United States: Oregon Temporarily Disallows Use Of Credits To Pay Corporate Minimum Tax And Amends Tax Haven Provisions

Oregon Governor Kate Brown signed legislation on July 20, 2015 which specifies that, for tax years beginning on or after January 1, 2015 and before January 1, 2021, tax credits cannot be used to satisfy a corporate minimum tax (CMT) liability.1 The legislation was enacted in response to a 2013 Oregon Supreme Court decision which had allowed a taxpayer to utilize a business energy tax credit (BETC) to satisfy a CMT liability.2 The legislation also makes changes to various tax credits, including extending some expiration dates. Other legislation, signed July 21, 2015, prospectively modifies "tax haven" rules requiring inclusion of income and apportionment factors from entities incorporated in designated jurisdictions to be included in the computation of taxable income for members of an affiliated group.3

Credits

Background

The Oregon Supreme Court held in 2013 that a taxpayer could utilize a BETC to satisfy its obligation to pay a CMT4 of $75,000 on its Oregon corporate excise tax return.5 Specifically, the Supreme Court concluded that there was no language in the CMT statute that prevented a credit from being used to pay the tax. Also, unlike the statutory language for some other credits, there was nothing in the BETC statute that precluded applying the credit against the CMT.

This decision provided a refund opportunity to taxpayers that had a BETC in the same year(s) for which they paid their CMT liability. Similarly, taxpayers with credits under other Oregon statutes that did not explicitly disallow the use of the credit against the CMT were able to use this case to support refund claims and/or reduce their current liabilities.

The decision also made the purchase of credits an attractive option to corporations that wished to reduce their expected CMT obligations.

Changes to Use of Credits

The enacted legislation removes this option for taxpayers for tax years beginning on or after January 1, 2015, and before January 1, 2021.6 Specifically, the legislation provides that the CMT may not be reduced, paid or otherwise satisfied through the use of any tax credit.7 For tax years beginning on or after January 1, 2021, this language is redacted.8

Other Changes

The legislation extends availability of certain credits through tax years beginning prior to January 1, 2022 (previously set to expire for tax years beginning on or after January 1, 2016), including the additional personal exemption credit for personal income taxpayers with a severe disability,9 credit for early intervention services for a disabled child,10 and credit for contributions to the child care division.11 Other credits, including the credit for individuals providing rural medical care, and the credit for certified film production development contributions, were also extended.12 Finally, a credit against personal income tax for certain expenses relating to finding employment was enacted and is available for tax years beginning on or after January 1, 2016 and before January 1, 2022.13

The Oregon Department of Revenue is required to work with the Oregon legislature to prepare an analysis of options for restructuring Oregon's state and local revenue system, with an initial report due by December 1, 2015.14 Precise options to be analyzed include: (i) alternatives for restructuring the property tax system; (ii) alternative methods of taxing consumption in Oregon; (iii) alternative methods for taxing business in Oregon including taxes based on net income, and commercial activity and value-added taxes; and (iv) alternatives for restructuring the personal income tax.15

Tax Haven Rules

For purposes of computing Oregon taxable income for a member of an affiliated group of corporations filing a consolidated federal income tax return, an addback to federal taxable income is required based on the amount of taxable income or loss of any corporation that is a member of the unitary group and incorporated in a designated "tax haven" jurisdiction.16 Apportionment factors from these entities are also included in the calculation of the apportionment factor for the unitary group.17

For tax years beginning on or after January 1, 2016, the list of designated "tax haven" jurisdictions is modified.18 Specifically, the new legislation adds the following jurisdictions to the previously existing list of designated "tax havens:" Bonaire, Curacao, Guatemala, Saba, Saint Eustatius, Saint Maarten, and Trinidad and Tobago.19 Monaco and the Netherlands Antilles are removed from the list.20

Further, the legislation clarifies that corporations affected by this addback are eligible to petition the Department for alternative apportionment if the resulting tax burden does not fairly represent the extent of the taxpayer's activity in Oregon.21

Finally, the Department is required to adopt rules to determine the computation of income or loss for a corporate member of a unitary group that is not otherwise required to file an Oregon consolidated return and rules to prevent double taxation or double deduction of any amount included in the computation of income under Oregon's "tax haven" laws.22

Commentary

Enactment of legislation effectively closing the "loophole" provided by the Oregon Supreme Court's 2013 decision is not surprising. However, the expiration of the corrective language after a six-year period is somewhat curious. Perhaps the current legislative body recognized that, with many of the currently existing tax credits now set to expire near that deadline, more decisions surrounding credit use in general will be required by a future legislature and executive administration. This is in line with the general purpose of the legislation requiring that a fuller examination of the current Oregon tax system, along with consideration of potential prospective alternatives, be performed.

