Multinational corporations are waiting to find out how each state will decide to tax their foreign earnings as tax legislation shifts to accommodate the current pandemic. Federal tax law’s global intangible low-taxed income, or GILTI, is a category of foreign income added to corporate taxable income each year. It is a tax on earnings that exceed a 10 percent return on a company’s invested foreign assets. Its purpose is to reduce the incentive to shift corporate profits out of the United States.
While we cannot speculate on what the outcome would have been pre-COVID-19, many states are delaying guidance because they need to now take into account the state revenue implications. If states consider a taxpayer-favored approach to GILTI, they ultimately will lose revenue, a burden most states cannot bear.
Business groups have opposed efforts by states to tax GILTI, stating that taxing authorities shouldn’t extend beyond national borders. Historically, states have not included foreign income in their tax base and corporations have lobbied for similar treatment for GILTI. There have been a number of pieced together regulations to address this due to the complicated nature of this new federal provision. Currently, twenty-one states have deviated from the federal provisions and do not tax GILTI, six states have not issued any guidance, six states do not have corporate income tax, and eighteen states tax GILTI but in different ways.
Corporations should be prepared for changes in state tax law in response to fallout related to the pandemic. Revenues have dropped significantly in most states so budgets will be scrutinized. The revenue will have to be made up somewhere, which brings these issues back on the table. Major spending and tax issues, including GILTI, will likely be up for review in legislative sessions.
If you have questions about your state and local tax (SALT) requirements, contact our team today!