New York State Tax Reform and Fairness Commission Corporate ...

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Nov 19, 2013 ... Corporate Tax Reform Proposal. -1-. 11/19/2013 1:16 PM ... version of the Tax Department's draft Article 9A/32 legislation. We have highlighted ...
New York State Tax Reform and Fairness Commission Corporate Tax Reform Proposal NOTE: This memo was prepared by Commission staff to provide further details of its recommendations to Governor Cuomo, as presented in their November 14, 2013 report. Business Council staff annotated this memo to illustrate changes compared to the most recent version of the Tax Department’s draft Article 9A/32 legislation. We have highlighted major changes in yellow, and provided brief descriptions of the changes in red. I look forward to any questions, comments or recommendations you have in response to this overview. Thanks. Ken Pokalsky Vice President of Government Affairs The Business Council of New York State, Inc. 152 Washington Avenue Albany, NY 12210 T 518.465.7511 x. 205 C 518.339.5894 www.bcnys.org

Unification of Articles 9-A (Corporate Franchise Tax) and 32 (Bank Franchise Tax)  Article 32 would be merged into Article 9-A. Corporations Subject to Tax  The following corporations would be subject to tax: o existing Article 9-A taxpayers; and o existing Article 32 taxpayers.  Jurisdiction to tax would be asserted over corporations without a physical presence in New York where economic nexus is present. o The existing tests to determine whether a corporation is subject to tax in New York (doing business, employing capital, maintaining an office, owning/leasing property) would be expanded to include deriving receipts from New York activity. o Corporations would not be subject to tax based on this new test unless their New York receipts exceeded an established “de minimis” threshold. o Alien corporations that meet the economic nexus standard but do not have effectively connected income (ECI) would not be subject to tax and would be excluded from the combined group. The language here is modified, but seems consistent with earlier versions. o The fulfillment service nexus rule would be repealed. Net Income Base and Rate  For U.S. corporations, the entire net income ( E N I ) starting point would continue to be federal taxable income ( F T I ) with most of the current Article 9-A modifications. o Modifications that are obsolete would be eliminated. -111/19/2013 1:16 PM

New York State Tax Reform and Fairness Commission Corporate Tax Reform Proposal 

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For non-U.S. corporations, the starting point would be ECI computed pursuant to Internal Revenue Code (I.R.C.) §882 with most of the current Article 9-A modifications. o Modifications that are obsolete would be eliminated. o Taxpayers would be required to add back treaty benefits to FTI. new ENI minus net investment income and net other exempt income would result in business income. o Allocated business income is the amount that would be subject to tax. The exemption for income from subsidiary capital would be eliminated. o Dividends and gains and losses from stock that is currently subsidiary capital would be investment income if the stock is stock of a non-unitary subsidiary and held for more than 6 consecutive months. • Dividends when mentioned in this outline also include Subpart F income. o Dividends from stock of unitary subsidiaries not included in the combined group would be classified as other exempt income. o Otherwise, dividends and gains and losses would be business income. o Interest income and gains and losses from debt that is currently subsidiary capital would be business income. Investment income would include income from stocks held in non-unitary corporations for more than 6 consecutive months and income that cannot be included in apportionable business income under the U.S. Constitution. o Only stocks considered equity under the I.R.C. could qualify as investment income. o The 6 month holding period for stocks would be measured across tax years. • In instances where the holding period is split across tax years, a taxpayer would be allowed to classify income from stock as investment income in the first year if it intends to hold the stock for more than 6 months. • If the stock is not held for more than 6 months, the dividends and gains and losses from the stock generated in year 1 and year 2 would be required to be included in the year 2 return as business income. Investment income would be exempt from tax and deductions for interest expenses attributable to the income would be disallowed. If expenses exceed income, the excess would still be disallowed. o The actual attribution would be based upon the current Article 9-A methodology for investment income, amended as follows: • For purposes of the asset ratios used in the indirect attribution of expenses, the values of the assets in both the numerator and denominator of the ratio would be reduced, but not below zero, by the average liabilities to which an expense has been directly traced. This replaces 60% safe harbor proposal • Direct tracing of interest expenses would be an accepted methodology in certain circumstances.  For example, if a unitary business includes a finance company that deals largely with unrelated parties, it may be appropriate to directly trace the finance company’s third party interest expense to its business income. -2-