Due to the retroactive elimination of the opportunity to use certain credits to offset an Oregon CMT liability, taxpayers who had anticipated using the credits in 2015 should consider the impact of the legislation on their estimated tax payment requirements. Although the legislation was enacted in the third quarter of the calendar year for financial statement tax provision purposes, any first and second quarter tax estimates are now past due.

Enactment of a provision specifically allowing taxpayers affected by the "tax haven" addback requirements23 to request alternative apportionment to accurately reflect income is interesting. The provision implicitly acknowledges that there are limitations to Oregon's right to tax these foreign entities, but avoids a clear attempt to provide a consistent solution. Instead, the legislature simply places the burden on the Department to adopt rules to prevent a potential constitutional defect.

Footnotes

1 Ch. 701 (H.B. 2171), Laws 2015.

2 Con-Way Inc. & Affiliates v. Department of Revenue, 302 P.3d 804 (Or. 2013). For a discussion of this case, see GT SALT Alert: Oregon Supreme Court Holds Business Energy Tax Credit May Be Used to Satisfy the Corporate Minimum Tax.

3 Ch. 755 (S.B. 61), Laws 2015.

4 The CMT is based on the amount of total Oregon sales of the combined filing group. The amount of tax ranges from $150 for corporations with less than $500,000 in Oregon sales to $100,000 for corporations with Oregon sales of at least $100,000,000. See OR. REV. STAT. § 317.090(2).

5 Con-Way Inc. & Affiliates v. Department of Revenue, 302 P.3d 804 (Or. 2013).

6 OR. REV. STAT. § 317.090(3), as amended by Ch. 701 (H.B. 2171), Laws 2015, § 43. For effective date provision, see Ch. 701 (H.B. 2171), Laws 2015, § 45(1).

7 Id.

8 OR. REV. STAT. § 317.090(3), as amended by Ch. 701 (H.B. 2171), Laws 2015, § 44. For effective date provision, see Ch. 701 (H.B. 2171), Laws 2015, § 45(2).

9 Ch. 701 (H.B. 2171), Laws 2015, § 14.

10 Ch. 701 (H.B. 2171), Laws 2015, § 16.

11 Ch. 701 (H.B. 2171), Laws 2015, § 25.

12 Ch. 701 (H.B. 2171), Laws 2015, §§ 18, 42. The film production credit is extended through tax years beginning prior to January 1, 2024 and the credit for providing rural medical care is extended through tax years beginning prior to January 1, 2018.

13 Ch. 701 (H.B. 2171), Laws 2015, §§ 3, 5. The amount of this credit is based on an amount equal to a percentage of employment-related expenses allowable as a federal credit pursuant to IRC § 21. The employment-related expenses cannot exceed $12,000 for a taxpayer for which there is one qualifying individual or $24,000 for a taxpayer for which there are two or more qualifying individuals. The credit is not allowed for a taxpayer with federal adjusted gross income or Oregon adjusted gross income in excess of 300 percent of the federal poverty level.

14 Ch. 701 (H.B. 2171), Laws 2015, § 1.

15 Ch. 701 (H.B. 2171), Laws 2015, § 1(2).

16 Current OR. REV. STAT. § 317.715(2)(a).

17 Current OR. REV. STAT. § 317.715(4)(b).

18 Ch. 755 (S.B. 61), Laws 2015, §§ 1, 2, 6; OR. REV. STAT. § 317.715(2).

19 Ch. 755 (S.B. 61), Laws 2015, § 2(1)(b); OR. REV. STAT. § 317.715(2). Note that OR. REV. STAT. § 317.717 is amended to require the Department to review this list on a biannual basis in oddnumbered years. Specific criteria for determining which jurisdictions meet the definition of "tax haven" are provided and countries must be included on the list if they: (i) have laws or policies that prevent the effective exchange of tax-related information with other governments; (ii) have a tax regime which generally lacks transparency; (iii) facilitate the establishment of foreign-owned entities without the need for substantive local presence; (iv) allow benefits for foreign entities that are unavailable to domestic businesses; or (v) have created a tax regime deemed "favorable for tax avoidance."

20 Id.

21 Ch. 755 (S.B. 61), Laws 2015, § 2(2); OR. REV. STAT. § 317.715(2).

22 Ch. 755 (S.B. 61), Laws 2015, § 2(3).

23 Note that several other jurisdictions, including Alaska, the District of Columbia, Montana, Rhode Island and West Virginia, have similar laws requiring inclusion of certain income from tax haven jurisdictions in the computation of taxable income.

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