True, Correct, and Complete: On-time Filing of State and Local Tax Returns Without Clear, Consistent, or Practical Guidance; In a GILTI world, taxpayers need to make their way without a compass.

• Date: 01 May 2019
• Author: Friedman, Jeffrey

While state and local tax is rife with uncertainty, the signature block of a state or local corporate income tax return is often deceptively simple and definitive. Typically, the signature certifies that the return is "true, correct, and complete." (1) From a practical standpoint, however, state and local corporate tax returns often reflect filing positions that are necessarily based on unclear taxing statutes, regulations, and other guidance. This article examines situations where taxpayers could be subject to secondguessing of their tax positions subsequent to the passage of the federal Tax Cuts and Jobs Act (TCJA) (2) and provides potential road maps for preparing and filing returns.

Tax Treatment of GILTI

Effective for tax years beginning on or after January 1, 2018, the TCJA created a new category of income, global intangible low-taxed income (referred to as GILTI), under Internal Revenue Code (IRC) Section 951A. This provision generally imposes a tax on U.S. shareholders based on income from controlled foreign corporations (CFCs), to the extent that this income exceeds a nominal ten percent return on the CFCs' tangible assets. A deduction is generally allowed for fifty percent of the amount of GILTI included in a taxpayer's federal gross income under IRC Section 250(a)(1)(B), (3) which is designed to result in a federal tax rate of 10.5 percent for GILTI. Additionally, foreign tax credits are available to offset the federal income tax imposed on GILTI, with credits limited to eighty percent of the amount of foreign taxes paid.

Because states and localities typically conform to some version of the IRC for purposes of calculating the taxable income base, (4) companies must now consider whether or how a jurisdiction will conform to the TCJA's GILTI provisions. Already a number of jurisdictions have passed legislation (5) or issued guidance (6) clarifying that GILTI will be treated as nontaxable income for state income tax purposes. That said, many other jurisdictions have passed legislation (7) or issued guidance (8) addressing how GILTI must be included in the jurisdiction's income tax base.

However, some jurisdictions have not directly addressed how to treat GILTI for corporate income tax purposes, (9) forcing corporate taxpayers to do their best to interpret (or guess) the state's application of GILTI. What follows is a framework to consider in such situations.

Step 1: Determine the Jurisdiction's IRC Conformity Date

First, determine whether the jurisdiction conforms to a version of the IRC as of the date the TCJA was added to the IRC. Some jurisdictions conform to the IRC on a "static" basis, meaning that they conform to the IRC as it existed on a specific date. (10) In a jurisdiction using a static IRC conformity date, determine whether the jurisdiction's tax law has updated its IRC conformity date to include provisions of the IRC added to or revised by the TCJA. If the jurisdiction has not updated its conformity date since the passage of the TCJA, it naturally will not conform to GILTI.

Other jurisdictions conform to the IRC on a "rolling" or "floating" basis, meaning that they conform to the IRC as soon as it is revised. (11) In a rolling conformity jurisdiction, along with any jurisdiction conforming to the IRC on a static basis that has updated its law to conform to the IRC as of the passage of the TCJA (including the GILTI provisions), (12) a taxpayer should consider how GILTI is (or is not) reflected in the jurisdiction's corporate income tax base.

Step 2: Determine the Jurisdiction's Starting Point for Calculating Taxable Income

If the jurisdiction generally conforms with the TCJA, a taxpayer next should determine whether the jurisdiction's starting point for calculating taxable income includes the GILTI addition alone or both the GILTI addition and the corresponding federal tax deduction. (13) The IRC classifies the GILTI deduction as a "special deduction," (14) and many jurisdictions calculate their corporate income tax base using federal taxable income without accounting for special deductions. (15)

Step 3: Determine Whether a Subtraction From the...