The Nebraska Department of Revenue recently issued two general information letters (GILs) clarifying the state’s income tax treatment of federally reported global intangible low-taxed income (GILTI) and foreign-derived intangible income (FDII),1 and revising the Department’s prior treatment of federally reported repatriated income under Internal Revenue Code (IRC) Sec. 965.2 The Department’s guidance confirms that the net GILTI inclusion, the FDII deduction and the net repatriated income inclusion are reflected in the Nebraska income tax base. However, the guidance indicates that the Nebraska foreign dividends deduction does not apply to GILTI or repatriated income includible in the tax base. The Department’s guidance also addresses the Nebraska sales factor apportionment treatment of GILTI and repatriated income, and provides some limited guidance for non-corporate entities and individuals reporting this type of income.
GILTI and FDII
For federal income tax purposes, the Tax Cuts and Jobs Act of 2017 (TCJA) created IRC Secs. 951A and 250.3 For tax years beginning after Dec. 31, 2017, IRC Sec. 951A requires taxpayers who are U.S. shareholders of a controlled foreign corporation (CFC) to include the taxpayer’s GILTI in gross income.4 IRC Sec. 250(a) allows domestic corporations to claim a deduction against a portion of GILTI, and a deduction for a portion of a domestic corporation’s FDII.5
For purposes of calculating Nebraska income tax, based on the state’s current conformity to the IRC,6 federal taxable income, as adjusted, for corporations and federal adjusted gross income (AGI) for individuals are the Nebraska tax bases. Because GILTI is included in federal taxable income, as adjusted, and federal AGI, GILTI is included in Nebraska taxable income and must be reported on the appropriate Nebraska return.
For domestic corporations, the IRC Sec. 250(a) GILTI and FDII deductions are included in federal taxable income and also are included on the Nebraska return. Nebraska allows a deduction from federal taxable income and federal AGI for any dividends or deemed dividends treated as foreign dividends under federal law.7 In its guidance, however, the Department determined that GILTI is not a foreign dividend and is not included in Subpart F income. Therefore, the Nebraska foreign dividends deduction does not apply to GILTI.
Multistate corporate taxpayers subject to the Nebraska corporation income tax are required to apportion income to Nebraska.8 The denominator of the sales factor includes the taxpayer’s share of GILTI reported on the federal return.9 The amount included in the numerator is determined under Nebraska law.10 The Department determined that because GILTI is generated as a result of an ownership interest in a CFC, this income is characterized as investment income under Nebraska law and is sourced to the location where the taxpayer’s investment, management and record keeping activities occur. These activities are presumed to occur at the taxpayer’s commercial domicile. Accordingly, if the taxpayer has a Nebraska commercial domicile, the guidance provides that the taxpayer’s share of GILTI must be included in the numerator of its sales factor unless the taxpayer rebuts the presumption that the relevant activities occur at its commercial domicile. If the taxpayer has a commercial domicile outside Nebraska, GILTI should not be included in the numerator of the sales factor unless the taxpayer conducts the relevant activities in Nebraska.
The guidance does not provide much specific guidance for individuals or non-corporate entities. However, the guidance clarifies that any IRC Sec. 951A income included in a taxpayer’s federal return as federal AGI for individuals must be included in the Nebraska return. Also, the guidance indicates that the deduction from federal AGI for any dividends or deemed dividends treated as foreign dividends under federal law does not apply to GILTI.
Under IRC Sec. 965, the TCJA generally required taxpayers to include in the federal income tax base for their 2017 tax year an amount based on the accumulated post-1986 deferred foreign income of CFCs owned either directly or indirectly through other entities (IRC Sec. 965(a) inclusion). IRC Sec. 965(c) allows a deduction intended to reduce the applicable tax rate on the IRC Sec. 965(a) inclusion amount. Taxpayers may elect to pay the federal income tax liability over an eight-year period. The revised guidance explains that Nebraska conforms to IRC Sec. 965, except for the elections to pay the tax in installments or to defer the tax.
In previous guidance issued in 2018, the Department determined that the net IRC Sec. 965 income amount is not a dividend or deemed dividend subject to the foreign dividends deduction under Nebraska law.11 While the Department previously considered taxpayer positions for taking the foreign dividends deduction for the net IRC Sec. 965 income if supported by legal analysis, the new guidance announces that any such claimed deductions will be disallowed outright.
The revised guidance also addresses the apportionment of IRC Sec. 965 income for corporate taxpayers. Concluding that the recognition of deferred foreign income of CFCs in a single year is a “unique and non-recurring factual situation” warranting special apportionment, the Department determined that excluding such income from a corporate taxpayer’s sales factor, or including such income in the sales factor numerator, would produce “incongruous results” relative to other taxpayers. Accordingly, corporate taxpayers are required to include the gross IRC Sec. 965(a) inclusion amount in their sales factor denominator and exclude this amount from their sales factor numerator for the last taxable year beginning before Jan. 1, 2018.12
The guidance explains the reporting of IRC Sec. 965(a) inclusion income and the IRC Sec. 965(c) deduction on Nebraska returns. Any IRC Sec. 965(a) income included in the taxpayer’s federal return must also be included in its Nebraska return. Also, any IRC Sec. 965(c) deduction allowed on the taxpayer’s federal return may also be deducted on its Nebraska return.13 Individuals should not modify federal AGI, the starting point for Nebraska taxation, because this amount includes the inclusion and deduction amounts.
