Philadelphia, PA, March 7, 2018 – As part of the federal Tax Cuts and Jobs Act of 2017, certain U.S. taxpayers are subject to a new tax known as the Global Intangible Low-Taxed Income (GILTI). The one redeeming effect of GILTI is that it yields a deduction for certain taxpayers, known as Foreign-Derived Intangible Income (FDII). In a nutshell, the GILTI functions as a global minimum tax on business groups with foreign activities. Some relief may be provided through the FDII deduction. In recent months, states have been issuing guidance on how to treat GILTI and FDII. Pennsylvania is one the latest states to do so within the Tax Bulletin 2019-02, as issued on January 24, 2019.
Corporate tax treatment
The calculation for Pennsylvania taxable income begins with the amount of taxable income reported on the federal tax return. For federal income tax purposes, GILTI is taxed similarly to how Subpart F income was in the past. Pennsylvania had treated Subpart F income as dividend income and will apply the same treatment to GILTI income. In conclusion, GILTI will be included in the Pennsylvania corporate income tax base.
The characterization of GILTI income as dividend income will provide the taxpayer to offset some of the income with a dividends received deduction (DRD), depending on the U.S. shareholder’s ownership. Furthermore, the IRC § 250 deductions for GILTI and FDII are considered special deductions for federal purposes. Pennsylvania has stated they do not conform to the special deduction for CNIT purposes. Therefore, Pennsylvania suggests they will disallow the GILTI and FDII deductions, but provide a DRD as some relief.
Lastly, Pennsylvania does not include dividend income in the sales apportionment factor; therefore, GILTI income will be excluded for state apportionment purposes.
Personal tax treatment
Pennsylvania also provided additional guidance on personal tax within the same bulletin. The state specifically describes dividends as distributions in cash or property made out of current or accumulated earnings and profits. For federal purposes, GILTI is considered a “deemed dividend” regardless of the actual distribution of cash. As such, Pennsylvania will not tax GILTI as a dividend for personal income tax purposes until the cash is received by the taxpayer, consistent with a cash-basis methodology.
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