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The New Jersey Division of Taxation (Division) has struggled to provide clear and straightforward guidance regarding the New Jersey Corporate Business Tax (CBT) treatment of Global Intangible Low-Taxed Income (GILTI) and Foreign Derived Intangible Income (FDII) as enacted under the federal Tax Cuts and Jobs Act (TCJA). Initially, the Division released guidance introducing a special accounting method of allocating GILTI- and FDII-related revenue using a combination of comparative gross domestic product (GDP) measures and separate allocation.1
In response to taxpayer and practitioner concerns, the Division announced that it would be revising its GILTI and FDII allocation methodology.
On Aug. 22, 2019, the Division issued Technical Bulletin TB-92 (TB-92), in which it announced a substantially revised policy regarding the allocation of GILTI and FDII for purposes of the CBT.2
In the Bulletin, the Division announced that both GILTI and FDII are potentially includable in the numerator of the sales factor, differing from a statement released days earlier indicating the Division’s intention to issue guidance reflecting a sales factor dilution method. Most recently, the Division released further guidance clarifying that most taxpayers would be able to apply a sales factor dilution approach for GILTI and FDII, and that TB-92 would be further updated.3
This Alert addresses the Division’s conflicting guidance issued to date on the subject, and explains the resulting ambiguity for taxpayers.
Enacted in December 2017, the TCJA created a new category of gross income for federal income tax purposes known as GILTI. Beginning in 2018, U.S. shareholders are required to include as income the GILTI of controlled foreign corporations (CFCs), with a corresponding 50% deduction for the GILTI inclusion amount.4
GILTI is defined as the excess net CFC “tested income” over a routine return on certain qualified intangible assets.5
The calculation is performed on a federal consolidated basis, allowing loss entities to offset other entities with tested income. In addition, Internal Revenue Code (IRC) Section 250 identified a separate category of gross income known as FDII,6
along with a corresponding deduction of 37.5% of the sum of a taxpayer’s FDII plus 50% of its GILTI, in order to reduce the effective tax rate for the GILTI and FDII amounts.7
Neither GILTI nor FDII are treated as dividends for federal tax purposes.
Under New Jersey tax law, GILTI and FDII are included in entire net income (ENI).8
Therefore, GILTI and FDII are not treated as dividends or deemed dividend income for CBT purposes. Instead, they are considered separate categories of income and are not treated as distributions from earnings and profits.9
The Section 250 deductions are allowed only to taxpayers that included the respective GILTI and FDII income on their federal and New Jersey CBT returns, and that actually took the deductions for federal tax purposes. If taxpayers were not allowed the Section 250(a) deduction for federal purposes, they would not be allowed the deduction for CBT purposes.10
Initial New Jersey GILTI/FDII allocation policy
In December 2018, the Division set out its initial policy regarding the allocation of GILTI and FDII in Technical Bulletin TB-85.11
In this bulletin, the Division stated that GILTI would be treated as regular business income of a CBT taxpayer and not as a deemed dividend eligible for a dividends received deduction. On Dec. 24, 2018, the Division issued revised guidance under Technical Bulletin TB-85(R) (TB-85(R)), in which it introduced a unique approach for allocating GILTI- and FDII-related items. The Division relied on a separate special accounting method, under which the portion of GILTI allocated to New Jersey would be the ratio of New Jersey GDP over the total GDP of every U.S. state in which the taxpayer has economic nexus for income tax purposes.
New Jersey’s unique GDP-based allocation methodology differed from the majority of other states requiring taxpayers to expend significant effort in determining how to represent GILTI and FDII inclusions in the sales factor. In response to this policy, numerous taxpayers filed requests for discretionary alternative apportionment relief (Section 8 Relief).12
In their Section 8 Relief requests, taxpayers also questioned whether the Division’s method appropriately reflected the allocation of GILTI- and FDII-related income to the state. In response to these requests, representatives from the New Jersey Treasurer’s office, the Governor’s office and the Division met with tax practitioners and business groups throughout the summer and sought feedback regarding how to develop a more reasonable GILTI and FDII allocation methodology.
