United States

New York: Tax Appeals Tribunal Holds in Favor of Taxpayer in International Banking Facility Apportionment Dispute

Jun 08, 2015
From KPMG TaxWatch

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The New York State Tax Appeals Tribunal recently affirmed an Administrative Law Judge (ALJ) decision rejecting the audit division’s standard approach for curtailing apportionment benefits available to International Banking Facilities (IBF).  As a New York State Tax Tribunal decision, this case is now final and constitutes binding precedent for both the State and New York City.  It is important to note, however, that effective January 1, 2015, as part of New York’s 2014 tax reform, the Bank Tax and Corporate Tax law were merged, and the special provisions applicable to IBFs were eliminated.  These issues remain important, however, as the statute of limitations for years prior to 2015 is open and these tax years are subject to exam by the State and City.

New York’s Bank Tax law provided two methods for banks to carve out the income or apportionment attributes attributable to their IBFs – the Income Modification Method and the Formula Allocation Method.  The Income Modification Method permitted a bank to exclude from its New York Bank Tax base the income earned by the IBF related to its transactions with foreign persons, less any direct and indirect expenses attributable to the IBF’s operations.  Banks electing this method excluded from their allocation formula any payroll, receipts, and deposits attributable to the IBF.  This method reduced the bank’s pre-allocation tax base and effectively treats the IBF as though it and the bank are separate entities. 

Under the Formula Allocation Method, a bank subtracted from the “New York numerators” of its respective deposits, payroll, and receipts allocation factors, the values which are properly attributable to the IBF’s production of “eligible gross income” (i.e., income from foreign persons).  The Formula Allocation Method therefore reduced the bank’s New York allocation percentage and effectively treats the IBF as though it were a foreign branch of the bank.  A bank that has established an IBF has the right to elect on an annual basis either the Income Modification Method or the Formula Allocation Method. 

The taxpayer at issue, Unicredit Bank, elected the Formula Allocation Method on its 1999 and 2000 Bank Tax returns and therefore excluded the apportionment factors related to its IBF in computing its allocation percentage.  The audit division asserted that Unicredit’s application of that method inappropriately excluded deposits, payroll, and receipts that related to ineligible income of the IBF from the numerator of those factors, thereby resulting in an overall New York allocation percentage below what was required.  To remedy that result, the audit division limited the exclusions from Unicredit’s apportionment factors by applying a “scaling ratio” to the claimed exclusion amounts.  The scaling ratio was a ratio of the IBF’s eligible gross income to its total gross income. 

Use of a scaling ratio is included in the regulations applicable to the Income Modification Method, but not the Formula Allocation Method chosen by the taxpayer.  Likewise, the 1999 and 2000 Bank Tax form instructions did not direct taxpayers to apply a scaling ratio or any other method to reduce amounts excluded from the allocation percentage calculation when using the Formula Allocation Method. However, the audit division has consistently required use of the scaling method in examining taxpayers, and the 2003 return instructions were revised to require use of a scaling ratio. 

Unicredit argued that application of the scaling ratio in its case was not supported by the regulations governing the Bank Tax law.  The ALJ agreed.  The Tribunal affirmed, holding that “a plain reading of the statutes and regulations governing the calculation of petitioner’s [Unicredit’s] Allocable Taxable ENI indicates that the concept of ineligible income and the application of the Scaling Factor that flows therefrom are not applicable to the Formula Allocation method.”  Please contact Russ Levitt at (212) 872 6717 with questions on Matter of Unicredit S.P.A., May 19, 2015.


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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.