On April 17, 2019, the Comptroller of Maryland issued a Tax Alert to provide guidance to taxpayers on the state’s taxation of global intangible low-taxed income (GILTI), a new category of foreign earnings subject to federal income tax as a result of provision enacted by The Tax Cuts and Jobs Act (TCJA). The Tax Alert outlines Maryland’s treatment of GILTI, as well as the different reporting requirements for C corporations, pass-through entities, and individuals.
The TCJA enacted the GILTI provisions (IRC section 951A) to target businesses with offshore intangibles that have significant value outside the country. U.S. shareholders that own 10% of a controlled foreign corporation (CFC) are required to report and pay U.S. federal income tax on a new category of undistributed income from the CFC. The GILTI rule taxes the U.S. shareholders of CFCs on income that is considered to be excessive, as compared to the CFC’s tangible assets.
States have taken different approaches to their treatment of GILTI, so multistate taxpayers need to be aware the specific rules in each jurisdiction. The state treatment of GILTI, as is the case in Maryland, also can be different depending on the type of taxpayer. Some states have existing provisions that may address whether GILTI is ultimately excluded, in whole or in part, from the state income tax base. Still, the applicability of these provisions may depend on whether the particular state characterizes GILTI as a deemed dividend.
The Tax Alert generally outlines the reporting requirements on the income returns for each type of taxpayer. Maryland’s Tax Alert clearly states that the Comptroller considers GILTI to not be a dividend or deemed dividend. Thus, a subtraction under Maryland’s dividend received deduction will not be allowed for GILTI. For C corporations, GILTI and the corresponding IRC § 250 deduction are included in Maryland taxable income for corporations. However, there is no foreign tax credit for GILTI, as may be the case for federal income tax purposes. For pass-through entities and individuals, GILTI is similarly included in Maryland taxable income. However, due to the IRC § 250 deduction specifically provided, under federal rules, for C corporations, the Tax Alert indicates that the deduction is not allowed on Maryland pass-through entity or individual income tax returns.
The Tax Alert also addresses how GILTI is reflected in the Maryland apportionment factor. Specifically, the Maryland sales factor should include the entire amount of GILTI in the denominator of the factor. The numerator should include a percentage of GILTI equal to the average of the payroll and property factor percentages. This rule is based on the treatment of GILTI as income attributable to intangibles, the sales factor treatment of which is addressed in an existing Maryland regulation.
As indicated above, other states are treating GILTI differently. Massachusetts, for example, has amended its definition of “net income” for corporate excise tax purposes to include GILTI, but the law provides that GILTI will be treated as a dividend received. Thus, eligible corporate excise taxpayers can subtract 95% of GILTI through Massachusetts dividends received deduction. Virginia has similarly amended its corporate income tax law to allow a full subtraction of GILTI. Taxpayers that have GILTI need to be aware of the varying state income tax treatment, as well as the specific reporting requirements.
If you have questions regarding Maryland’s Tax Alert, please contact your Aronson tax advisor or Michael L. Colavito, Jr. at 301.231.6200.