United States

New Jersey: Foreign Taxpayer not required to Pay New Jersey Corporation Business Tax on Worldwide Income

Dec 11, 2017
From KPMG TaxWatch

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The New Jersey Tax Court recently addressed whether a company headquartered and incorporated in India, with a branch location in the United States, was required to add back worldwide income in computing its New Jersey Corporation Business Tax (CBT) liability. As a non-U.S. corporation, the taxpayer filed Form 1120-F, reporting its federal taxable income before net operating loss and special deductions on line 29 of that return. This is the same amount that is reported on line 28 of the Form 1120. Under the India/U.S. tax treaty and a pre-filing agreement with the IRS, the income reported for federal tax purposes by the  taxpayer was generally limited to its U.S. source income. When filing its original New Jersey CBT returns for tax years at issue, the taxpayer added back its foreign source income, essentially making its worldwide income the starting point in computing New Jersey entire net income. The taxpayer later filed amended CBT returns using its federal income reported on line 29 of the Form 1120-F (federal taxable income before net operating losses and special deductions) as its starting point. After the Division denied the resulting refunds, the matter came before the tax court.

Under the CBT Act, entire net income is broadly defined as “total net income from all sources, whether within or without the United States.” This broad definition is then limited by language in the CBT statute which states “… the amount of a taxpayer’s entire net income shall be deemed prima facie to be equal in amount to the taxable income, before the net operating loss deduction and special deduction, which the taxpayer is required to report … to the United States Treasury Department for the purpose of computing its federal income tax …” The Division essentially argued that although entire net income is deemed to be the amount reported for federal, this was not an absolute requirement. The tax court disagreed. Citing to the earlier IBM case, the court held that where no specific exception is identified, the clear intent of the legislature was to couple entire net income to federal taxable income. In reaching this conclusion, the court rejected the Division’s position that the holding in Toyota Motor Credit Corporation undercut the IBM decision and allowed a taxpayer to deviate from Line 28 without a specific statutory adjustment. In Toyota, the taxpayer was allowed, for CBT purposes, to adjust its federal basis in property for the purpose of reducing the gain realized on the sale of leased vehicles. The adjustment was allowed after the tax court held that the Legislature intended to tax only an entity’s actual economic gains and not phantom income. The Division attempted to argue that it was contradictory that a taxpayer could adjust its base without a specific adjustment, but that the Division could not increase a taxpayer’s state tax base to capture excluded income.  In the court’s view, the Toyota holding was inapplicable because that case addressed phantom income, not the starting point in computing the entire net income tax base. The tax court ruled in favor of the taxpayer. Please contact Jim Venere at 973- 912.6349 with questions on Infosys Limited of India, Inc. v. Division of Taxation. 

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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.