Other than the detailed reporting information, the guidance does not provide specific information for individuals or non-corporate entities. However, the guidance indicates that the deduction from federal AGI for any dividends or deemed dividends treated as foreign dividends under federal law does not apply to the net IRC Sec. 965 inclusion income.
The Department instructs taxpayers to file an amended 2017 Nebraska income tax return if they improperly reported IRC Sec. 965(a) income or improperly computed their sales factor. Recognizing its change in position, the Department has stated its intent to waive or abate penalties or interest related to the reporting of IRC Sec. 965(a) income for taxpayers who filed an amended return by the end of 2019.14
The guidance on the treatment of GILTI and FDII and repatriated income may be informative, but taxpayers should take into account the level of authority provided by GILs before deciding how to proceed on their tax return filings. Guidance in GILs “is advisory in nature but is binding on the [Department] until amended . . . [and] may change with updated information or added examples.” As discussed above, the guidance on repatriated income was substantially changed approximately nine months after it originally was released. Therefore, there is no guarantee that the Department’s guidance in this area is fully settled, and raises the specter of taxpayer challenges. That is problematic for taxpayers that had no guidance on the treatment of repatriation, GILTI or FDII until well after the extended due date for the returns on which these amounts were supposed to be reflected, and still may not be entirely certain of how to address these issues on returns. Further, the guidance is primarily directed at corporations and does not provide much specific guidance for individuals and non-corporate entities. Guidance that provides additional detail concerning the treatment of GILTI beyond the corporate context would be useful.
The similarities and differences in the approaches taken in the GILs deserve some consideration. Both GILs provide consistent treatment by incorporating the net GILTI and repatriated income amounts in the tax base. Also, both GILs provide that the foreign dividends deduction does not apply to GILTI or repatriated income, which could cause concern for taxpayers that may have believed that income derived from international sources should never remain in the Nebraska income tax base. On the other hand, taxpayers conducting activities related to GILTI or having commercial domicile in Nebraska are likely to notice the stark difference between apportioning repatriated income (which may dilute the Nebraska sales factor) and GILTI (which may substantially increase the Nebraska sales factor).
Despite the advisory nature of the Department’s guidance, taxpayers should still consider whether to file amended returns. Specifically, taxpayers filing Nebraska income tax returns should evaluate their 2018 returns to determine if they properly apportioned GILTI and whether amended returns should be filed to reflect the Department’s recent guidance. Also, taxpayers filing Nebraska income tax returns should reconsider their 2017 tax year filing positions – including how the net IRC Sec. 965 income was reported, whether a foreign dividends deduction was claimed, and representation in the Nebraska sales factor – to determine whether amended returns should be filed to reflect the Department’s revised position. In both situations, taxpayers with potential exposure also should consider whether a reserve may be required under ASC 740-10.
1 General Information Letter 24-19-3, Nebraska Department of Revenue, Dec. 10, 2019.
2 General Information Letter 24-19-1, Nebraska Department of Revenue, Sept. 13, 2019. This guidance supersedes General Information Letter 24-18-1, Nebraska Department of Revenue, Dec. 21, 2018.
3 P.L. 115-97.
4 In general, GILTI is defined as the excess of a U.S. shareholder’s aggregated net “tested income” from CFCs over a routine return on certain qualified tangible assets.
5 FDII is broadly defined to include income received from the sale of property for foreign use or services rendered to persons outside the United States.
6 See NEB. REV. STAT. § 77-2714.
7 NEB. REV. STAT. § 77-2716(5).
8 The income is apportioned to Nebraska based on the Nebraska receipts as compared to all receipts as provided by NEB. REV. STAT. §§ 77-2734.05 - 77-2734.15.
9 Based on such guidance, it appears that while the net GILTI amount is used for purposes of the tax base, the taxpayer uses the gross GILTI amount (without the IRC Sec. 250(a) deduction) for purposes of the sales factor.
10 See NEB. REV. STAT. § 77-2734.14(3)(d).
11 NEB. REV. STAT. § 77-2716(5).
12 The guidance does not address situations where IRC Sec. 965 inclusion is reported for taxable years beginning after January 1, 2018, which may occur in certain circumstances when the foreign corporation and its domestic parent have different tax years. Taxpayers facing this issue should consider the intent of the guidance and potential disclosure requirements to the extent that the return is filed reflecting the apportionment treatment as provided in the GIL.
13 Taxpayers must attach a copy of the IRC Sec. 965 Transition Tax Statement to the Nebraska return when filed. The guidance states that for C corporations, inclusion income is reported on Line 8 and the deduction on Line 18, Nebraska Schedule A, Form 1120N. For S corporations, inclusion income is reported on Line 6 and the deduction on Line 16, Nebraska Schedule A, Form 1120-SN. For partnerships, inclusion income is reported on Line 7 and the deduction on Line 17, Nebraska Schedule A, Form 1065N.
14 In contrast, the GILTI and FDII guidance neither addresses amended returns nor provides for the waiver or abatement of penalties or interest.
Jamie C. Yesnowitz
Jamie Yesnowitz, principal serving as the State and Local Tax (SALT) leader within Grant Thornton's Washington National Tax Office, is a national technical resource for Grant Thornton's SALT practice. He has 22 years of broad-based SALT consulting experience at the national and practice office levels in large public accounting firms.
Washington DC, Washington DC
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