United States

New Mexico: Failure to Allow Deduction for Foreign Dividends and Subpart F Income Did Not Violate the Foreign Commerce Clause

Apr 16, 2018
From KPMG TaxWatch

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In a lengthy decision, a New Mexico hearing officer ruled that a taxpayer filing a consolidated return in New Mexico was not allowed a dividends-received deduction for or to otherwise exclude dividends and Subpart F income received from more than 50 percent owned controlled foreign corporations. The issue was whether the Department’s failure to allow such a deduction discriminated against foreign commerce when the Department employed the so-called Detroit formula to provide factor relief. This was a case of first impression in New Mexico. Earlier cases/hearing officer decisions had addressed the situation in the context of separate entity reporting and unitary combined reporting. Uniquely, New Mexico allows taxpayers to elect among three distinct filing methodologies: separate reporting, unitary combined reporting, and consolidated reporting. Regardless of the chosen filing method, the starting point in determining New Mexico base income is a corporation’s federal taxable income, which includes dividends from foreign subsidiaries. Dividends from domestic subsidiaries, in contrast, are eligible for a dividends-received deduction for federal tax purposes. In the context of separate reporting, the New Mexico Supreme Court had previously held that taxing foreign dividends under the separate reporting method ran afoul of the foreign Commerce Clause, even with factor relief. In contrast, a New Mexico hearing officer had held the opposite in a case involving combined reporting.

The hearing officer in this case concluded that because under the consolidated filing method the domestic income of the taxpayer’s domestic subsidiaries is included in the consolidated group’s tax base, there was no discrimination when a portion of the more than 50 percent owned foreign subsidiaries’ income was likewise included.  Notably, there was a “taxing symmetry” between the treatment of foreign-sourced income and the aggregate of domestic income when a taxpayer filed on a consolidated basis. In reaching this conclusion, the hearing officer rejected the Department’s position that by electing to file on a consolidated group basis, the taxpayer had waived its right to raise Commerce Clause arguments. This “recycled” argument had been raised and dismissed by the New Mexico Supreme Court. The hearing officer also upheld the Department’s use of the “Detroit Formula” to incorporate the taxpayer’s relevant foreign payroll, property and sales into the denominator of the apportionment formula. Please contact Nick Palmos at 214-840-4076 with questions on Matter of the Protest of General Electric Company.


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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.