Technical bulletin TB-92 and subsequent guidance
In response to taxpayer concerns, the Division on Aug. 20, 2019, posted a three-sentence notice on its website indicating its intent to revise the allocation methodology of GILTI and FDII as represented in TB-85(R).13
The notice stated that taxpayers would report GILTI and FDII and the corresponding Section 250(a) deductions on Schedule A of their Form CBT-100 or BFC-1. In order to prevent distortion to the allocation factor and arrive at a reasonable level of New Jersey tax, the Division indicated that the taxpayers’ Schedules J should include the net amount of GILTI in the denominator of the sales factor and the net FDII income amounts in both the numerator (if applicable) and denominator.14
This announcement signified a significant departure from TB-85(R) in that allocated GILTI and FDII would not be reported as separately allocated items of income, and GDP charts would not be utilized in determining amounts includible in the sales factor.
On Aug. 22, 2019, the Division issued TB-92, officially revising its previously-issued guidance on the allocation of GILTI and FDII, and replacing TB-85(R). Significantly, TB-92 provided that “the net amount of GILTI and the net FDII amounts are included in the numerator (if applicable) and the denominator” of the taxpayer’s sales factor. The Division indicated that this method would help prevent distortion to the allocation factor and arrive at a “reasonable and equitable determination of New Jersey tax.” However, this position contrasted the notice that had been posted on the Division’s website two days earlier, in which the Division indicated that upcoming guidance would reflect a sales factor dilution method.
In support of its revised position, the Division referred to GILTI and FDII as “a hybrid of different income items” sourced under the category of “all other business receipts” pursuant to New Jersey law and regulations.15
Likely referring to CBT sourcing regulations, the Division concluded that GILTI and FDII are integrated in the business of the taxpayer. Despite this statement, the revised bulletin provides that taxpayers are prohibited from looking through to underlying sales of the CFC that generated the GILTI when determining how to source the new GILTI receipts, except in certain combined reporting situations where the CFC is included in the combined group.
Sourcing of GILTI and FDII for combined group members
TB-92 provides specific instructions for sourcing GILTI and FDII under the combined reporting rules applicable for tax periods ending on or after July 31, 2019. To the extent a combined group does not include CFCs, the net GILTI and net FDII amounts are included in the allocation factor. In contrast, if a worldwide or water’s-edge combined group includes CFCs that generated GILTI for federal purposes, such group may look through to the underlying CFC receipts from which GILTI income is derived for CBT allocation purposes. Statutorily, the CFC’s receipts are included in the denominator of the combined group allocation factor only when the CFCs are included in the same New Jersey combined return as members required to include GILTI in income for federal purposes.16
Since GILTI is excluded from the combined group’s ENI, the Bulletin explains, the GILTI must be excluded from the allocation factor. This result prevents the double taxation and double counting of income and receipts derived from the same source since the CFC income is already included in the combined group’s ENI. The Division announced that another schedule (Schedule A-8) is currently in development to prevent the double counting of such income.
TB-92 also addresses instances where a portion of a combined group member’s business may be independent of the overall unitary business activity of the combined group. If the income from non-unitary business operations results in GILTI or FDII, such income must be reported on the group member’s Schedule X to the Form CBT-100. This saves taxpayers the trouble of filing a separate return to report the separate portion of the group member’s business operations.
Amended return filing instructions
TB-92 provides detailed filing instructions for taxpayers in light of the Division’s revised guidance. Taxpayers filing a Form CBT-100 with a 2018 tax year or 2019 short period ending before July 31, 2019, are instructed not to prepare Schedule A-6, since GILTI and FDII net income are no longer separately allocated. The Bulletin provides specific adjustments that may need to be made to the CBT-100 and supporting schedules that would have otherwise been represented on Schedule A-6.
The Division recognized that taxpayers having already filed a Form CBT-100, CBT-100-R or BFC-1 for the 2018 tax year ending before July 31, 2019, may need to file amended returns to reflect the changes announced in TB-92. In this case, taxpayers are instructed to write “GILTI Amended Return” at the top of their amended returns. The Bulletin ensured that any resulting overpayments may be either credited toward future payments or refunded. Finally, the Division indicated that it is in the process of drafting regulations addressing the topics covered in the Bulletin.
