A federal interpretation of global intangible low-taxed income could weaken New Jersey’s position on GILTI and open the state to a legal challenge, according to a tax practitioner.
A PowerPoint presentation published June 6 by the Joint Committee on Taxation provides an overview of taxation of GILTI and foreign-derived intangible income under IRC sections 250 and 951A.
According to the presentation, the federal Tax Cuts and Jobs Act “retained many of the definitions and concepts of prior law with respect to the taxation of foreign business income but introduced rules that effectively ended deferral of income earned through foreign corporations.”
Norman Lobins of Deloitte Tax LLP in Parsippany, New Jersey, told Tax Notes June 7 that under New Jersey Technical Bulletin 85(R), the state Division of Taxation seemed to take the position that GILTI is displaced income from U.S. operations — which is inconsistent with the JCT’s interpretation.
“[The JCT] clearly calls it income earned through foreign [corporations]. They wouldn’t have used that language if they thought there was U.S. income that was inappropriately shifted overseas,” Lobins said. “They could have used different language . . . and they chose not to.”
Lobins said New Jersey’s proposed method for GILTI effectively apportions it and taxes it like it is U.S. income. The state’s proposed calculation for allocating state tax on net GILTI would be New Jersey’s GDP over the total U.S. GDP of all the states in which the company has economic nexus. If GILTI is deemed to be foreign income, then nothing should be in the numerator, Lobins said.
The JCT interpretation also “opens the door for states that are not giving [dividends received deductions] on this income because [the presentation] seems to support that it’s a dividend much like the subpart F,” he said.
The presentation stated that “a GILTI inclusion is generally treated as a subpart F inclusion.” Lobins said this could weaken the position of states that aren’t providing a dividends received deduction for GILTI but did so under subpart F.
Steven Wlodychak of EY agreed the JCT presentation could diminish New Jersey’s position on GILTI.
“I think New Jersey’s approach to GILTI is just plain wrong,” Wlodychak said. “Not only did Congress say it ought to be treated as Subpart F income . . . I think that the GILTI provisions applied not only by New Jersey, but by any state, constitute a discriminatory state tax of foreign corporations which has long been deemed unconstitutional under the dormant commerce clause.”
Meanwhile, Darien Shanske, with the University of California, Davis School of Law, who was among those New Jersey consulted to craft its approach to GILTI, has argued that New Jersey's position is constitutional.
Shanske told Tax Notes June 7 it is true that the JCT produces "hugely important reports, but reading so much into a [PowerPoint] meant to explain the act is unjustified."
Shanske pointed to an April 2018 Congressional Budget Office report, which he said clearly classifies GILTI and BEAT as measures meant to reduce profit shifting. "Of course, GILTI builds on existing concepts, but it is manifestly a provision meant to counter base erosion; that is the whole point of the provision’s name," he said.