Enactment of proposed Illinois legislation that would tax worldwide or tax haven income of corporations could prompt international and constitutional controversies.
Proposed legislation in the Illinois General Assembly (S.B.
1115; H.B. 2085) would return Illinois to worldwide combined
reporting as the default method for Illinois corporate income tax
filers. Since 1984, Illinois has been a water's-edge combined
filing state, excluding the combined return from those unitary
entities with more than 80 percent of their business activity
outside the United States (the so-called 80/20 rule). The proposed
legislation allows an election for water's-edge combined
filing, but limits the foreign dividends received deduction to 75
percent, as opposed to the current 100 percent deduction. The
legislation also eliminates the 80/20 rule, and it contains a tax
haven "blacklist" that would include the income and
apportionment factors of entities in so-called tax havens despite a
water's-edge election.
Worldwide combined reporting is not new to Illinois. In 1974, the
Illinois Department of Revenue released administrative guidance
stating that the 1969 Illinois Income Tax Act allowed worldwide
combined reporting. See Illinois Income Tax Informational
Bulletin No. 1974-1 (Oct. 15, 1974). The Illinois Supreme Court
agreed in Caterpillar Tractor Co. v. Lenckos, 84 Ill. 2d
102 (1981). In response to the Caterpillar ruling, the
General Assembly adopted legislation in 1984 limiting unitary
combined reporting to the water's-edge, essentially excluding
most foreign entities and income from Illinois tax.
When implemented properly, worldwide combined reporting is
constitutional. See Container Corp. of Am. v. Franchise Tax
Bd., 463 U.S. 159 (1983). Nevertheless, the proposed
legislation in Illinois raises a host of administrative and legal
issues. Since 2004, Illinois has had addback provisions for certain
payments to unitary foreign members, so it already manages the
concerns that worldwide combined reporting and tax haven lists
claim to address. Moreover, the tax haven blacklist, which includes
Ireland and the Netherlands, invites controversy overseas and
constitutional challenges domestically.
The tax impact of the new proposed regime is extremely fact
dependent; some taxpayers may pay less, some more. Others might see
no change under this new regime. The Illinois legislative session
ends in May. Jones Day lawyers will continue to monitor this
development closely.
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