Division issues clarifying statement to TB-92
Most recently on Aug. 26, 2019, the Division posted a subsequent statement on its website clarifying the guidance contained in TB-92. The statement provided that the intent of TB-92 may have been misrepresented regarding the inclusion of GILTI- and FDII-related revenue in the sales factor, and that the Bulletin would be updated accordingly. In response to any confusion surrounding the CBT treatment of FDII, the Division clarified that: “FDII continue[s] to be classified, sourced and apportioned as appropriate under existing NJ statutes and regulations,” despite being identified as a new category of federal income. The Division further explained that while it was unaware of any specific situation that would require GILTI- or FDII-related amounts to be included in the numerator of the sales factor, it could not confirm that this would always be the case. The Division encouraged feedback from practitioners as it continues to draft final regulations.
New Jersey’s evolving position on the appropriate methodology for the sourcing of GILTI- and FDII-related revenue has unduly complicated matters for taxpayers and practitioners trying to properly reflect such amounts on New Jersey CBT returns. It was understandable that decisions made by the Division on the allocation of GILTI and FDII would be scrutinized, given that New Jersey’s treatment of GILTI and FDII as taxable business income is more aggressive than neighboring states such as New York, which statutorily excludes 95% of GILTI from the tax base for tax years beginning on or after Jan. 1, 2019.17
Noting the legislative decision to include such amounts in the tax base, New Jersey’s one-of-a-kind accounting method of allocation based on GDP was widely panned by the business and tax practitioner communities on the grounds of severe complexity and results that would necessitate Section 8 Relief requests on a regular basis. Under the GDP allocation method, even a company operating in all 50 states would have a 3.1% allocation factor for GILTI purposes, resulting in a distortive tax liability for taxpayers.
Eventually, the Division heeded practitioner concerns with the issuance of TB-92, in which it abandoned the initial GDP-based allocation policy and created a new set of rules to follow. However, the guidance arguably created further confusion because it contradicted the statement posted on the Division’s website days earlier in which it suggested that the new sourcing rules would reflect a sales factor dilution method. Instead, TB-92 announced that the net GILTI and FDII amounts would be included in the numerator of the taxpayer’s sales factor (if applicable), without elaborating how such amounts derived from foreign businesses would ever be characterized as being generated in New Jersey. This announcement invited more questions than answers from the business and practitioner community, causing the Division to post yet another statement on its website clarifying the intent of TB-92, indicating that it could not divine any instances in which GILTI- or FDII-related amounts would be included in the numerator of the sales factor. It should be noted that a link to this announcement only appears at the end of TB-92, or alternatively in the news and updates at the bottom of the front page of the Division’s website.
Also concerning is the Division’s revised policy regarding the allocation of FDII. Even though it suggests in its clarification statement that FDII had always been included in the New Jersey tax base as domestic income, the Division in effect treats FDII as a new category of income by including it in the denominator of the sales factor. Similarly, the guidance states that GILTI and FDII are to be included in the denominator on a net basis instead of a gross basis. The result is troubling given that many other types of receipts are included in the New Jersey allocation factor on a gross basis.
Questions still remain as to the ambiguity created by the issuance of TB-92. First, taxpayers are likely to face complications in properly reporting GILTI and FDII income on their 2018 New Jersey corporation tax returns, now that Schedule A-6 to Form CBT-100 is rendered obsolete. Other mechanical issues may occur when preparing and qualifying returns for electronic filing to properly report GILTI and FDII amounts on the 2018 forms and schedules. Acknowledging the added return filing complexity caused by the Division’s change in policy, Division officials are currently considering practitioner feedback regarding potential e-filing waivers for returns that are rejected due to GILTI and FDII reporting issues.
Second, taxpayers will need to re-examine their computation of GILTI and FDII in light of the new guidance released in order to determine how their overall New Jersey tax liability is impacted and resulting financial statement implications under ASC 740. Finally, taxpayers impacted by TB-92 that already filed CBT returns for the 2018 tax year will likely need to file amended CBT returns to reflect the revised allocation method. In the meantime, taxpayers await the Division’s revisions to TB-92 or the issuance of further guidance in the near future to resolve lingering interpretive issues.18
Based on the complicated and shifting positions on this issue, along with the difficulties brought on by simultaneously complying with a new federal tax law and New Jersey’s newly formulated CBT, it is welcome news that the Division will be affording calendar year taxpayers an automatic 30-day extension on filing their extended CBT returns, from Oct. 15, 2019, to Nov. 15, 2019.19
Similar relief is being afforded to fiscal year corporate taxpayers.
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