The New York State 2018 legislative session included a couple bills, including a State Senate draft of the budget bill, that aimed to exclude so-called GILTI income (explained below) from the corporate tax base. However, as finally passed, the new law is silent as to the treatment of such income. That is especially bad news for banks and other financial institutions that expect to report significant amounts of GILTI and do business in New York. Does the silence mean that a taxpayer with GILTI must include its GILTI inclusion in New York State taxable income, or does the silence mean that the legislature recognized other already-available methods to exclude such income, and therefore the explicit exclusion was not needed? Of course, we can debate for a lifetime what legislative silence means and never reach an answer. This Legal Update highlights several possible avenues for removing the GILTI inclusion from the tax base—some that are fairly obvious (but important and practical) and a few that are much less obvious but worthy of consideration nonetheless. While we focus primarily on New York, many of these positions are equally applicable in other states as well.


The Tax Cuts and Jobs Act ("TCJA") created a new type of taxable income, called "global intangible low-taxed income" or "GILTI." Some states' laws will function in a way that GILTI income will not be included in the state's tax base to begin with. Some states' laws may explicitly exclude the GILTI inclusion or provide a subtraction or other modification. But in many of the states that conform to the Internal Revenue Code, as amended by the TCJA, there is no specific guidance that addresses the GILTI inclusion, causing concern that the GILTI inclusion will be includible in the state tax base and there will be no clear statutory modification to remove it.

The GILTI provisions are intended to discourage companies from moving or maintaining valuable intangibles outside of the United States and avoiding US tax on the income they generate. The US shareholder of a controlled foreign corporation (a "CFC") must include in gross income in the current year such shareholder's GILTI inclusion, which is very generally the US shareholder's share of net CFC tested income minus its net deemed tangible income return for the year.1 Income already included in US taxable income (as a result of subpart F, as effectively connected income, etc.) is excluded from the GILTI inclusion. US shareholder is a defined term that applies to a US person that owns at least 10% of the vote or value of a foreign corporation (after taking ownership attribution into account). The US Treasury Department released an initial installment of proposed regulations that address important aspects of the GILTI inclusion under section 951A of the Internal Revenue Code, but also leave open significant questions. For an analysis of the new proposed regulations, please read Mayer Brown's related Legal Update, GILTI Pleasures: The IRS Releases Proposed Regulations on Global Intangible Low-Taxed Income.2

Because many states conform to the federal tax code as currently in effect, those states will look to line 28 (or line 30) of the federal form 1120 as a starting point. The GILTI inclusion will generally be included in the starting point, because it will be incorporated into line 28, but the deduction provided in section 250 of the Internal Revenue Code may not naturally flow into the starting point because special deductions are not included in line 28. The new proposed regulations for GILTI are relevant to the inclusion that goes into the line 28 or line 30 starting point.

Some states may have or may enact modifications to provide partial or complete GILTI relief. But for the remainder of states, taxpayers are left with inflated state entire net income amounts. Even though GILTI does not represent actual cash received, state taxable income will increase, sometimes substantially. Financial institutions, as they have certainly discovered, face an acute problem at the state level because they have the twin pressure of intangible assets and capital requirements abroad.

There are several avenues a taxpayer should consider to mitigate the tax increase. This Legal Update discusses 5 (and ½) of those potential avenues.

Door No. 1 – Subpart F Treatment

Many states exclude Subpart F income from the state tax base. Therefore, if GILTI is considered Subpart F income for state tax purposes, it could be excludable on that basis.

GILTI is not Subpart F income but it shares a statutory scheme with Subpart F income. Much like Subpart F income, GILTI arises from a US shareholder's interest in a CFC.3 Additionally, the TCJA requires that US shareholder to include GILTI in current year gross income, despite GILTI amounts remaining undistributed by the CFC.4 However, GILTI amounts are not included in the definition of Subpart F income and are explicitly determined without regard to amounts that would be considered Subpart F income of the CFC; GILTI would be included in the US shareholder's gross income even if the CFC would not otherwise generate Subpart F income to the US shareholder.5

