New York City’s Department of Finance has outlined the treatment of global intangible low-taxed income, foreign-derived intangible income, and repatriation income for the purpose of several city corporate taxes.
In a finance memorandum dated September 1, the department focused on the business corporation tax, explaining the impact of Tax Cuts and Jobs Act provisions on GILTI, FDII, and IRC section 965 income, as well as related changes from New York state’s 2018–2019 budget.
A separate September 2 finance memorandum offered instructions for reporting such foreign-source income on returns and attachments for the general corporation tax (GCT), unincorporated business tax (UBT), and banking corporation tax (BTX).
“The impact of the TCJA is much more complex in New York City than in most other jurisdictions because of the unincorporated business tax, recognition of S corporations, and that it didn’t follow [New York state] in exempting 95 percent of GILTI,” Leah Robinson with Mayer Brown LLP told Tax Notes in a September 6 email. “The recent guidance will be a huge help to taxpayers and preparers. It’s fantastic to see the Department of Finance providing such detailed guidance to taxpayers.”
Under section 951A, each U.S. shareholder of a controlled foreign corporation is subject to tax on GILTI, with section 250 allowing a 50 percent deduction.
New York City intentionally decoupled from the state’s recently enacted law exempting 95 percent of GILTI from the state corporate franchise tax base, choosing to conform to the federal 50 percent deduction.
“NYC Department of Finance has been trying to figure out what it wants to do about the TCJA’s overhaul on the taxation of foreign-derived income, particularly with respect to GILTI, for well over a year,” Elizabeth Pascal with Hodgson Russ LLP told Tax Notes in a September 6 email. “In some respects, it’s not surprising that the city took until now to issue guidance, given the state’s recent legislative change to exempt 95 percent of GILTI income.”
“But in light of the state’s change, and the overall trend among states to exclude most or all of GILTI income, NYC decided to go in a different direction, keeping the GILTI amount as part of the tax base, but permitting the net amount (after the deduction) for all NYC taxpayer-types,” she added.
Different Treatment
Per the September 2 memorandum regarding the GCT, UBT, and BTX, taxpayers subject to the three respective city taxes must incorporate GILTI into city tax computations and “classify GILTI as business income, investment income, or income from subsidiary capital, to the extent applicable.” The guidance further provides that “for city tax purposes, if the stock that generates GILTI is business capital the income is treated as business income, if the stock that generates GILTI is investment capital the income is treated as investment income, and if the stock that generates GILTI is subsidiary capital the income is treated as income from subsidiary capital.”
However, Norman Lobins of Deloitte Tax LLP explained that state tax return preparers must go beyond simply inquiring about the amount of GILTI and must conduct a “qualitative analysis around the source of the GILTI income.”
“The memo shows the complications that taxpayers must deal with around the new (square peg) federal law and the old/existing law (round hole),” Lobins told Tax Notes in a September 6 email. “In general, federal tax reform has made the states more different and the city just adds to the disparaging treatment of items of tax reform.”
The September 2 memorandum notes that S corporations and their shareholders do not get the GILTI deduction at the federal level. However, subject to select limitations, “under the City’s GCT and BTX entire net income is the same as the entire taxable income which a taxpayer would have been required to report to the United States Treasury Department if it had not made an election under Subchapter S of Chapter One of the Internal Revenue Code.”
Neither the GCT regime nor the BTX regime excludes the GILTI deduction from city tax computations, according to the memorandum, which provides that GCT and BTX taxpayers “will be permitted to calculate entire net income by taking the GILTI deduction into account.”
“The allowance of the [section] 250 deduction for S corporations (which cannot be S for city purposes) is well reasoned, and I think S corp taxpayers will appreciate the allowance,” Lobins said.
Allocation Guidance
Citing allocation guidance in the September 2 memorandum, Lobins explained that New York City “avoided some of the controversy that New Jersey had with their initial GILTI apportionment stance by not asserting numerator representation.”
The memorandum provides that for GCT purposes, if GILTI-generating stock is business capital, “the net GILTI amount (GILTI from business capital minus corresponding GILTI deduction) must be included in the calculation of the Business Allocation Percentage.” Specifically, this net GILTI income must be incorporated in the business allocation percentage’s denominator, but not the numerator, according to the memorandum.
“Nonetheless, one can still make an observation that domestic income is apportioned based on gross receipts while this component of foreign income is being apportioned based on net income and after a special (the [section] 250) deduction,” Lobins said. “Such a distinction could lead to a discrimination (against foreign commerce) claim.”