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GILTI pleasure? DFL tax plan opts for new business taxes that could be less problematic than worldwide combined reporting

Worldwide combined reporting would have required corporations with foreign subsidiaries who owe income taxes to the state to include earnings of overseas subsidiaries.

Private talks between House Taxes Committee Chair Aisha Gomez and her Senate counterpart Ann Rest, above, were completed Wednesday evening.
Private talks between House Taxes Committee Chair Aisha Gomez and her Senate counterpart Ann Rest, above, were completed Wednesday evening.
MinnPost photo by Peter Callaghan

Minnesota tax negotiators abandoned one method to capture income of companies that have overseas subsidiaries and replaced it with another.

Goodbye worldwide combined reporting. Hello GILTI.

Private talks between House Taxes Committee Chair Aisha Gomez and her Senate counterpart Ann Rest were completed Wednesday evening. A deal announced then combines tax increases, tax cuts and what are termed tax expenditures to meet a $3 billion net reduction in revenue over the next two years.

That was their target. But the dozens of decisions needed to get there include around $4 billion in tax benefits that include everything from rebate checks to letting a school district not pay sales taxes on construction of a new school. It also includes more than $1 billion in tax hikes. Most of those are on businesses and high earners.

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“Many Minnesotans’ question, which is fair, you’ve got a surplus, why is revenue in that?” Gov. Tim Walz said Wednesday during a news conference. “The areas where we’re talking about revenues are very, very dedicated for those things that we know are going to need long-term funding.”

State Rep. Aisha Gomez
State Rep. Aisha Gomez
The biggest missing item in the conference committee report was a proposal the House had made to create a new 5th income-tax tier. The rate of 10.85% would have kicked in on incomes of $1 million for married couples and $600,000 for individuals. The current top rate is 9.85%. The new tier would have affected 24,200 taxpayers, or about 0.8% of all filers, with an average increase of $9,231 a year. 

Senate leaders didn’t go for the new income tax, but the largest new item in the agreement is known by the acronym GILTI for global intangible low tax income. It is expected to raise $437 million over the next two-year budget period.

Other increases are items that only tax accountants might understand, if not love:

  • Changes to how corporations deduct dividends from domestic subsidiaries raises $128 million.
  • A new tax on investment income like interest, dividends and royalties of individuals, trusts and estates raises $128 million.
  • A faster phase-out of standard and itemized deduction of high earners starting at $300,000 in adjusted gross income raises $354 million.

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But GILTI got more attention, because it replaced worldwide reporting of corporate income. Sen. Bill Weber, the Senate Republican on the taxes conference committee, joked that he would be hard pressed to explain it. He isn’t alone.

Worldwide combined reporting would have required corporations with foreign subsidiaries who owe income taxes to the state to include earnings of overseas subsidiaries. The intent was to confront corporations who shift earnings to other countries to avoid federal and state taxes.

Had Minnesota followed through, it would have been the only state to fully tax such earnings, though Alaska does so for its oil and gas companies. No other countries do so. It would have raised $600 million over two years but whether it could have been collected was a question mark. If corporations didn’t pay, proving they owed the state money would require access to records kept in other countries.

While it was included in the tax bills that passed the House and Senate, Rest pulled her caucus’s support shortly after House-Senate negotiations began.

“The worldwide reporting provision no longer has our support,” she said on the first day of negotiations. She did say that her caucus liked the GILTI provision, though the offer wasn’t accepted by the House until after several days of closed-door talks that included Gov. Tim Walz and his Revenue Commissioner Paul Marquart.

State Rep. Paul Marquart
State Rep. Paul Marquart
So what is GILTI? Paul Marquart, as House Taxes Committee chair, first proposed the tax change in 2019 when he was chair of the House Taxes Committee. It was the result of the GOP-passed Tax Cuts and Jobs Act in 2017 that offered lower taxes to corporations that repatriated some foreign income to the U.S. At the same time, Congress crafted a way to continue to tax certain income that some corporations continued to hold in foreign subsidiaries.

Marquart thought that because a GOP-Congress passed the provision and President Trump had signed it, that Republicans who controlled the state Senate would think it was OK. They didn’t. 

With Democrats running both the House and Senate, and with the conference committee looking for money to replace worldwide combined reporting, GILTI is back.

Marquart explains the concept like this: Some corporations continue to transfer what are called intangible assets or intellectual properties such as patents, trademarks and copyrights and drug formulas to foreign subsidiaries. They then buy them back or rent them back by transferring payments overseas. That money then is treated as a business expense rather than an asset for tax purposes.

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In addition to being a way to lower their taxes in the U.S., these transfers gave companies with foreign subsidiaries an advantage over domestic companies that do not, he said.

“It was President Trump and a Republican Congress who said, we have to deal with this problem,” Marquart said. “To me it was always leveling the playing field with small businesses.”

The Department of Revenue also has more confidence in its estimates of how much revenue joining the federal government in implementing GILTI would bring to the state than it did with worldwide combined reporting. While Marquart said he thinks the estimates of how much potential tax revenue was out there were accurate, collecting it was a challenge.

“Let’s say you’ve got a company that’s China-based,” he said. “You think China’s gonna give us your numbers and what your companies are? We knew the money was out there. We just didn’t quite know how to bring it in for sure.”

GILTI is easier to estimate because corporations that pay Minnesota corporate taxes already report to the state how much they paid to the U.S. because it is deducted from its state taxes, he said. Those tax payments are a subset of what the state might have collected via worldwide reporting.

The Tax Foundation explains GILTI this way: “GILTI allows the U.S. to be relatively indifferent about where U.S. companies do business in the world — in high-tax countries or low-tax countries — so long as companies are paying at least a minimum rate of tax.” 

“To the extent that companies are not paying that minimum rate of tax, the tax on GILTI gives the U.S. the opportunity to charge a top-up tax to ensure the minimum is paid,” the foundation said.

The same is true for some 20 states and the District of Columbia that impose the tax.