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New York State Tax Reform and Fairness Commission Corporate Tax Reform Proposal





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o The computation of expense attribution for a combined group would be done on a combined “one company” basis. new Dividends from unitary corporations not included in the combined group would be classified as other exempt income. These dividends would be exempt from tax and deductions for interest expenses attributable to the income would be disallowed. If actual expense attribution exceeds income, the excess would still be disallowed. o Unitary corporations not in the combined group would include: (1) corporations taxable under another tax article; (2) alien corporations with no ECI; and (3) corporations less than 50% directly or indirectly owned. new o The actual attribution would be based upon the amended Article 9-A methodology for investment income discussed above. o The computation of expense attribution for a combined group would be done on a combined “one company” basis. New; again 60% safe harbor eliminated Business income would not be defined but would include the following: o Interest income and gains and losses from debt instruments, unless the income cannot be included in apportionable business income under the U.S. Constitution. o Gains and losses from stock of a unitary corporation. o Dividends and gains and losses from stock held in a non-unitary corporation for 6 months or less. The election to treat cash as business income or investment income would be eliminated; cash would be business income. The current approach to partnership items of receipts, income, gain, loss, and deduction that flow through a partnership to a corporate partner as well as gains or losses from the sale of a partnership interest itself (i.e., the current regulations) would be retained. o The statute would clarify that any corporation that is a partner in a partnership must determine its tax liability under Article 9-A and in accordance with the regulations of the Commissioner. new Solely new for purposes of the definition of investment income, corporations less than 20 percent directly or indirectly owned would be presumed to be non-unitary. o Only stocks that entitle the holders to vote for the election of directors or trustees would be considered in determining whether a corporation is 20 percent directly or indirectly owned by another corporation. o Corporations 20 percent or more owned, directly or indirectly, would be determined to be unitary or non-unitary based on the facts and circumstances, with no presumption. new The “tax treaty” exception to the royalty addback provision would be eliminated. The current ENI rate structure would be continued. Note: best we can tell, the rate reduction was based on need to present revenue neutral package.

Special Provisions  Eliminate many special provisions, including: o Special Article 32 international banking facilities provisions; and o The Article 32 deductions for interest income from government obligations and income and net gains from subsidiary capital. Drops previous deletion of Article -311/19/2013 1:16 PM

New York State Tax Reform and Fairness Commission Corporate Tax Reform Proposal





32 bad debt provisions. Note that prior outline also said NY to recouple with federal bad debt provisions. In an effort to encourage local lending in New York, thrift institutions and community banks could elect one of two entire net income modifications discussed below. o The first modification, eligibility for which would be determined based on the eligibility for the prior New York State bad debt modification for thrift institutions, would be available to thrifts and community banks holding a qualified residential loan portfolio. o The second modification would be available to thrifts and community banks for holding a significant amount of New York small business loans and New York residential mortgages. New Address business tax incentive credits as follows: o Specific credits • Reform the Investment Tax Credit (ITC) by instituting a manufacturing enterprise qualification, denying ITC for used equipment, and creating a “for sale” requirement; • Repeal the Financial Services ITC; • Reform the Brownfields Credits; • Reduce the Empire State Film Production Tax Credit allocation. new o Provide that amounts of credit carry forwards that existed in pre-reform years would continue to be carried forward into post-reform years, with the exception of the alternative minimum tax credit, notwithstanding changes to combined groups as a consequence of other reform provisions or impacts of specific credit reform or repeal.

Net Operating Losses (NOLs)  NOLs could not be carried back and New York would conform to the federal carryforward period.  The New York net operating loss deduction (NOLD) would no longer be limited by the federal NOLD source year or amount.  New York would continue its policy that a NOLD is not allowed for a NOL sustained during any year in which the corporation generating the loss new was not subject to tax in New York.  The maximum amount of NOL that a taxpayer would use as the NOLD would be the amount necessary to bring the tax on business income down to the higher of the tax measured by capital or the fixed dollar minimum tax. The remaining unused NOL would then be carried forward for use as a NOLD in future periods, if applicable. Modified language, similar effect  A taxpayer’s NOLD in any specific tax year would be the sum of allocated business losses that were incurred in post-reform tax years, less any portion of such losses that were deducted as a NOLD in a prior tax year.  The current separate return limitation year (SRLY) rules used when corporations enter or leave a combined group would continue.  Pre-reform NOLs would be converted into a credit to stabilize their value for financial -411/19/2013 1:16 PM

