HB1567 (2020) Detail

Relative to worldwide combined reporting for unitary businesses under the business profits tax.


HB 1567-FN-A - AS INTRODUCED

 

 

2020 SESSION

20-2487

10/05

 

HOUSE BILL 1567-FN-A

 

AN ACT relative to worldwide combined reporting for unitary businesses under the business profits tax.

 

SPONSORS: Rep. Schamberg, Merr. 4

 

COMMITTEE: Ways and Means

 

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ANALYSIS

 

This bill repeals the water's edge combined group provisions of the business profits tax.

 

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Explanation: Matter added to current law appears in bold italics.

Matter removed from current law appears [in brackets and struckthrough.]

Matter which is either (a) all new or (b) repealed and reenacted appears in regular type.

20-2487

10/05

 

STATE OF NEW HAMPSHIRE

 

In the Year of Our Lord Two Thousand Twenty

 

AN ACT relative to worldwide combined reporting for unitary businesses under the business profits tax.

 

Be it Enacted by the Senate and House of Representatives in General Court convened:

 

1  Intent.  

I.  During the legislature's 1981 session, the business profits tax law was changed to allow the department of revenue administration or taxpayers to employ the combined reporting method of taxation under the unitary business principle.

II.  Before this change, large multi-form corporations were allowed to file their business profits tax returns on a separate accounting/separate entity basis as if unconnected and unrelated to its affiliated sister corporations.  This separate method of taxation is inadequate to measure accurately the income of a corporation with non-New Hampshire affiliates and creates a tax disadvantage for smaller New Hampshire corporations which compete with larger multistate and multinational corporations conducting business in New Hampshire.

III.  Combined reporting treats a parent corporation and its subsidiaries - both US and foreign - as if a single taxpayer.  The purpose of combined reporting is to counteract the profit shifting that takes place between and among a parent and its subsidiaries operating across state lines and international boundaries.  The United States Supreme Court endorsed the unitary business principle in the 1980 decision in Mobil vs Commissioner of Taxes, Vermont and Exxon vs Wisconsin Department of Revenue and, in 1983, approved worldwide combined reporting in the decision in Container Corporation vs Franchise Tax Board, California.  The United States Supreme Court revisited the worldwide combined reporting method in 1994 in the decisions in Barclays Bank PLC vs Franchise Tax Board, California and Colgate-Palmolive vs Franchise Tax Board, California and approved it use for both United States and foreign-based multinational corporations.  The Court noted that during the intervening years Congress did not pass any laws to prohibit state from utilizing the worldwide combined reporting method.

IV.  During the legislature's 1986 session, the business profits tax was changed again to curtail the state's ability to employ the worldwide unitary method of taxation and; in its place, implement the unitary water's edge method of taxation.  In hindsight and with reports of massive profit shifting by multinational corporations over the intervening years, the 1986 change in the business profits tax was a mistake and needs to be reversed.  In hindsight, the water's edge method defeats the original purpose of unitary combined reporting and is unworkable and unfair unless employed on a worldwide basis.

V.  Compounding this mistake is the unintended consequence of the water's edge method that grants a tax advantage to foreign based corporations with United States subsidiaries operating in New Hampshire.  Their United States subsidiaries have been allowed to file their business profits tax returns on a separate accounting/separate entity basis under the water's edge method.  This creates a tax disadvantage for United States based corporations big and small.  It is the intent of this bill to treat all corporations conducting a unitary business fairly and equally no matter how big no matter where the headquarters are located.

VI.  In addition, a return to the unitary worldwide method will counteract the negative effects of the territorial taxation system that was adopted in the 2017 Federal Tax Cut and Jobs Act.  The territorial system is more or less the separate accounting/separate entity method that is inadequate to measure accurately the income of a corporation with non-New Hampshire affiliates.

2  Repeals.  Water's Edge Combined Reporting for Business Profits Taxation.  The following are repealed:

I.  RSA 77-A:1, XV, relative to the definition of water's edge combined group.

II.  RSA 77-A:1, XVI, relative to the definition of water's edge method.

III.  RSA 77-A:1, XVIII, relative to the definition of foreign property, payroll ans sales.

IV.  RSA 77-A:2-b, relative to conditions for employment of only water's edge combinations.

V.  RSA 77-A:3, II(b), relative to apportionment for a combined water's edge group.

VI.  RSA 77-A:6, IV, relative to returns for water's edge combined group reporting.

3  Definition; Gross Business Profits.  Amend RSA 77-A:1, III(f) to read as follows:

(f)  In the case of any business organization which is part of [a water's edge combined group] a unitary business with combined net income and which does not make or file a United States income tax return or schedule under subparagraphs (a)-(d), the amount of net income as would be determinable under the provisions of the United States Internal Revenue Code as defined in RSA 77-A:1, XX and applied within the concepts of RSA 77-A for such business organizations.

