDII) under the CBT Act.
The DOT reiterated its position set forth in TB-84 (and described earlier) that neither GILTI nor FDII are treated as dividends or deemed dividends and that GILTI is a new category of gross income for federal income tax purposes. The DOT explained that IRC Section 951A requires each United States shareholder of a controlled foreign corporation to include its share of GILTI in its federal taxable income for the applicable tax year. Further, the DOT stated that IRC Section 250(b) identified FDII as yet another new category of gross income for federal tax purposes and that the new federal tax law provided a corresponding deduction for both GILTI and FDII in IRC Section 250(a). For federal income tax purposes, the DOT articulated that the deductions provided under IRC Section 250 are intended to reduce the effective federal income tax rate applicable to the GILTI and FDII amounts included in the computation of federal taxable income.
Treatment of IRC Section 951A and IRC Section 250 under the CBT Act
The DOT next addressed how the GILTI and FDII amounts will be treated for CBT purposes, along with the corresponding deductions under IRC Section 250.
For New Jersey CBT purposes, the starting point for calculating ENI is the amount of income reported for federal income tax purposes before the net operating loss deduction and special deductions. Therefore, GILTI and FDII are included in ENI but neither the federal nor the CBT dividends-received deduction applies to such income. On the other hand, the deductions allowed under IRC Section 250(a) for GILTI and FDII amounts are allowed against ENI to the extent that the taxpayer claimed such deductions for federal income tax purposes.
The DOT further stated that it regards GILTI and FDII amounts as "all other business receipts" for apportionment purposes, under N.J.S.A. 54:10A-6(B)(6) and that "[t]axpayers may not look through to underlying sales when determining how to allocate GILTI and FDII, because they represent items of receipt to the taxpayer."
Separate apportionment methodology
The DOT provides a unique sourcing method to "reflect a fair and equitable allocation," as GILTI and FDII are "a hybrid of different income items," and that "GILTI, by design, constitutes displaced [US] income at least in part." Further, 'the result of the FDII deduction (an incentive meant to encourage certain domestic activities) could yield a disproportionate impact on New Jersey." The DOT's method requires all CBT payers filing a CBT-100 or BFC-1 to calculate the portion of GILTI and FDII that is subject to CBT:
… equal to the ratio of New Jersey's gross domestic product (GDP) over the total GDP of every US state (and the District of Columbia) in which the taxpayer has economic nexus. GDP amounts should be based on the most recent quarter's data published by the US Bureau of Economic Analysis as of the end of the taxpayer's privilege period. For example, assuming economic nexus in all 50 states, the current ratio of New Jersey GDP for allocation purposes approximates 3.1%. When applied to the net GILTI amount (after reduction for the 50% [IRC] Section 250 deduction), this results in taxation of approximately 1.6% of gross GILTI.
The DOT further instructed that taxpayers will be required to separately apportion GILTI and FDII amounts (and the corresponding IRC Section 250 deductions) reported for federal income tax purposes, on new Schedule A-6 when filing their returns for the 2018 tax year and then include the allocated net GILTI and net FDII amounts on line 3c of page 1 of the CBT-100 or BFC-1 to remove those amounts from the regular CBT tax calculation on page 1, line 3(a).
The DOT's guidance provides written clarification of its positions on a number of significant issues that have been debated within the taxpayer community since July of 2018.
The DOT's GILTI apportionment position is perhaps the most important and unexpected aspect of its guidance. In our view, the DOT's New Jersey GDP/throwout method raises interesting constitutional questions as to whether it promotes a fairly apportioned tax consistent with the US Supreme Court's seminal ruling on state apportionment methods in Complete Auto Transit v. Brady.1 Moreover, even as a gating question, it is unclear whether the DOT's guidance is, in fact, consistent with New Jersey's own CBT apportionment statutes.
For additional information concerning this Alert, please contact:
|State and Local Taxation Group
|• Bill Korman
|• Michael Puzyk
1 Complete Auto Transit v. Brady, 430 U.S. 976 (1977).
I am an expert in taxation, particularly in corporate tax matters and legislative amendments affecting businesses. My extensive knowledge is grounded in practical experience and a thorough understanding of tax laws. I have been actively involved in interpreting and implementing changes in tax regulations, ensuring that businesses comply with the latest legislative updates.
In the article dated January 11, 2019, released by the New Jersey Division of Taxation (DOT), they provided guidance related to the Corporation Business Tax (CBT) overhaul. The DOT issued two technical bulletins, TB-84 and TB-85, interpreting key aspects of the legislative amendments to the CBT Act. Let's break down the information and concepts covered in the article:
Legislative Amendments to CBT Act (July 1 and October 4, 2018):
- Transition from separate to combined reporting.
- Introduction of a temporary surtax.
- Impact of the federal Tax Cuts and Jobs Act (TCJA) on CBT, including treatment of Repatriation Tax (IRC Section 965), Global Intangible Low-Taxed Income (GILTI) (IRC Sections 250 and 951A), Foreign Derived Intangible Income (FDII) (IRC Section 250), and limitations on the deductibility of business interest expense (IRC 163(j)).
- Effective for tax years beginning on and after January 1, 2017.
- Repatriation Tax (IRC Section 965) – No deductions, exemptions, or credits allowed.
- Dividend-Received Deduction (DRD) reduced from 100% to 95% for dividends from 80%-or-more-owned subsidiaries.
- Special allocation formula for dividends from 80%-or-more-owned subsidiaries.
- Tiered dividend exclusion for certain dividends received from subsidiaries that paid New Jersey CBT.
- Effective for tax years beginning on and after January 1, 2018.
- Surtax imposed on CBT liability, not on New Jersey S corporations or partnerships.
- Treatment of GILTI and FDII as business income, not eligible for DRD.
- Amendments to treaty exceptions for related-party addbacks.
- IRC Section 163(j) limitation method for business interest expense deduction.
- Miscellaneous major changes: Add back all income exempt under any US law to entire net income (ENI).
- Addresses taxability and apportionment of income under IRC Section 951A (GILTI) and treatment of IRC Section 250 (GILTI and FDII) under the CBT Act.
- GILTI and FDII not treated as dividends but as new categories of gross income for federal income tax purposes.
- Treatment of GILTI and FDII for CBT purposes.
- Calculation of ENI base for CBT purposes.
- Separate apportionment methodology for GILTI and FDII.
- GILTI apportionment position is a significant aspect of the guidance.
- DOT's New Jersey GDP/throwout method raises constitutional questions.
- Unclear whether DOT's guidance aligns with New Jersey's CBT apportionment statutes.
The DOT's guidance clarifies various issues debated within the taxpayer community since July 2018, providing a comprehensive overview of the changes and their implications for businesses subject to the New Jersey CBT.