New Jersey Abandons Controversial Apportionment Treatment for Gilti and Fdii; Questions Remain

Summary

On August 20, 2019, the New Jersey Division of Taxation (Division) announced that it was abandoning its controversial allocation formula (aka apportionment) for Global Intangible Low-Taxed Income (GILTI) and Foreign Derived Intangible Income (FDII).  The Division then issued Technical Bulletin TB-92 on August 22, 2019, which revoked as obsolete the December 2018-issued Technical Bulletin’s special allocation formula for GILTI and FDII.
 

Details

Background

The Division issued TB-85(R) on December 24, 2018, and announced that GILTI under Internal Revenue Code (IRC) Section 951A, as well as FDII under IRC Section 250 (a federal special deduction) are items of income included in New Jersey entire net income.  Further, TB-85(R) provided that neither are treated as dividends for New Jersey corporation business tax purposes and, thus, do not qualify for the New Jersey dividends received deduction.  TB-85(R) referenced New Jersey tax legislation enacted in 2018 that allows the deductions provided by IRC Section 250(a)(1)(A) (FDII deduction) and Section 250(a)(1)(B) (GILTI deduction), but only with respect to the specific taxpayer that reported the corresponding GILTI or FDII income in its federal and New Jersey tax returns.  Thus, for most New Jersey taxpayers the net GILTI amount or “net FDII amount” is included in their entire net income.
 
In addition, TB-85(R) mandated a special New Jersey corporation business tax allocation (or apportionment) formula for a taxpayer’s GILTI or FDII income.  While New Jersey treated both GILTI and FDII as “other business receipts,” the Division required use of a special gross domestic product (GDP) formula.  That is, a New Jersey taxpayer was required to separately allocate (or apportion) GILTI or FDII that it reported on its New Jersey CBT-100 or BFC-1 return based on the ratio of New Jersey’s GDP over the aggregate GDP of every state, including the District of Columbia, in which the taxpayer has economic nexus.     

 

Technical Bulletin, TB-92 (Issued August 22, 2019)

With the issuance of TB-92, the Division has declared TB-85(R) “obsolete.”  Although mostly repeating TB-85(R)’s net GILTI/net FDII discussion, in TB-92 the Division revoked the special GDP allocation formula.  Taxpayers are now instructed to include the net amount of GILTI and FDII in the denominator of the New Jersey single sales factor.  The Division also instructs that the net GILTI and net FDII amount will be treated as “other business receipts” for purposes of sourcing the New Jersey numerator of the allocation formula under N.J.S.A. Section 54:10A-6(B)(6) and N.J.A.C. Section 18:7-8.12(e). 
 
Taxpayers will not be allowed to look-through to the sales of the controlled foreign corporation (CFC) to which the net GILTI or net FDII relates unless that CFC is included as a member of the same New Jersey combined group as the taxpayer reporting the GILTI or FDII for federal purposes.  Further, the net GILTI or net FDII will be excluded from entire net income and the sales factor of the New Jersey combined group if the CFC is included in a New Jersey water’s-edge combined group or if a New Jersey worldwide combined group election is made.
 
There remains uncertainty with respect to whether, or how, to source net GILTI or net FDII as “other business receipts” when the CFC is not included in the same New Jersey combined group with the taxpayer.  The Division also announced that it is drafting regulations to further address the matters discussed in TB-92.    
 
These changes are effective for New Jersey corporation business tax returns filed for tax years beginning on or after January 1, 2018.  Taxpayers that already filed a 2018 CBT-100, CBT-100-R, or 2018 BFC-1 for their 2018 tax year that ended before July 31, 2019, may need to file an amended return considering TB-92.  If an amended return is required, taxpayers should write “GILTI Amended Return” at the top of the return.  Taxpayers currently on extension for their 2018 tax year that ended before July 31, 2019, and taxpayers with a 2019 short period that ended before July 31, 2019, that file a 2018 CBT-100 or 2018 BFC-1 will not complete the Schedule A-6 that was contained in the original package of forms.
 

The “Clarification” 

Perhaps realizing some confusion was caused by its discussion of FDII in the technical bulletins, on August 26, 2019, the Division issued a clarification that it recognized FDII is a type of income already included in federal taxable income and New Jersey entire net income (i.e., FDII is a federal special deduction).  Further, the Division also clarified that it “is not aware of any specific situation that would require GILTI or FDII related amounts to be included in the numerator of the apportionment factor,” but the Division also requests input from taxpayers as it drafts the final regulations announced in TB-92.
 

BDO Insight

• The Division did not change the treatment of the GILTI and FDII deductions.  To the extent a New Jersey taxpayer reports the GILTI and FDII income items for federal purposes, there is no addition modification with respect to these federal deductions for New Jersey corporation business tax purposes.
• While the issuance of TB-92 is a welcome development, unlike other states that either fully exclude or provide a 95-percent subtraction for GILTI such as Connecticut, Massachusetts, New York, and Tennessee, New Jersey will still include the net GILTI amount in a taxpayer’s New Jersey entire net income, except when the CFC is a combined group member.
• There remains uncertainty as to exactly how the net GILTI or “net FDII” should be sourced for purposes of the New Jersey sales factor.  Taxpayers will need to await the Division’s regulations for further guidance.  Interested taxpayers may want to consider providing comments or input to the Division as it drafts the final regulations.