New York State Tax Reform and Fairness Commission Corporate Tax Reform Proposal accounting purposes. o The credit would be computed by applying the taxpayer’s (or combined group’s) pre-reform business allocation percentage and tax rate to the pre-reform preapportionment New York NOL carryforward. o The credit could be used only in a year when the taxpayer’s tax is measured by business income and could reduce the taxpayer’s tax to the higher of the tax measured by capital or the fixed dollar minimum tax. • Most taxpayers could only use 1/10 (was 1/15th) of the total amount of credit in each year for the next 20 years. • If taxpayers cannot use the entire 1/10 allotment of credit in one year, the unused portion can be carried forward into future years and added to the amount allowed in subsequent years. • Years where credit cannot be used still count in determining the 20 year period. • Qualifying small business taxpayers would not be limited to the amount of credit allowed in a given year. o Where two or more taxpayers and/or groups that existed prior to reform constitute one post-reform group, each taxpayer and/or group would compute its NOL credit for separately; in the first year of reform, the group’s total NOL credit would be the sum of the credits of each of its constituent taxpayers and/or groups. Apportionment of Business Income  Business income would be apportioned based on a single receipts factor using customer sourcing rules. o New sourcing rules for apportioning business income would address income from positions that are marked to market under I.R.C. §475 or §1256, excluding loans secured by real property (“qualified financial instruments,” or QFIs). • Positions on physical commodities that are marked to market under I.R.C. §475 or §1256 would be included in the definition of QFIs. o For income from QFIs, taxpayers would be required to use customer-based sourcing for each income stream that does not constitute exempt income or elect to treat all income from QFIs as taxable business income and apportion 8 percent of the net income (dividend income, interest income, and net gains), not less than zero, from QFIs to New York. • The 8 percent QFI election is irrevocable, must be made on an annual basis, and applies to all members of a combined group with such income. • The 8 percent, based on New York’s approximate contribution to gross domestic product, would be fixed in statute and not subject to periodic revision. o For income from nonqualified financial instruments, taxpayers would be required to use customer-based sourcing. • The election to apportion 8 percent of net income to New York would not apply.  In cases where sourcing rules rely on commercial domicile, taxpayers would use the following hierarchy: -511/19/2013 1:16 PM

New York State Tax Reform and Fairness Commission Corporate Tax Reform Proposal

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o location of the treasury function; o seat of management and control; or o billing address of the customer. New Receipts constituting the primary spread or selling concessions from underwritten securities would no longer be sourced using production credits. Instead, the receipts would be sourced to the customer. Receipts from digital products would generally be sourced to New York if the product is used in the State. o These rules were proposed as a part of the 2009-10 Executive Budget (Part CC of S.60/A.160) but were not enacted. Receipts from services would generally be sourced to New York if the customer is located in the State. Receipts would be sourced based on rules derived from current sourcing rules for: o interest, fees, penalties, service charges, merchant discounts, and credit card fees; o broker/dealer activities, except as described above; o services provided to a RIC; o sales of tangible personal property; o railroad and trucking activity; o air freight forwarding activity; o rentals of real and tangible personal property; o royalties from the use of patents, copyrights, and other intangibles: o transportation of gas through pipes; o aviation services (other than air freight forwarders); and o advertising in newspapers, periodicals, TV, and radio. • Receipts from internet advertising would be sourced to New York if the potential customers are located in the State.

Combined Reporting  The requirements to be combined would be: o unitary business test; and o more than 50 percent stock ownership test. • One corporation directly or indirectly owns another (based on voting power) or corporations are controlled by a common interest or by related parties.  Cross article combination would continue to be prohibited.  New York would adopt a full unitary water’s-edge method for combined reporting. o The substantial intercorporate transactions test would be eliminated.  The New York combined group must include all domestic corporations, alien corporations deemed domestic corporations under the I.R.C (contiguous, stapled, and inverted corporations), and alien corporations with effectively connected (was “federal taxable”) income.  The group could make a commonly owned group election for a period of 7 years. o Under the commonly owned group election, the group must include all non-611/19/2013 1:16 PM

