Massachusetts Enacts Bill Addressing IRC Section 965, IRC Section 951A GILTI, and IRC Section 250, in Response to TCJA

November 2018

Summary

On October 23, Massachusetts enacted House Bill 4930 (H. 4930), the state’s supplemental appropriations bill for fiscal 2018.  H. 4930 also addresses the treatment of Subpart F income and Global Intangible Low-Taxed Income (GILTI) for corporate excise tax, financial institution excise tax, and personal income tax purposes in response to what is commonly known as the Tax Cuts and Jobs Act (TCJA) of 2017. For corporate excise tax and financial institution tax purposes, H. 4930 generally provides a 95-percent dividends received deduction (DRD) for Subpart F income, IRC Section 965(a) income, and GILTI. However, individuals, partnerships and trusts may be taxable on such income for Massachusetts personal income tax purposes.   
 

Background

U.S. shareholders (generally, “U.S. persons” that hold 10 percent or more stock ownership) of any controlled foreign corporation (CFC) must include in federal gross income for a taxable year the global intangible low-taxed income (GILTI) of the CFC.  The inclusion of GILTI is calculated in a manner similar to inclusions of subpart F income, but under new IRC Section 951A.  The new GILTI rules are applicable to taxable years of foreign corporations beginning after December 31, 2017, and to taxable years of U.S. shareholders in which or with which such taxable years end.
 
Under IRC Section 250, domestic C corporations (other than RICs and REITs) are generally permitted a deduction equal to 37.5 percent of its foreign derived intangible income (FDII) and 50 percent of (i) GILTI (if any) and (ii) the amount treated as a dividend received by such corporation under IRC Section 78.
 
H. 4930 addresses the Massachusetts business and individual income tax treatment of the new federal GILTI provisions, including the IRC Section 250 deduction for C corporations.  The legislation also provides other clarity with respect to the Massachusetts income tax treatment of Subpart F income and IRC Section 965 items.  
 

Details

Corporate Excise Tax and Financial Institution Excise Tax
 
Dividend Treatment of IRC Section 965(a) and GILTI
For corporate excise tax purposes, Massachusetts has historically treated Subpart F income as eligible for a DRD pursuant to the Supreme Judicial Court’s 1979 decision in Dow Chemical Co. v. Commissioner. However, such treatment was never expressly adopted by Massachusetts statute or regulation.
 
H.4930 provides clarity and statutory authority for such DRD.  First, H. 4930 amends M.G.L. ch. 63 to include in the definition of “dividend” the following: “amounts included in federal gross income pursuant to sections 951 and 951A of the Code.”  Next, the bill amended M.G.L. ch. 63 to explicitly allow for a 95-percent DRD for Subpart F income included in a taxpayer’s federal gross income under IRC Section 951. In addition, H. 4930 provides that GILTI is also eligible for the DRD for corporate excise and financial institution excise tax purposes. The changes to the definition of “dividend” and the DRD in M.G.L. ch. 63 are effective for the last taxable year beginning before January 1, 2018, and for subsequent tax years.  Likewise, because IRC Section 965(a) income is includible in federal gross income under IRC Section 951 by the terms of the IRC, it is also eligible for the 95-percent DRD.   
 
Apportionment Exclusions
H.4930 requires the exclusion of deemed repatriated income and GILTI from the sales and receipts factors for corporate excise and financial institution excise tax purposes, respectively. Furthermore, when a Massachusetts combined filing group contains both business corporations and financial institutions, the adjustment (or exclusion) related to dividend income is applicable to the taxable group members’ sales or receipts factor, whether the member is a business corporation or financial institution.
 
Decoupling from the IRC
H.4930 decouples from a number of deductions allowed by the TCJA. Specifically, the deductions under the following IRC sections are specifically disallowed: IRC Section 245A (federal foreign-source DRD), IRC Section 250 (the GILTI and FDII deduction), and IRC Section 965(c) (participation exemption deduction). It is important to note that the deductions allowed by these IRC sections are disallowed for Massachusetts corporate excise, financial institution excise, and personal income tax purposes.
 
