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Technical Information Release TIR 18-11: Treatment of Deemed Repatriated Income Under General Laws Chapter 63
Table of Contents
On December 22, 2017, Public Law 115-97, commonly known as the Tax Cuts and Jobs Act (the “TCJA”), was signed into law. The TCJA made various amendments to the Internal Revenue Code (the “Code”), including the imposition of a so-called “transition tax” on the untaxed earnings and profits of certain foreign subsidiaries accumulated after 1986 and before 2018 (“deemed repatriated income”). This TIR provides guidance on the Massachusetts tax treatment of the deemed repatriated income for business corporations, including financial institutions, under G.L. c. 63.1 Additionally, the TIR provides guidance on the reporting of such income. For many affected taxpayers, the deemed repatriated income was recognized in the 2017 taxable year.
II. Overview of Deemed Repatriated Income
The TCJA amended Code § 965 to require a “U.S. shareholder” owning at least 10% of a “specified foreign corporation” to include in its “Subpart F” income an amount equal to the shareholder’s pro rata share of post-1986 accumulated deferred foreign income of the foreign corporation. The new law imposes a one-time federal transition tax at a rate of 15.5% on foreign earnings held as cash and cash equivalents and 8% on foreign earnings held as illiquid assets. The rates are achieved through an effective rate deduction provided in Code § 965(c). At the election of the taxpayer, the federal net tax liability is payable over a period of eight years. See I.R.C. § 965(h).
In guidance issued in March 2018, the IRS instructed taxpayers who have deemed repatriated income to separately report that income on an IRC 965 Transition Tax Statement to be filed with their federal tax returns. Taxpayers were advised to make two separate federal payments: one reflecting the federal tax owed without regard to Code § 965 and a second, separate payment reflecting the amount of tax owed attributable to Code § 965.
III. Massachusetts Tax Treatment Under General Laws Chapter 63
A. Effect of Deemed Repatriated Income on Net Income
Deemed income attributable to controlled foreign corporations under Subpart F of the Code is treated as dividend income for Massachusetts corporate excise purposes. See Dow Chemical Co. v. Commissioner of Revenue, 378 Mass. 254 (1979). Consequently, deemed repatriated income of a business corporation subject to tax under chapter 63 is treated as dividend income for Massachusetts purposes, and is included in the corporation’s net income as determined under G.L. c. 63, § 30.4 in the case of a general business corporation, and under G.L c. 63, § 1 in the case of a financial institution. Similar to dividends more generally, the deemed repatriated income is eligible for the 95% dividends received deduction pursuant to G.L. c. 63, §§ 1, 30.4, and 38(a),2 subject to the voting stock ownership requirements referenced in those sections.3 The deduction under Code § 965(c) is not allowed for Massachusetts purposes. See G.L c. 63, § 30.4(i).
B. Effect of Deemed Repatriated Income on Apportionment Factors
In general, a business corporation subject to tax under G.L. c. 63, § 39 that is taxable in another state and that therefore apportions its income to Massachusetts will be subject to the apportionment provisions of G.L. c. 63, § 38.4 The sales factor of the apportionment formula determined under this section expressly excludes “interest, dividends and gross receipts from the maturity, redemption, sale, exchange or other disposition of securities.” G.L. c. 63, § 38(f). Accordingly, deemed repatriated income is excluded from the numerator and denominator of the sales factor of any business corporation required to apportion pursuant to section 38. Moreover, the inclusion of five percent of dividends as referenced in G.L. c. 63, § 30.4 is intended as a disallowance of expenses of the corporation reporting the dividend income, rather than as a tax on the earnings and profits of the subsidiary corporation making the dividend.5 In general, an expense disallowance does not implicate the taxpayer’s apportionment calculation.
For purposes of apportionment under G.L. c. 63, § 2A, the receipts factor of a financial institution generally includes dividends when those dividends are from “investment assets and activities and from trading assets and activities.” G.L. c. 63, § 2A(d)(xii). Consequently, the deemed repatriated income may be included in the numerator and denominator of the receipts factor of a financial institution subject to tax under G.L. c. 63, § 2. Such income is includible in the numerator of the financial institution’s receipts factor as provided in G.L. c. 63, § 2A(d)(xii).
In the case of one or more business corporations filing as members of a combined group, each taxable member separately determines its apportionment percentage pursuant to the provisions of G.L. c. 63, § 2A or § 38, as applicable, subject to the rules in G.L c. 63, § 32B and 830 CMR 63.32B.2(7). When a combined group includes both one or more financial institutions and one or more business corporations that are not financial institutions, adjustments are made to the numerators and denominators of the apportionment factors of the taxable group members. G.L. c. 63, § 32B(d)(2)(iii); 830 CMR 63.32B.2(7)(h). Pursuant to these provisions, certain adjustments are made to the numerator and denominator of a business corporation that is not a financial institution. These sections, however, do not permit dividends to be included in the numerator or denominator of a business corporation that is not a financial institution. See G.L. c. 63, § 32B(d)(1) (limiting the adjustments to be made to non-financial institution members of a combined group to the receipts described in G.L. c. 63, § 2A(d)(i)-(xi), which do not include dividend receipts).
IV. Guidance for Business Corporations Reporting Deemed Repatriated Income for Tax Year 2017
The amount of deemed repatriated income reported for Massachusetts tax purposes is the amount reported on line 1 of the IRC 965 Transition Tax Statement filed with its federal return. The chart below provides instructions as to how a business corporation is to report the deemed repatriated income on various Massachusetts tax forms.
Business corporation (including a financial institution) that is part of a combined group filing a combined report (Form 355U)
Report as an adjustment to dividend income on Schedule U-M, line 4, column c.
Business corporation, other than a financial institution, that is not part of a combined group
Report as an adjustment on Schedule E, line 13. Also report this amount as a dividend when completing Schedule E-1.
Financial institution that is not part of a combined group
Report as an adjustment on Schedule A, line 10. Also include this amount on Schedule D, line 1. (Combine the amount of the deemed repatriated income with the amount from US Form 1120, Schedule C, line 19 when completing Schedule D.)
As previously announced, the Department of Revenue intends to waive estimated tax penalties imposed under G.L. c. 63B to the extent that an underpayment of estimated tax is attributable to Code § 965. See TIR 18-4. To claim a waiver, a business corporation must include Massachusetts Schedule M-2220, Underpayment of Massachusetts Estimated Tax by Corporations, with its return. This filing must be accompanied by Massachusetts Schedule TDS, Taxpayer Disclosure Statement, documenting the amount of federal gross income attributable to Code § 965 as well as an explanation of the Schedule M-2220 calculation. Id.
The election under Code § 965(h) to pay the tax liability attributable to the deemed repatriated income over an eight year period does not apply under Massachusetts law. Payment of Massachusetts tax liability resulting from deemed repatriated income is governed by the relevant provisions of G.L. c. 62C.
/s/Christopher C. Harding
Christopher C. Harding
Commissioner of Revenue
October 4, 2018