The New Jersey Division of Taxation is open to modifying its special method for apportioning global intangible low-taxed income and foreign derived intangible income, according to division Director John Ficara.
“As I’m sure most of you know, we’ve got a somewhat novel approach,” Ficara said July 25 at the New York University State and Local Tax Forum.
New Jersey conforms to the IRC section 951A GILTI inclusion, as well as the section 250 FDII inclusion and related deductions. Under the state’s unique separate special accounting method — laid out in a December 2018 technical bulletin — the equation for allocating state corporate business tax on net GILTI and net FDII is New Jersey’s GDP over the total U.S. GDP of all the states in which the company has economic nexus.
There’s been quite a bit of discussion about the special apportionment method already, Ficara said. The division continues to meet with taxpayer groups and practitioners to take comments on the issue,“ and that may very well result in some modification to those rules. But that’s still under consideration,” he said.
Ficara raised the possibility of modifications a second time when he said temporary regulations on the special apportionment method are in final review. Even if the forthcoming temporary regulations wind up mirroring what is in the technical bulletin, “that doesn’t mean we aren’t still open to and expect to be receiving comments and discussion, which may well result in a revision” of the approach, he said.
Ficara said that the New Jersey Administrative Procedure Act and the state’s corporation business tax statute give the director authority to issue temporary regulations that would be in effect for a 180-day period. At the end of that period, the division will issue regulations in final form with an accompanying regular comment period. Throughout that time, the division will be receiving and considering comments, “and we’ll be considering how we should be at least thinking about further revising the regulations,” Ficara said.
Separately, Ficara said he’s not aware of any legislative or policy plans to change New Jersey’s statutory inclusion of 50 percent of GILTI in the state’s corporate business tax base.
Alysse McLoughlin of McDermott Will & Emery said that the focus of discussion to date has been on GILTI, but that companies need to examine the special apportionment method’s effect on FDII. The New Jersey Legislature provided the section 250 deduction for FDII to provide a benefit to taxpayers — but the way the special apportionment method is working, one of McLoughlin's clients with this category of income wound up with a tax increase.
“So something that was supposed to be a benefit by the Legislature ends up hurting the company,” McLoughlin said. “I think it was a surprise.”
Ficara said that’s a good point and that the division is just starting to hear from some taxpayers “who have indicated that it’s a pretty significant impact.”
Ficara backed up by saying the premise behind the division’s plan for how to apportion GILTI and FDII was to follow the federal government’s carrot-stick integration of the two components rather than to consider them piecemeal, and then to look at the net result. The drafters of the Tax Cuts and Jobs Act sought to provide an incentive to companies that derive income from intangibles owned or used inside the United States with a lower effective federal tax rate, while deterring the ownership and use of intangibles outside the United States through the GILTI inclusion.
The special apportionment rules thus consider GILTI and FDII together, including the relevant section 250 deductions for both, Ficara said. “That’s wrapped up into one calculation subject to this special apportionment factor.”
But companies need to run the numbers to see what the impact would have been if FDII were part of the regular return and apportionment factor, “and what happens now if it’s pulled out and the calculations are done under this special method in New Jersey,” Ficara said.
‘First Line of Relief’
One day earlier, Audrey Tyndall-Hoyle, supervisor of the Division of Taxation’s nexus group, said “the first line of apportionment relief” New Jersey provided to taxpayers was to conform to the IRC section 250 deductions for GILTI and FDII.
This is important, she said, because New Jersey’s starting point for calculating state corporate business tax is line 28 of the federal Form 1120 for corporations. This would have meant that all of GILTI would have been included in New Jersey’s corporate tax base had the state not also decided to affirmatively adopt the 50 percent deduction for GILTI under section 250, which is part of line 30, she said. Tyndall-Hoyle added that New Jersey allows taxpayers to use their net operating losses and tax credits on top of the section 250 deduction, though no state has the equivalent of the federal foreign tax credit.
She went on to describe how, when the state was first addressing the TCJA, the tax division created a special allocation formula to provide factor relief for IRC section 965 repatriation income purposes; New Jersey provides a 95 percent dividend exclusion for repatriation income. That special apportionment formula for section 965 repatriation income is the lesser of the company’s average allocation factor for 2014, 2015, and 2016, or 3.5 percent of the tax on dividends and deemed dividends received between January 1, 2017, and January 1, 2019.
Tyndall-Hoyle said economists at that time said GDP was a fair way of determining the allocation formula for repatriation income purposes. The division also decided to use a separate accounting method for GILTI and FDII, in which the numerator was New Jersey GDP and the denominator was the business throughout the United States.
“People weren’t really addressing GILTI at that point, so we didn’t get too many calls,” Tyndall-Hoyle said. “Now, it’s time to do the tax return and they’ve noticed that there are issues with that allocation factor, especially if you have a lot of overseas activities.”
Any taxpayer that believes the apportionment method is distortive can request relief, Tyndall-Hoyle said. “It’s something that we’re addressing as we go forward,” she said.
Leah Robinson of Mayer Brown wondered whether a taxpayer that seeks factor relief and enters into an agreement with the division will later be able to seek a refund if another taxpayer takes the issue to court and the method is declared unconstitutional or otherwise invalid. She said that when New Jersey had its throwout rule, early resolution agreements she was involved in had a carveout so that if a court later deemed throwout to be unconstitutional, those companies could go back and seek a refund.
“But over time, it became harder and harder to get the division to agree to that language,” Robinson said. Later agreements she was involved with were instead structured so that the taxpayer either accepted the terms and had no protest rights on the issue, or declined to accept the agreement, she said.
Tyndall-Hoyle declined to comment generally, though later she said each agreement is confidential and time-limited. “No agreements go out forever,” she said, adding that with each case in which a taxpayer is seeking relief, the division works with the taxpayer on the facts and circumstances of that case.
The December 2018 technical bulletin on the special apportionment method explained that assuming a company has economic nexus in all 50 states, the current New Jersey GDP is 3.1 percent; when that figure is applied to a corporation’s net GILTI, the formula would result in the state’s taxation of about 1.6 percent of the company’s gross GILTI.
Robinson asked whether the 3.1 percent figure is the lowest apportionment a company could have for GILTI without seeking discretionary relief from the division. Tyndall-Hoyle indicated that is correct.
Robinson then clarified: The special apportionment formula is New Jersey GDP over U.S. GDP — not New Jersey GDP over worldwide GDP, “even though the GILTI income arguably is a worldwide thing?”
“That could be possibly an argument for [discretionary] relief,” Tyndall-Hoyle said in response.
Robinson pressed by saying there’s no question taxpayers are going to mount a legal challenge to New Jersey’s special apportionment method for GILTI. Taxpayers that seek a formal agreement that locks them into an approach and prevents them from seeking a refund later are worse off than a company that exercises reasonable self-help, discloses it on a return, and then deals with it on audit, Robinson said. She added that in her mind, “what’s reasonable should be the same” whether the taxpayer is asking prospectively for relief or is addressing it on audit. Without any guarantee of being able to seek a refund, a taxpayer is potentially harmed by seeking discretionary relief, which Robinson said is ironic.
Tyndall-Hoyle agreed that the scenario is ironic.
“Unfortunately, I can’t say what’s going to happen,” Tyndall-Hoyle said. However, she said that during an audit, taxpayers or the agency can still contact regulatory services for a letter ruling or position on the matter.