4  Definition; Combined Net Income.  Amend RSA 77-A:1, XIII to read as follows:

XIII.  "Combined net income" means the revenues less expenses as would be determinable under the provisions of the Internal Revenue Code as defined in RSA 77-A:1, XX and applied within the concepts of RSA 77-A for all business organizations conducting a unitary business regardless of whether such business organizations are required to file a federal income tax return.  This provision shall authorize the application of worldwide combined reporting.

5  Definition; Foreign Dividend.  Amend RSA 77-A:1, XVII to read as follows:

XVII.  "Foreign dividends" as used in RSA 77-A:3, II means dividends from overseas business organizations.  [For purposes of RSA 77-A:3, II(b), actual distributions from partnerships, limited liability companies, and "S" corporations are dividends for purposes of this definition.]

6  Application.  The provisions of this act shall apply for taxable periods beginning after December 31, 2021.

7  Effective Date.  This act shall take effect January 1, 2022.

 

LBAO

20-2487

11/21/19

 

HB 1567-FN-A- FISCAL NOTE

AS INTRODUCED

 

AN ACT relative to worldwide combined reporting for unitary businesses under the business profits tax.

 

FISCAL IMPACT:      [ X ] State              [    ] County               [    ] Local              [    ] None

 

 

 

Estimated Increase / (Decrease)

STATE:

FY 2020

FY 2021

FY 2022

FY 2023

   Appropriation

$0

$0

$0

$0

   Revenue

$0

$0

Indeterminable

Indeterminable

   Expenditures

$0

$0

$0

$0

Funding Source:

  [ X ] General            [ X ] Education            [   ] Highway           [    ] Other

 

 

 

 

 

METHODOLOGY:

This bill changes the water's edge method of taxation for unitary business groups under the business profits tax to worldwide combined reporting for taxable periods beginning after December 31, 2021.  A unitary business group under worldwide combined reporting, unlike a water's edge combined group, includes foreign incorporated business organizations and entities referred to as 80/20 companies where 80% or more of the average of their payroll and property is located outside the United States.  Such an overseas business organization is subject to the business profits tax under the water's edge method as a separate entity provided that the business organization by itself is engaged in business activity in NH.

 

The Department is not able to determine the fiscal impact of this bill on State General Fund or  Education Trust Fund revenue as it cannot estimate the business profits tax liability for a unitary business group under the worldwide combined reporting due to the Department not having the combined net income, the addition or deductions as provided in RSA 77-A:4, or the group's apportionment percentage as provided in RSA 77-A:3.  The water's edge system of taxation on the business profits tax is still imposed on foreign dividends paid by foreign subsidiaries to US parent companies and, for taxable periods beginning on or after January 1, 2020, on global intangible low-taxed income (GILTI).  The water's edge system of taxation also applies to any overseas business organization that by itself as a separate entity engages in business activity in NH.  The Department states there would be winners and losers depending on this bill's effects on the tax base and apportionment which further complicates estimating the fiscal impact of this bill on revenues.

 

AGENCIES CONTACTED:

Department of Revenue Administration

 

Links

HB1567 at GenCourtMobile
HB1567 Discussion

Action Dates

Date Body Type
Jan. 21, 2020 House Hearing
March 3, 2020 House Exec Session

Bill Text Revisions

HB1567 Revision: 7220 Date: Dec. 3, 2019, 11:39 a.m.

Docket

Date Status
Jan. 8, 2020 Introduced 01/08/2020 and referred to Ways and Means
Jan. 21, 2020 Public Hearing: 01/21/2020 10:00 am LOB 202
Jan. 30, 2020 Subcommittee Work Session: 01/30/2020 01:00 pm LOB 202
Feb. 12, 2020 Subcommittee Work Session: 02/12/2020 10:00 am LOB 202
Feb. 18, 2020 Full Committee Work Session: 02/18/2020 01:00 pm LOB 202
March 3, 2020 Executive Session: 03/03/2020 01:00 pm LOB 202