Department of RevenueJanuary 28, 2008

Analysis of H.F.2058, As Amended and as Proposed to be Amended, Revised Estimates

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CORPORATE FRANCHISE TAX

Foreign Operating Corporations

Foreign Royalty Subtraction

Worldwide Unitary Option

January 28, 2008

Revised Estimates

Department of Revenue

Analysis of H.F. 2058(Lenczewski) As Amended (H2058A1) and as Proposed to be Amended

Fund Impact

F.Y. 2008F.Y. 2009F.Y. 2010F.Y. 2011

(000’s)

General Fund$0$143,000$108,000$107,000

As proposed to be amended, effective for tax years beginning after December 31, 2007.

Department of RevenueJanuary 28, 2008

Analysis of H.F.2058, As Amended and as Proposed to be Amended, Revised Estimates

Page 1

EXPLANATION OF THE BILL

Current Law: Minnesota allows certain intercompany income of a unitary group to be classified as the income of a foreign operating corporation (FOC). Because FOC income receives a dividend received deduction, 20% of this income is subject to tax. In order to qualify for FOC status, a corporation must have 80% or more of the average of its property and payroll factors located outside the United States. Also, a corporation must have at least $1 million of payroll and $2 million of property located outside the U.S.

Corporations are allowed to claim a subtraction against their net income equal to 80% ofintercompany foreign royalty income received from an FOC or a foreign corporation. The recipient corporation and the FOC or foreign corporation must be part of the same unitary business. Royalty income is defined as royalties, fees, or other like income.

Proposed Law: The bill repeals the foreign operating corporation provisions and the foreign royalty subtraction. It also modifies the combined reporting by including the income and factors of foreign affiliates with more than 20% of their property, payroll, and sales in the United States. The combined income of a unitary group would also include the deemed domestic income from certain controlled foreign corporations. These corporations are defined under federal subpart F rules.

Unitary businesses could elect to file on a worldwide unitary basis. Under the election a unitary group would include all of its foreign corporations’ apportionment factors and income on the combined income report. The election would apply for a five-year period.

REVENUE ANALYSIS DETAIL

  • The revenue impact from these changes will vary substantially by unitary group. For some unitary groups, the revenue gain from repealing the foreign provisions may be reduced substantially by using the option to file on a worldwide unitary basis. The revenue impact of the proposal is computed as the net of gains and losses.
  • The revenue estimate is based on data from returns received by the Department of Revenue in calendar year 2005.
  • Since the state of California allows the option of choosing either water’s edgeor worldwide reporting, data from California was used to determine which unitary groups would choose the worldwide reporting option. The California data was matched with Minnesota data to determine the scope of the changes proposed by this bill.
  • The estimates of current law against which the proposal is measured reflect the November 2007 forecast and include the prospective estimated impact of the June 2005 decision by the Minnesota Supreme Court in Hutchinson Technology, Inc., vs. Commissioner of Revenue.
  • The estimates also take into account the phased-in increase of the weighting of the sales factor in the apportionment formula which results in a decrease of the revenue gain in subsequent years.
  • Growth in overall corporate tax collections as projected by the Department of Finance in the November 2007 forecast is used to project future revenue gains.
  • All of tax year 2008 revenue gain is allocated to fiscal year 2009. Other tax years were allocated 30/70 to fiscal years.

Number of Taxpayers: Up to 10,000 corporations may be affected by the bill.

Source:Minnesota Department of Revenue

Tax Research Division

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