Mar 23, 2015
From KPMG TaxWatch
House Bill 142, which would implement mandatory unitary combined reporting, was introduced in the Alabama legislature on March 5, 2015. Combined reporting is one of eight tax measures proposed by Governor Bentley to alleviate an estimated $700 million budget shortfall. If enacted, combined reporting is anticipated to raise an additional $20 million annually.
Under House Bill 142, effective for tax years beginning after December 31, 2014, a taxpayer engaged in a unitary business with one or more other corporations would be required to file a combined report including the income and apportionment factors of all corporations that are members of the unitary business. Under the proposed bill, “unitary business” is defined broadly as a “a single economic enterprise that is made up either of separate parts of a single business entity or of a commonly controlled group of business entities that are sufficiently interdependent, integrated and interrelated through their activities so as to provide a synergy and mutual benefit that produces a sharing or exchange of value among them and a significant flow of value to the separate parts.” There is no specific statutory ownership requirement for inclusion in the unitary group. House Bill 142 would also grant the Commissioner the authority to combine entities, including non-corporate entities, in various situations. Although non-corporate entities would not be treated as group members (unless the Commissioner invoked this authority), corporate owners of pass-through entities would be required to include the factors and income of partnerships in computing their business income and overall Alabama apportionment. Specifically, the property, payroll, and sales of a partnership would be included in the partner’s apportionment percentage in proportion to a ratio the numerator of which is the amount of the partner’s distributive share of the partnership’s unitary income included in the income of the combined group and the denominator of which is the partnership’s total unitary income.
With respect to net operating losses, House Bill 142 provides that a group member’s share of a net operating loss can only be carried forward or carried back to offset income of that group member. This is the case regardless of whether the taxpayer is or was a member of a combined report in the prior or subsequent year. Similarly, no credits or post-apportionment deductions earned, but not fully used, by one member of the group could be used in whole or in part by another member of the group or applied against the total income of the combined group.
The default filing method for the combined return would be a worldwide combined return. Members of a unitary group could, however, make a water’s edge election. The election, which must be made on a timely-filed, original return, would be binding for ten years, and if not properly withdrawn after a ten-year period, it would remain in place for an additional ten-year period. If the water’s-edge election is made, the entire income and apportionment factors of certain members would be included in the water’s-edge return: members incorporated or formed in the U.S., or a possession or territory of the U.S.; members, regardless of where incorporated, if the average of their property, payroll and sales factors in the U.S. is 20 percent or more; and, members who are DISCs, FSC’s or export trade corporations, as defined in the Internal Revenue Code. The water’s-edge return would also include a portion of the income and the related apportionment factors of members that are controlled foreign corporations, and members that earn more than 20 percent of their income directly or indirectly from intangible property or service-related activities that are deductible against the business income of the other members of the group. Similar to several other recently-proposed combined reporting bills, the combined report would also include the entire income and apportionment factors of a member that is doing business in a tax haven. House Bill 142 defines tax haven as a jurisdiction that, during the tax year in question, has no or nominal effective tax on the income and meets certain other criteria. The bill does not list specific countries that would be considered tax havens.
In addition to the water’s-edge election, House Bill 142 would also allow a taxpayer to treat as a combined group all entities that are members of its affiliated group that are doing business in Alabama or that would be subject to tax if they were doing business in the state. If this election is made, all the income of the affiliated group would be treated as apportionable business income. Finally, the Alabama Department of Revenue would be granted “broad discretion” to “promulgate rules to facilitate the transition from separate entity reported to unitary combined reporting.” Please stay tuned to TWIST for future updates on the proposal.
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The following information is not intended to be "written advice concerning one or more federal tax matters" subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230.
The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.