Tennessee Enacts State Subtraction Modifications to Federal Tax Cuts and Jobs Act Foreign Repatriation Income

On May 8, 2019, Governor Bill Lee signed Senate Bill 558 (SB558), which allows for the subtraction of foreign repatriation income related to IRC §965 Transition Toll Tax on foreign earnings and IRC §951A Global Intangible Low-Taxed Income (GILTI) to the extent included in federal taxable income in computing Tennessee franchise and excise (income) tax. SB558 applies retroactively for all tax years beginning on or after January 1, 2018.

IRC §965 Transition Toll Tax - Federal Overview & Treatment

For taxable years beginning on or after January 1, 2018, dividends attributable to foreign source income received from controlled foreign corporations (CFCs) will generally no longer be taxable as a result of the 100% dividends received deduction. In light of this, IRC §965 requires the inclusion of post-1986 undistributed deferred foreign earnings and profits from specified foreign corporations for taxable years beginning prior to January 1, 2018, as taxable income subject to a special one-time transition toll tax.

  • The “gross” amount of IRC §965 income (gross §965(a) income) is the amount of undistributed earnings & profits (E&P) of the taxpayer’s foreign corporation stockholdings, including offsets of any E&P deficits of any owned foreign corporations by the greater of such net amount of E&P as of November 2, 2017, or December 31, 2017. [IRC §965(a) & (b)]
  • A IRC §965(c) participation exemption deduction (§965(c) deduction) is calculated on the gross §965(a) income amount to adjust such income to be federally taxed at reduced blended income tax rates depending on the nature of the balance sheet assets of these foreign corporations. [IRC §965(c)]
  • The difference between the taxpayer’s gross §965(a) income and the §965(c) deduction becomes the net taxable IRC §965(c) income before any consideration of IRC §78 gross up income on deemed taxes paid to the extent any federal foreign tax credits are claimed against such income.
  • The amount of transition toll tax is calculated on the net taxable IRC §965(c) income plus any related IRC §78 gross up income, net of any foreign tax credits.
IRC §951A Global Intangible Low-Taxed Income (GILTI) & IRC §250 Foreign Derived Intangible Income Deduction (FDII) - Federal Overview & Treatment

For tax years beginning on or after January 1, 2018, IRC § 951A requires that a U.S. shareholder of a CFC must include its GILTI in gross income in a manner similar to Subpart F income. GILTI is defined as net deemed intangible income return in excess of 10 percent of the qualified business asset investment (i.e. net income of each CFC) over a deemed return on the tax basis of depreciable property.

Subchapter C corporations with GILTI are allowed to claim a FDII deduction against 50 percent of such income on its federal return under IRC §250. The FDII is not available to subchapter S corporations or non-corporate taxpayers.

Tennessee Senate Bill 558 Highlights

SB558 requires the following state modification adjustments to the federal taxable income starting point:

  • An addition of 5 percent of the gross amount of GILTI included in federal taxable income before the IRC §250 FDII deduction;
  • An addition of 5 percent of the gross amount of IRC §965(a) income included in federal taxable income before the IRC §965(c) deduction;
  • A subtraction of 100 percent of the amount of GILTI as included in the federal taxable income starting point before any state addition or subtraction modifications; and
  • A subtraction of 100 percent of the amount of IRC §965 income (i.e. net IRC §965 taxable income after the IRC §965(c) deduction) as included in the federal taxable income starting point before any state addition or subtraction modifications.

The net end result of these state modifications to federal taxable income would be the remaining inclusion of 5 percent of the amount of gross IRC §965(a) income and 5 percent of the gross amount of GILTI without offset of the FDII deduction in the taxpayer’s Tennessee excise tax base.

Tennessee’s statutes do expressly provide for a state subtraction of income included in federal taxable income that is not taxable under Tennessee franchise and excise tax provisions, which would include IRC §78 gross-up income. Thus, any IRC §78 gross-up income included in federal taxable income separately reported as related to IRC §965 or GILTI would be availed a full 100 percent subtraction from the Tennessee excise tax base.

In the case of dividend income generated from 80 percent or greater owned CFCs, Tennessee provides an existing statutory state subtraction of such amount from federal taxable income.

In the case of IRC §965 income, the Tennessee Department of Revenue issued guidance regarding repatriated earnings subject to transition tax, providing that IRC §965 income would be treated as dividend income subject to the dividends subtraction to the extent such income was received from 80 percent or greater owned corporations and included in the federal taxable income base.

There are currently no Tennessee statutes, regulations or other administrative guidance that have been issued affirming whether any net residual GILTI income remaining in the taxable income base after the above-mentioned SB558 state modifications would meet the definition of dividend income for purposes of applying the subtraction of such income from 80 percent or greater owned CFCs; however, this should be monitored for potential subsequent guidance issued by the Tennessee Department of Revenue (Department) clarifying this issue. To the extent such income is determined by the Department to not constitute dividend income availed the state subtraction, opportunities to include such net residual GILTI income in the sales apportionment factor denominator should be explored.