A New Jersey bill would make changes to the state’s new combined reporting rules and reduce the amount of global intangible low-taxed income that taxpayers must report for state tax purposes.
A. 5062, introduced February 14 by Democratic Assembly members Roy Freiman, Vincent Mazzeo, and John Burzichelli, would make several business-friendly changes to the corporation business tax, including requiring corporate taxpayers to report only 90 percent of the GILTI reported on their federal returns in calculating their net income for New Jersey tax purposes. Current law requires taxpayers to report 100 percent of GILTI reported on a federal return.
The bill was referred to the Assembly Commerce and Economic Development Committee.
Noting the business community’s negative reaction to the Division of Taxation’s December 2018 guidance (TB-85R) on apportioning GILTI, Matthew Setzer of Reed Smith LLP told Tax Notes that the proposed change “would be a taxpayer-friendly addition to the law.”
Freiman told Tax Notes February 21 that he believes the state overreached in its taxation of GILTI and on the other items addressed in his bill and that he is “trying to bring the pendulum a little closer back to center.”
“There are various different groups in the business community that in totality are saying, ‘Look we want to work with you and we believe in New Jersey, but some of these were just overreaching,’ and I concur,” Freiman said. “New Jersey right now has the highest per capita investment from foreign entities," he added, "and foreign companies come to New Jersey because we have such a great talent base . . . . Yet if you’re going to have an unfavorable tax treatment for companies, it just doesn’t make sense.”
A. 5062 also would lower the minimum tax imposed on members of combined groups from $2,000 to $1,000 for combined reporting under the corporation business tax. New Jersey enacted mandatory combined reporting last year under A. 4202 and A. 4495 for privilege periods ending on or after July 31, 2019.
The tax division in January issued TB-86 to clarify that the minimum tax does not apply to members of a combined group without nexus in New Jersey. A. 5062, however, wouldn't codify the changes under the bulletin and instead contains language indicating the tax would apply to each member of a combined group regardless of nexus, Setzer said.
Under the bill, combined groups that make a water’s-edge election would not have to include income derived from a corporation organized outside the United States if it is subject to a federal income tax treaty.
A. 5062 would also remove a requirement “that the related member be subject to tax in the foreign nation on such amounts in order to qualify for the deduction or avoid the addback provision," Setzer said. Under prior law there was no addback and all the taxpayer had to prove was that the interest or royalty was directly or indirectly paid by a member in a foreign nation, he explained.
Setzer said removing the requirement seems to be somewhat of a reaction to Infosys Ltd. of India Inc. v. Director, Division of Taxation, in which the Tax Court of New Jersey ruled in March 2018 that the corporation business tax law does not require foreign-source income to be added back if it is exempt from federal taxes through an international treaty.
"This proposal would insulate and protect the treaty income from New Jersey tax. What's not clear is if you've got a foreign corporation that is not part of a water's-edge group. . . . Are they subject to tax if they have nexus with New Jersey?" asked David Gutowski, also of Reed Smith.
Sheila Reynertson of New Jersey Policy Perspective, a group that has advocated for combined reporting, said in a statement that New Jersey enacted the combined reporting law to block tax avoidance strategies commonly used by large international companies. “Legislators looking for ways to make New Jersey more business-friendly should focus on the small business sector — the real meat and potatoes of state economic growth,” she said.
The bill would also broaden the ability of members of a combined group to share net operating loss carryovers. Under current law, if a combined group’s entire net income for a privilege period culminates in a NOL, it may be carried over by a member of the group, which can be deducted from entire net income, according to the bill statement. A. 5062 would permit members of a combined group to carry over a NOL earned in any privilege period regardless of whether the combined group’s entire net income resulted in a NOL. The NOL carryover could be shared with other members of the combined group that were members in the privilege period in which the NOL was acquired.
A fiscal note was not available for the bill as of February 21.