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Directive Directive 20-2: Application of the Massachusetts Personal Income Tax Credit for Taxes Paid to Another Jurisdiction on Deemed Repatriated Income

Date: 10/09/2020
Referenced Sources: Massachusetts General Laws

Table of Contents

I. INTRODUCTION

This directive provides guidance for chapter 62 taxpayers[1] that seek to claim a Massachusetts credit for taxes paid to other states under G.L. c. 62, § 6(a) (hereafter referred to as the “§ 6(a) credit” or the “credit”) with respect to deemed repatriated income.  As discussed below, such income must be reported in Massachusetts in the 2019 tax year.[2]   However, deemed repatriated income was generally reported in other states in the 2017 and 2018 tax years.  Notwithstanding this discrepancy in reporting year, a chapter 62 taxpayer who reports and pays  tax on deemed repatriated income in another state may be eligible for the § 6(a) credit, pursuant to the rules set out below.

II. ISSUE

Whether chapter 62 taxpayers are eligible for the credit under G.L. c. 62, § 6(a) with respect to taxes paid to other jurisdictions on deemed repatriated income where such tax is due in the other jurisdictions in a different year than it is due in Massachusetts?

III. DIRECTIVE

Chapter 62 taxpayers who are Massachusetts residents, including individuals who are members of pass-through entities, are eligible for the credit allowed under G.L. c. 62, § 6(a) for tax on deemed repatriated income paid to another jurisdiction in a year other than the year it is paid in Massachusetts, if the requirements of G.L. c. 62 § 6(a) are otherwise met.

IV. DISCUSSION

A. Massachusetts Treatment of Deemed Repatriated Income for Chapter 62 Taxpayers

Under Internal Revenue Code (“Code” or “IRC”) § 951, a U.S. shareholder in a controlled foreign corporation (“CFC”) is required to include in income for a taxable year its proportionate share of the CFC’s “Subpart F income” for such taxable year.[3]  P.L. 115-97, known as the “Tax Cuts and Jobs Act” (the “TCJA”), amended Code § 965 to require shareholders of CFCs and certain other foreign corporations to increase their Subpart F income by an amount equal to the deferred foreign earnings of the foreign corporation that accumulated since 1986.[4] 

Massachusetts legislation enacted in 2018 and 2019 set forth the Commonwealth’s treatment of deemed repatriated income for purposes of General Laws chapter 62.[5]  Generally, gross income for Massachusetts personal income tax purposes is determined based on the Code as amended and in effect on January 1, 2005 except that Massachusetts specifically adopts the current version of particular Code sections under G.L. c. 62, § 1(c).  For purposes of chapter 62, the list of Code sections for which Massachusetts conforms to the Code as currently in effect for the taxable year includes Code § 951.[6]  Accordingly, deemed repatriated income included in federal gross income pursuant to Code § 951 is included in income under chapter 62.[7]  

Deemed repatriated income is treated as Part A income and is taken into account in the taxable year ending December 31, 2019, with a deduction equal to 60 percent of the amount of such income.[8]  The gross amount of deemed repatriated income required to be reported by taxpayers, including individuals that are members of a pass-through entity, for Massachusetts tax purposes is the amount reported on the taxpayers’ federal income tax returns for 2017 and 2018.[9]  In the case of such taxpayers with deemed repatriated income who, for federal purposes, made an election under Code § 965(h) or Code § 965(i), the Massachusetts tax liability attributable to such income is due in 8 installments, in the same percentages that are due each year for federal purposes.[10]  For taxpayers allowed to pay the liability in installments, the first 3 installments are due in 2020.[11]  The remaining 5 installments are due in the 5 succeeding years, 2021 through 2025.[12]  Installments must be paid as follows:  8 percent of the net tax liability in each of the first 5 installments; 15 percent of the net tax liability in the case of the sixth installment; 20 percent of the net tax liability in the case of the seventh installment; and 25 percent of the net tax liability in the case of the eighth installment.[13]

Solely for purposes of the determination and reporting of deemed repatriated income, the status of a taxpayer as a resident or non-resident is determined by the taxpayer’s status as a resident or non-resident in the taxable year in which the income was required to be taken into account for federal income tax purposes.[14] In the case of reporting of such income by non-residents, the sourcing of such income to the Commonwealth must be consistent with the apportionment or other sourcing method used by the taxpayer in the year that the income was taken into account for federal income tax purposes.[15]

