GILTI or Not Guilty

This Article addressed the newly enacted GILTI provisions in the Tax Cuts and Jobs Act and their interplay with state corporate income taxes. If GILTI were not difficult enough to deal with on just the federal level, its interaction with a state corporate income tax takes that difficulty to new heights (or depths). While Congress intended GILTI to deal with the shifting of profits abroad, not all GILTI is abusive tax haven income; the calculation of GILTI is complicated and can capture legitimate manufacturing and financial services. This may be an acceptable price to pay for shutting down more egregious games. Even though the federal government can tax GILTI, not all states can do so, despite what their legislatures might want. That is because the states must abide by the Supreme Court and the U.S. Constitution’s supremacy clause and foreign commerce clause. In Kraft, the Supreme Court prevented Iowa from discriminating against foreign dividends in favor of domestic dividends. Those who support state taxation of GILTI would like to limit Kraft to only dividends, but that is a questionable proposition. Under Kraft, separate entity states cannot tax GILTI. Conversely, the one mandatory worldwide reporting state — Alaska — will automatically include GILTI as part of the combined group. In the water’s-edge states, unless a state is also the commercial domicile of the U.S. corporation, GILTI can be taxed only if a unitary relationship exists between the GILTI foreign corporation and the U.S. taxpayer. Often times, this is an intensive facts and circumstances inquiry. Moreover, there is little judicial guidance on how to conduct this inquiry with modern complicated and sophisticated foreign structures. Determining how factor representation should be implemented may be even more difficult. Of course, a state legislature may nonetheless determine that the projected revenue makes it worthwhile for a tax department to deal with all this complexity (or to simply ignore it).