New York State Tax Reform and Fairness Commission Corporate Tax Reform Proposal







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unitary corporations that could be taxed under Article 9-A and that are more than 50 percent directly or indirectly owned by any member of the New York unitary combined group. o The irrevocable election must be made at the time the original return is filed. o In the event that the group makes the commonly owned group election, each corporation in the group is deemed to have agreed to treat the income from the non-unitary businesses as if it were from the group’s unitary business and any corporation conducting a non-unitary business that is acquired during that period that could be taxed under Article 9-A would also be included in the combined group for the remainder of the election period. o As an administrative convenience, the election would automatically be renewed for another 7 years upon the expiration of the original election unless the group affirmatively notifies the Department of its intention not to elect to include non-unitary corporations. The unitary business would be treated as if it were a single entity. Each taxpayer member of the combined group would be liable for the group's whole tax, not just its pro rata share of the combined group's tax. The combined group would designate one taxpayer member to be the agent for administrative purposes (e.g., filings, assessments, payments, and waivers). o The combined group’s whole tax would be the greater of the tax on business income, the tax on business capital, or the fixed dollar minimum tax of the agent, plus the fixed dollar minimum tax for each other taxpayer member of the combined group. o Generally, combined net income would be computed using the federal intercorporate deferral rules. Credits, NOLs, and capital losses could be used by the unitary group, not just the corporation that incurred the credit, NOL, or capital loss and would be applied in computing the combined tax The current captive REIT/RIC combination requirements would be incorporated without the special exclusion for affiliated groups whose members own assets that do not exceed $8 billion in average value. The combined reporting requirements for overcapitalized captive insurance companies would be continued and extended to all captive insurance companies. new Since all corporations would apportion business income using a single receipts factor, all Article 9-A corporations would be eligible to be included in a combined group, including aviation, railroad, and trucking companies.

Alternative Tax Bases  The current Article 9-A fixed dollar minimum tax for C corporations would be amended for taxpayers with New York receipts over $50 million as follows: -711/19/2013 1:16 PM

New York State Tax Reform and Fairness Commission Corporate Tax Reform Proposal New York Receipts Not more than $100,000 $100,001 - $250,000 $250,001 - $500,000 $500,001 - $1,000,000 $1,000,001 - $5,000,000 $5,000,001 - $25,000,000 $25,000,001 - $50,000,000 $50,000,001 - $100,000,000 $100,000,001 - $250,000,000 $250,000,001 - $500,000,000 $500,000,001 - $1,000,000,000 Over $1 billion



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C Corp Fixed Dollar Minimum $25 $75 $175 $500 $1,500 $3,500 $5,000 $10,000 $20,000 $50,000 $100,000 $200,000

The tax on business capital would be based on the current Article 9-A capital base tax. o The tax rate would remain at 0.15 percent. o The tax would be capped at ten million dollars for non-manufacturers. Proposal was $10 million cap for all 9A taxpayers. The alternative tax bases would be modified to include a credit for similar taxes paid to other states (to address possible constitutional challenges to these taxes). The Article 9-A minimum taxable income base, the Article 32 alternative entire net income base, the Article 32 taxable assets base, and the Article 32 fixed dollar minimum tax would be eliminated. The tax liability under the fixed dollar minimum could not be reduced by most credits.

MTA Surcharge  The MTA base and apportionment rules would conform to the State base and apportionment rules as applied to the MTA region while maintaining revenue neutrality for the MTA. Other Business Taxes and Fees  The following taxes and fees would be repealed: o organization tax and tax on changes of capital under §180 of the Tax Law; o license fees on foreign corporations imposed by §181.1 of the Tax Law; and o tax on subsidiary capital.  The annual maintenance fee imposed on foreign corporations would be reduced to $25.  To prevent the overcapitalization of insurance corporations under the new regime, the Commissioner would be provided with discretionary powers to make a “deemed distribution” of non-premium income from overcapitalized Article 33 corporations to the affiliated Article 9-A corporations to properly reflect the activities of the unitary business. New York State/New York City Conformity  Continue to work with New York City to conform the City and State tax structures. Effective Date -811/19/2013 1:16 PM

New York State Tax Reform and Fairness Commission Corporate Tax Reform Proposal 

The earliest the proposal could be effective would be for tax years beginning on or after January 1, 2015, although the 2016 tax year might be more reasonable for both taxpayers and the Department

ENI rate reduction was deleted

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