Of course, there is an argument that GILTI is enough like Subpart F income that it should be entitled to the same treatment for state purposes. Before the TCJA, if what is now GILTI had become taxable in the United States, it would have been taxable as a dividend from a CFC. Recognizing this, a congressional Conference Committee Report analyzing a draft of the Senate version of what eventually became the TCJA stated "although [GILTI] Income inclusions do not constitute subpart F income, [GILTI] inclusions are generally treated similarly to subpart F inclusions."6 Indeed, the GILTI provisions require GILTI to be treated as if it were Subpart F income in applying certain other provisions of the Code.7

For many financial institutions, the Subpart F exception for qualified banking or financing income8 means that Subpart F income is not a material factor in their state tax bases, and GILTI redirects that income into their state tax bases for the first time, without the benefit of tax credits that apply at the federal level. For these taxpayers, the similarity (and differences) between Subpart F income and GILTI are exceptionally meaningful, and they will presumably report net tested income largely from unitary affiliates, which is relevant to the options discussed below.

Due to the similarities between GILTI and Subpart F income, some corporations will take the position that GILTI should have the same consequences as Subpart F income at the state level. Those corporations should find a basis in the statutory frameworks that exclude Subpart F income; often an exclusion or deduction exists for US constitutional reasons and the considerations that apply to Subpart F income also apply to GILTI because of the different tax results that would arise for income from US subsidiaries and foreign subsidiaries. Therefore, it can be argued that the application of an exclusion or deduction for Subpart F income, whether provided by statute or pulled into a dividends received deduction, applies to GILTI as well, in order to give effect to the statutory scheme and to carry over the likeness provided in the Internal Revenue Code.

In New York State, the franchise tax provides a very specific template for excluding the Subpart F income of unitary subsidiaries and it means that financial institutions, as a result of the qualified banking or financing exception, will characterize income as GILTI that other taxpayers will characterize as Subpart F income (and exclude). Imposing different tax results on these similarly situated taxpayers would not make sense, and would contradict the intent of the recent tax reform legislation under Article 9-A of the New York Tax Law. The old law—applicable to tax years beginning before 2015—provided an exemption for income from subsidiaries, including Subpart F income, and the new law was designed to maintain that exemption to the extent of stock in unitary corporations. It provides a specific exemption for Subpart F income and dividends from unitary corporations that are not included in the taxpayer's combined group (often non-US subsidiaries).9 Of course, GILTI did not exist at that time, and the drafters did not anticipate the new inclusion, but they would have treated it like Subpart F income if they could have foreseen the TCJA. Given this background and the disparate treatment applicable to a single industry, GILTI and Subpart F income should incur the same tax consequences. The two categories of income have more relevant similarities than differences in this context. States may note that the Internal Revenue Code does not characterize GILTI as a deemed dividend for any purpose, in contrast to Subpart F income, and that GILTI is a share of active business income. However, the origin of the income abroad means that similar constraints apply to taxing it.


1 This Legal Update does not address the nuances of GILTI at the federal level. [For Law360 coverage of the federal implications of GILTI, see Gary Wilcox, Jason Osborn, Rebecca Eisner, and Brad Peterson, Tax Reform Reshuffles The Deck For Outsourcing, Law360, Jan. 17, 2018; Frederick Fisher, Barbara Goodstein, Michael Marion, Adam Wolk, Christopher Chubb, and Lucas Giardelli, The Impact of Tax Reform On Leveraged Transactions, Law360, Mar. 20, 2018.]

2 See Mark H. Leeds and Lucas Giardelli, GILTI Pleasures: The IRS Releases Proposed Regulations on Global Intangible Low-Taxed Income, Mayer Brown Legal Update, Sept. 21, 2018.

3 IRC § 951A(a).

4 IRC §§ 951A(a), (b), (c).

5 IRC §§ 951(a), 952(a), 951A(c)(2)(A)(i)(II).

6 Staff of J. Comm. on Taxation, Description of the Chairman's Mark of the "Tax Cuts and Jobs Act," No. JCX- 51-17, at 227 (Nov. 13, 2017).

7 IRC § 951A(f)(1)(A).

8 IRC § 954(h).

9 N.Y. Tax Law § 208(6-a).

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