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Jamie C. Yesnowitz
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The Iowa Department of Revenue recently published guidance regarding the state’s treatment of global intangible low taxed income (GILTI) and foreign derived intangible income (FDII),1
and subsequently issued proposed regulations for public comment.2
The proposed regulations provide details regarding the calculation of GILTI and FDII amounts, and confirm that the net federal amount of GILTI is included in Iowa net income. Separately, the Department recently issued guidance on the computation of the interest expense limitation under IRC Sec. 163(j), requiring the limitation to be computed on a federal basis as if the same members of the Iowa group filed a federal return.3
The Department also updated its guidance regarding the impact of the Sec. 163(j) limitation on partnerships and their partners.4
The Department’s guidance and proposed regulations are applicable for tax years beginning on or after Jan. 1, 2019.
For federal income tax purposes, the Tax Cuts and Jobs Act of 2017 (TCJA) created IRC Secs. 951A and 250.5
For tax years beginning after Dec. 31, 2017, IRC Sec. 951A requires taxpayers that are U.S. shareholders of a controlled foreign corporation (CFC) to include the taxpayer’s GILTI in gross income.6
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.7
Under state tax reform legislation enacted in 2018, for tax years beginning in 2019, Iowa conforms to the Internal Revenue Code (IRC) with an effective date of March 24, 2018.8
As a result, Iowa generally conforms to the federal tax reform provisions contained in the TCJA. For tax years beginning on or after Jan. 1, 2020, the legislation provides that Iowa income tax law is based on the IRC as currently amended.9
Accordingly, Iowa conformed to the GILTI and FDII provisions of the TCJA beginning with the 2019 tax year, along with the Sec. 163(j) limitation rules. With this general conformity, further guidance regarding application of these provisions was needed.
GILTI and FDII
On Dec. 31, 2019, the Department submitted proposed changes to Chapters 54 and 59 of the Iowa Administrative Code consistent with the earlier-published guidance on its website. Under both the guidance and the proposed regulations, Iowa corporate taxpayers are required to compute GILTI and FDII amounts as if the separate-company or Iowa nexus consolidated group filed a federal income tax return including only those members reported on the Iowa income tax return. Furthermore, the Department allows taxpayers a measure of apportionment factor relief by including the “net GILTI” amount, equal to GILTI less the corresponding GILTI deduction. This apportionment relief is consistent with the Department’s treatment of investment income, and the proposed administrative rules seek to expand investment income to include GILTI.10
The public comment period for the proposed regulations runs through Jan. 21, 2020.
Under both the Department’s guidance and the proposed regulations, the starting point for the Iowa taxable income calculation includes net GILTI, which consists of the GILTI inclusion, less the corresponding GILTI deduction.11
As GILTI is not expressly considered to be a dividend or subpart F income under Iowa law, the guidance notes that GILTI does not qualify for the Iowa dividends received deduction.12
Iowa allows for separate-company or nexus-consolidated corporate income tax reporting. As a result, adjustments may be required to compute a corporate taxpayer’s net GILTI to the extent there are differences between those entities included in the federal and Iowa consolidated filing groups.
Specifically, the Department requires that Iowa corporate taxpayers compute their own net GILTI for federal income tax purposes as if only those members of the Iowa filing group filed a federal corporation income tax return.
Beginning with the 2019 tax year, Iowa conforms to the FDII deduction under the TCJA.13
As with GILTI, adjustments may be required to compute a corporate taxpayer’s FDII to the extent there are differences between those entities included in the federal and Iowa filing groups. Specifically, the Department requires that Iowa corporate taxpayers compute their own FDII for federal income tax purposes as if only those members of the Iowa filing group filed a federal corporation income tax return.
Under both the Department’s guidance and the proposed changes to Iowa Admin. Code Sec. 701–54.2, Iowa would allow for the net GILTI amount included in Iowa taxable income to be included in a corporate taxpayer’s Iowa business activity ratio (BAR) (i.e. sales factor) if such income “arises out of the taxpayer’s ownership interest in CFCs that are an integral part of some business activity occurring regularly in or outside of Iowa.” Other net GILTI income may be included in the Iowa BAR at the taxpayer’s election, provided that the taxpayer then elects to include all of its “investment business income” as detailed under Iowa Admin. Code Sec. 701–54.2.14
The proposed apportionment treatment of GILTI income is consistent with other categories of what Iowa’s administrative rules characterize as “investment income,” which includes interest, royalties, rents, and dividends.
Under the proposed changes to Iowa Admin. Code Sec. 701–59.28, net GILTI would be included in the numerator of a taxpayer’s Iowa BAR under either of the following scenarios:
Interest expense limitation under IRC Sec. 163(j)
- “to the extent that the income arises from the taxpayer’s ownership of controlled foreign corporation(s) (CFCs) that are an integral part of some business activity occurring regularly in Iowa.”; or
- “[i]f no portion of the net GILTI is part of some business activity occurring regularly in or outside of Iowa but the income is determined to be business income, the net GILTI shall be included in the numerator if the taxpayer’s commercial domicile is in this state.”
