Global Intangible Low-Tax Income, or “GILTI,” is a provision[1] enacted under the Tax Cuts and Jobs Act (TCJA) of 2017 requiring the inclusion of a controlled foreign corporation’s (CFC) tested income[2] into the gross income of its US shareholder, similar to the longstanding Subpart F income rules. Since its enactment, most states have issued guidance or have passed legislation addressing their specific treatment of GILTI; essentially denying or permitting a full (or partial) subtraction which could be classified as a dividend received deduction or a separate “GILTI” modification depending on the state. However, not all states have issued any guidance, leaving taxpayers in limbo and uncertain if GILTI is includible in the US shareholder’s tax base.
Proposed State Legislation Regarding Tax Treatment of GILTI
Fortunately, a handful of the states which may be late to the GILTI game have recently enacted or proposed legislation regarding their tax treatment of GILTI. Here are a few of them:
Alabama
Alabama House Bill 170 was signed into law on February 12, 2021 which provides taxpayers a deduction for the amount included as GILTI in its federal taxable income tax.[3] This deduction is allowed only to the extent that such amount is not otherwise deductible in determining federal taxable income (i.e., IRC section 250 provides a 50% deduction on GILTI with certain taxable income limitations). In addition, an addback is required for any expenses deducted from a taxpayer’s federal taxable income that are directly or indirectly attributable to the amount subtracted from computing its Alabama taxable income. Also, the GILTI deduction provided under IRC section 250 only applies to the extent the same income was included in Alabama taxable income. This means that taxpayers cannot obtain a double benefit by receiving a deduction under section 250 if the GILTI income attributable to such deduction is not also in the Alabama tax base. The new law related to Alabama’s GILTI deduction is retroactive to tax years beginning after December 31, 2017, however refunds related to the GILTI deduction will not be granted for any tax years ending before January 1, 2020.
Kansas
In Kansas, Senate Bill 22 was passed by the Senate but remains under review by the House as of the release date of this blog. If passed in its current form, Kansas would join the list of states which provides a full deduction for GILTI.
Utah
Utah House Bill 39 was recently signed by the governor on March 22, 2021 essentially expanding the application of their preexisting dividend received deduction to now also include income inclusions under IRC sections 965(a)[4] and 951A. The state is retroactively granting fifty percent (50%) dividends received deduction on such income providing a prime opportunity for taxpayers to review their previously filed tax returns to determine if refund opportunities exist. In addition, H.B. 39 amended its definition of “unadjusted income” to be federal taxable income before the net operating deduction and special deductions. In other words, the starting point for determining Utah taxable income is line 28 of the federal form 1120 for most corporate taxpayers. While this means that the federal GILTI deduction under IRC section 250 is not available, since it is considered a special deduction, the state will now grant its own 50% dividends received deduction for such GILTI inclusions.
Other States Without Guidance Related to GILTI
As mentioned earlier, there are a few remaining states that have yet to issue any form of guidance related to GILTI which forces taxpayers to look to that individual state’s conformity rules. For example, Alaska, Delaware, District of Columbia, Rhode Island, and Vermont, have a rolling conformity to the Internal Revenue Code and therefore automatically follow the federal taxation rules of GILTI. As a result, those states would include GILTI in the tax base by nature of their respective starting point but do not explicitly provide a deduction to taxpayers on such income.
States with a static (or “fixed date”) conformity which have not issued guidance on the application of GILTI force taxpayers to review the date in which the state last specifically conformed to the IRC. States such as Arkansas, California, and Texas have not updated their IRC conformity dates to include changes enacted by the TCJA resulting in GILTI being excluded from their tax base since section 951A did not exist in a pre-TCJA world.
Given the ever-changing landscape of federal corporate taxation coupled with the staggered and delayed release of state response to those changes it has become increasingly more critical than ever to remain current with each state’s rules. The potential state impact can be significant and without knowing each jurisdiction’s rules, both regarding the TCJA and IRC conformity in general, can result in the additional imposition of tax or lost refund opportunities.
[1] §951A of the Internal Revenue Code of 1986, as amended.
[2] The term “tested income” is defined under §951A(2)(A) as a controlled foreign corporation’s gross income less certain deductions for related party dividends, Subpart F income, high-taxed income, effectively connected income, and foreign oil and gas extraction income.
[3] Ala. Code § 40-18-35.2.
[4] §965(a) relates to the treatment of deferred foreign income upon transition to participation exemption system of taxation, also referred to as the “Transition Tax” or “Toll Charge Tax” enacted by the TCJA.