B. Application of the § 6(a) Credit to Deemed Repatriation Income

Massachusetts law generally provides for a credit against taxes imposed under chapter 62 on Massachusetts residents for taxes due to any other state, territory or possession of the United States, or to the Dominion of Canada or any of its provinces, on account of any item of Massachusetts gross income.[16] Taxpayers may also be eligible for the credit on their distributive share of taxes imposed on a pass-through entity, but only if additional criteria are met.[17] 

The amount of the credit is determined separately for each of Part A, B and C income. The credit for each category of income is limited to the lesser of (i) the tax due to the other jurisdiction on such income, or (ii) the amount of tax imposed by chapter 62 on such income multiplied by a fraction, the numerator of which is the amount of Part A, B, or C income, as applicable, taxed in the other jurisdiction, and the denominator of which is the total Part A, B, or C income, as applicable.

Taxpayers with deemed repatriated income for federal income tax purposes in either 2017 or 2018 are required to report such amounts as Massachusetts gross income for the tax year ending on December 31, 2019.[18] Taxpayers that paid tax on such income to another jurisdiction in 2017 or 2018 who are required to report that income on their 2019 Massachusetts income tax return are eligible for a credit under § 6(a) for such taxes paid to the other jurisdiction, assuming all the requirements of § 6(a) are met.[19] Note that in this case the § 6(a) credit is available only for the tax year that deemed repatriated income is required to be reported in Massachusetts, the 2019 tax year, not for 2017 or 2018 when tax was paid on such income to another jurisdiction.  Where tax on such income is paid to another jurisdiction in a later year, such as in the case of a jurisdiction that allows the payment of such tax in annual installments, the § 6(a) credit is available in Massachusetts in the tax year with respect to which the tax is paid to the other jurisdiction.   

The statutory purpose of the credit for tax paid to other jurisdictions is to ensure that the personal income tax is applied to income derived from activity in other states in a manner consistent with the United States Constitution.  The credit does this by protecting residents from double taxation of income earned outside the Commonwealth.  The specific statutory language affording the credit does not address the availability or calculation of the credit where an item of income is subjected to tax by another jurisdiction and by Massachusetts in different taxable years.  In order to achieve the statutory purpose of the credit, this Directive allows the credit under these circumstances and provides guidance for determining the credit with regard to deemed repatriated income. 

C. Determination of the Amount of the Credit

For Massachusetts purposes, deemed repatriated income is treated as Part A income.  As noted in section IV.B above, the credit for tax paid to another jurisdiction with respect to Part A income is equal to the lesser of: (i) the amount of tax paid to the other jurisdiction on such income; or (ii) the total amount of Massachusetts tax on Part A income multiplied by a fraction, the numerator of which is the amount of Part A income taxed in the other jurisdiction and the denominator of which is total Part A gross income.  For purposes of determining the amount of the credit with respect to deemed repatriated income where tax was paid on the income to another jurisdiction for the 2017 through 2019 tax years:

  • The amount of tax paid to the other jurisdiction is the amount of tax on deemed repatriated income reported and actually paid in the other jurisdiction in the 2017 through 2019 tax years.
     
  • The total Massachusetts tax on Part A income is determined without regard to any deferral of the Massachusetts tax on the deemed repatriated income under § 30(d) of chapter 5 of the Acts of 2019.  
  • The amount of income taxed in the other jurisdiction is the amount of deemed repatriated income upon which tax was paid to such jurisdiction in 2017 through 2019, reduced by a deduction of 60 percent.[20]
     
  • The total Massachusetts Part A income is the sum of (i) deemed repatriated income that is reported to Massachusetts in the 2019 tax year, reduced by a deduction of 60 percent and (ii) other Part A gross income required to be reported to Massachusetts in the 2019 tax year. 

This formula will determine a taxpayer’s total Part A credit amount for 2019, including any credit attributable to deemed repatriated income. Taxpayers who elected to pay their Massachusetts tax on deemed repatriated income in installments must determine the total credit amount attributable to deemed repatriated income under the rules set out above with respect to each installment and then claim a proportionate percentage of the credit in each year in which deferred tax is paid, while following the requirements set out in IRC § 965(h)(1).