For tax years beginning on or after Jan. 1, 2019, Iowa conforms to the Sec. 163(j) limitation as amended by the TCJA.15
On Jan. 3, 2020, the Department issued guidance on its website specifying how Iowa taxpayers should compute this limitation. As with GILTI and FDII, corporate taxpayers may need to compute adjustments to their Sec. 163(j) limitation to the extent that there are differences between those entities included in the federal and Iowa filing groups. Specifically, the Department requires that Iowa corporate taxpayers compute their own Sec. 163(j) limitation for federal income tax purposes as if only those members of the Iowa filing group filed a federal corporate income tax return.
As Iowa did not conform to the TCJA for the 2018 tax year, Iowa taxpayers will not be allowed to deduct any disallowed interest expense deduction from the 2018 tax year carried forward to subsequent tax years. For the 2018 tax year, Iowa taxpayers should deduct any federal Sec. 163(j) limitation to compute Iowa taxable income; thus, there is no disallowed 2018 Sec. 163(j) limitation to carry forward for Iowa tax purposes. To the extent that a taxpayer’s federal income tax return for a tax year beginning on or after Jan. 1, 2019 includes additional Sec. 163(j) interest expense deduction carried forward from the 2018 tax year, such amounts will need to be added back to taxable income. Such addbacks, as well as other IRC nonconformity adjustments, are reported on Form IA 101, “Nonconformity Adjustments.”
On Dec. 31, 2019, the Department updated its guidance on the impact of the Sec. 163(j) limitation on partnerships and their partners for tax years beginning on or after Jan. 1, 2019. Similar to corporate taxpayers, partnerships and partners filing Iowa tax returns may need to compute addback adjustments related to the carryforward of disallowed interest expense deductions from the 2018 tax year. Based on informal discussions with the Department, it is not anticipated that administrative rules will be proposed to expand on the Sec. 163(j) limitation guidance.
The guidance and proposed administrative rules issued by the Department provide clarification for taxpayers following Iowa’s 2018 legislation conforming to the TCJA starting with the 2019 tax year. Taxpayers should carefully review this guidance, particularly members of a federal consolidated group that file Iowa separate-entity returns or that are members of an Iowa nexus-consolidated group with a different composition than the federal group. In such instances, additional computations may be needed to accurately compute GILTI, FDII and the Sec. 163(j) limitation for Iowa income tax purposes.
Furthermore, as Iowa did not conform to the TCJA for the 2018 tax year, taxpayers may need to adjust their Iowa taxable income for any 2018 interest expense limitation carryforwards utilized in tax years beginning on or after Jan. 1, 2019.
The Department’s proposed regulations related to GILTI are similar to the advisory guidance issued by Nebraska last month,16
a clear indication that the Department leveraged the language of their neighbors to the west. Iowa law allows for subtractions from Iowa taxable income for “foreign dividend income, including subpart F income as defined in section 952 of the [IRC].”17
Based on the published guidance, the Department’s position is that GILTI income is neither foreign dividend income, nor is it included in the definition of subpart F income under IRC Sec. 952. As a result, Iowa law requires that the net GILTI amount be included in Iowa taxable income.
Although the proposed regulations allow for the inclusion of the net GILTI amount in a taxpayer’s Iowa sales factor, taxpayers should note that the Department considers GILTI to be similar to other forms of “investment income.” As a result, taxpayers must elect an all-or-nothing approach regarding the inclusion or exclusion in the sales factor of all of its “investment income” (including GILTI). Prior to making or changing this election, taxpayers should review Iowa Admin. Code Sec. 701–54.2, including the sourcing rules for all other forms of “investment income,” as this election is binding on future tax years unless permission is requested and received from the Department to subsequently change methodologies. Taxpayers should also consider whether a petition for alternative apportionment under Iowa Code Sec. 422.33(3) and Iowa Admin. Code Sec. 701-54.9 is warranted if the Department’s guidance results in an unreasonable amount of income being subject to the Iowa income tax. In addition, taxpayers should review the proposed changes to Iowa Admin. Code Sec. 701–59.28 regarding the sourcing of GILTI to the Iowa sales factor numerator, including whether any of the taxpayer’s GILTI income falls into one of the two broad categories sourced to the Iowa numerator.
Taxpayers should also review the proposed changes to Iowa Admin. Code Sec. 701–54.2 and Iowa Admin. Code Sec. 701–59.28 regarding the income and apportionment treatment of GILTI. Any feedback should be submitted directly to the Department during the public comment period, which remains open through the close of business on Jan. 21, 2020.
Finally, although the Department proposed regulations regarding Iowa’s conformity to GILTI and FDII with a publication date of Jan. 1, 2020, the guidance consistent with such proposed regulations should be considered a fourth-quarter 2019 event for ASC 740 purposes due to the Department’s guidance being released in November 2019. However, the updated guidance regarding Iowa’s treatment of the Sec. 163(j) limitation should be considered a first quarter 2020 event for ASC 740 purposes, given a January 2020 release date.
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