Personal Income Tax
In general, when determining Massachusetts gross income for personal income tax purposes, M.G.L. ch. 62 follows the provisions of the IRC, “as amended and in effect on” January 1, 2005. However, certain specific IRC sections are followed for Massachusetts personal income tax purposes on a “rolling” IRC conformity basis (i.e., the IRC “as amended”).  H. 4930 amended M.G.L. ch. 62 to specifically insert IRC Sections 951 and 951A as IRC sections that Massachusetts conforms to on a rolling basis.  This change is effective for tax years beginning on or after January 1, 2017.  H. 4930 also amended M.G.L. ch. 62 to include in the definition of “dividend” Subpart F income included in federal gross income under IRC Section 951 and GILTI under IRC Section 951A also for tax years beginning on or after January 1, 2017.   
 
The GILTI provision of IRC Section 951A is effective for tax years beginning on or after January 1, 2018.  Thus, individuals (including owners/members of pass-through entities) that are Massachusetts personal income taxpayers with GILTI for federal tax purposes will also be required to include the GILTI as dividend income taxable for Massachusetts personal income tax purposes, beginning with their 2018 tax year.  There is no personal income tax DRD comparable to the Massachusetts corporate excise tax or financial institution excise tax DRD.  Only to the extent dividends are paid out of any tax-free E&P of the paying entity are individuals, including partnerships and trusts, entitled to a DRD (e.g. dividends received in the RIC and corporate trust contexts).
 
However, the Massachusetts personal income tax treatment of IRC Section 965(a) income may be different for the 2017 tax year.  As discussed, for personal income tax purposes, Massachusetts follows “fixed-date” conformity with the IRC (as amended and in effect on January 1, 2005).  Certain IRC sections are followed on a rolling basis, including after H. 4930, IRC Sections 951 and 951A.  Yet, H. 4930 does not add IRC Section 965 to the list of IRC sections that the personal income tax follows on a rolling basis.  Given Massachusetts’ general fixed-date IRC conformity, it appears that Massachusetts may not conform at all to IRC Section 965 for personal income tax purposes (and neither the income nor deduction are recognized or reported for personal income tax purposes).  The Massachusetts Department of Revenue’s Technical Information Release TIR 18-11, issued October 4, or prior to the enactment of H. 4930, supports this interpretation regarding the inapplicability of IRC Section 965 for personal income tax purposes (and the deemed repatriated income is not taxable until actually distributed).
 
Coordination with TIR 18-11
In response to the TCJA’s changes to IRC Section 965, the Department of Revenue had issued TIR 18-11 on October 4, which provided guidance on the state’s treatment and reporting of IRC Section 965 items by business corporations and financial institutions.
 
Similar to H. 4930, TIR 18-11 administratively extended dividend treatment, and the applicable 95-percent DRD, to IRC Section 965(a) income for Massachusetts corporate excise and financial institution tax purposes. However, TIR 18-11 specified that such dividend income (1) is excluded from the sales factor for corporate excise tax apportionment purposes, but (2) may be included for financial institution excise tax apportionment purposes when IRC Section 965(a) income is from investment and trading assets and activities. As applied to financial institutions, it should be noted that H. 4930 differs from (and overrides) TIR 18-11 with respect to financial institution apportionment treatment of IRC Section 965(a) income.  Otherwise, the Department of Revenue’s administrative announcement in TIR 18-11 regarding its treatment and reporting of IRC Section 965 items generally aligns with the applicable provisions of H. 4930.
 

BDO Insights

  • H. 4930 adds much anticipated clarification that Subpart F income under IRC Section 951 and GILTI are eligible for the Massachusetts 95-percent DRD. However, individuals, partnerships, and trusts are generally required to include such income in Massachusetts taxable net income without the corresponding DRD that is otherwise available to corporate taxpayers.
  • H. 4930 allows for the exclusion of deemed repatriated income and GILTI from sales/receipts factors for corporate excise and financial institution excise tax purposes. Massachusetts decouples from deductions allowed by the TCJA under IRC Section 245A, IRC Section 250, and IRC Section 965(c).
  • Taxpayers affected by H. 4930 should consult with their financial statement auditor and tax advisor to evaluate and determine the potential financial statement implications under ASC 740, including the impact on current and deferred taxes, uncertain tax benefits, and disclosures.
 

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