For tax on deemed repatriated income paid to other states with respect to the 2020 tax year and thereafter, the credit will be available in the tax year for which the tax is paid.  The amount of the credit is the lesser of the tax actually paid to the other state or the credit limitation determined for 2019, determined under the rules set out above.   

Example 1:

Taxpayer A has $10,000 of deemed repatriated income that was reported to State X in 2017 and 2018 and such income is reported to Massachusetts in 2019. Taxpayer A did not make an election under IRC § 965(h) or (i). State X’s tax rate in 2017 and 2018 was 6 percent, resulting in $600 of tax, which was paid to State X.  Taxpayer A has an additional $100,000 of Part A income in 2019, on which no tax was paid to another jurisdiction. 

Taxpayer A’s Massachusetts Part A tax for 2019 is $5,200 (5 percent of the sum of the $4,000 of deemed repatriated income included after the 60 percent deduction and the $100,000 of other Part A income).  

Taxpayer A’s credit is the lesser of (i) the $600 of tax previously paid to State X or (ii) $200 (i.e., the $5,200 of 2019 Part A tax multiplied by a fraction, the numerator of which is the $4,000 of deemed repatriated income taxed in Massachusetts after the 60 percent deduction, and the denominator of which is the sum of that $4,000 amount plus the other $100,000 of Part A income). Taxpayer A’s Massachusetts credit amount is $200. 

Example 2:

Assume the same facts as in Example 1 except that Taxpayer A elected to pay the federal tax on the $10,000 of deemed repatriated income in 8 installments pursuant to IRC § 965(h).  Taxpayer A’s Massachusetts credit is $200 as determined using the same methodology as in Example 1.  However, the credit must be prorated over 8 installments, as described in Section A above. 

Based on the foregoing, Taxpayer A’s credit is applied as follows:

For the payment due in calendar year 2020 the credit is $48 (24 percent of $200);

For the payment due in calendar year 2021 the credit is $16 (8 percent of $200);

For the payment due in calendar year 2022 the credit is $16 (8 percent of $200);

For the payment due in calendar year 2023 the credit is $30 (15 percent of $200);

For the payment due in calendar year 2024 the credit is $40 (20 percent of $200); and

For the payment due in calendar year 2025 the credit is $50 (25 percent of $200). 

 

                                                                                    /s/Geoffrey E. Snyder
                                                                                    Geoffrey E. Snyder
                                                                                    Commissioner of Revenue

GES:RHF:wm

October 9, 2020

DD 20-2

[1] For purposes of this Directive, the term “chapter 62 taxpayers” refers to taxpayers, including individuals, that are subject to the personal income tax under Massachusetts General Laws chapter 62.

[2] TIR 19-11.

[3] Id. 

[4] Id.

[5] See “An Act Making Appropriations for the Fiscal Year 2018 to Provide for Supplementing Certain Existing Appropriations and for Certain Other Activities and Projects,” St. 2018, c. 273 (the “2018 Supplemental Budget”), as amended by “An Act Making Appropriations for the Fiscal Year 2019 to Provide for Supplementing Certain Existing Appropriations and for Certain Other Activities and Projects,” St. 2019, c. 5 (the “2019 Supplemental Budget”).

[6] G.L. c. 62, § 1(c).

[7] TIR 19-11.

[8] Id.

[9] Id.

[10] Id.

[11] Id.

[12] Id.

[13] IRC § 965(h)(1)(A)-(D).

[14] St. 2019 c. 5, § 30(a).

[15] Id.

[16] G.L. c. 62, § 6(a). 

[17] DD 19-1.

[18] TIR 19-11.

[19] For purposes of reporting deemed repatriated income, the status of a taxpayer as a resident or non-resident of Massachusetts is determined in the taxable year the income was recognized federally.  St. 2019 c. 5, § 30(a). Therefore, a taxpayer who is not a resident in 2019 but who must report deemed repatriated income as though he or she was a resident in that year is eligible for the credit.

[20] Since 60 percent of deemed repatriated income is effectively excluded from Massachusetts taxable income, only the remaining 40 percent is potentially subject to taxation in multiple jurisdictions and only that amount is taken into account in determining the Massachusetts credit. 

Referenced Sources:
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