BILL ANALYSIS
SENATE REVENUE & TAXATION COMMITTEE
Senator Lois Wolk, Chair
AB 759 - Ma
Amended: As Proposed to be Amended
Hearing: July 8, 2009 Fiscal: No
SUMMARY: Changes provisions of law related to the
controlled foreign corporations and the California Taxpayer
and Shareholder Protection Act of 2003.
Controlled Foreign Corporations
EXISTING FEDERAL LAW
Provides that all income of a corporation regardless of
source is taxable, and allows a credit for taxes paid to
foreign countries. Foreign corporations only file returns
in the United States for income effectively connected with
a trade or business in the United States, or income from
specified U.S investments, called noneffectively connected
income.
Defines a "controlled foreign corporation" (CFCs) as any
foreign corporation where more than 50 percent of the
voting power, or 50 percent of the value of the stock, is
held by U.S. shareholders. Federal law guiding CFCs, known
as "Subpart F," seeks to curtail abuses where companies
assign income to offshore tax havens. U.S Shareholders
must include income from CFCs, and federal law treats that
income as a dividend paid by the CFC. A U.S. shareholder's
income from a CFC cannot exceed the CFC's earnings and
profits for that year.
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EXISTING STATE LAW
Uses the "world-wide unitary method" with respect to all
multinational corporations doing business in California.
Taxpayers file a combined report for the unitary group or
subsidiaries and affiliates showing income, payroll,
property and sales both California and worldwide. Since
1986, state law also allows a "water's-edge election,"
where taxpayers may limit their combined reports to just to
those affiliates domiciled within the "water's edge" of the
United States, although state law may require taxpayers to
include certain foreign subsidiaries and affiliates under
specified circumstances.
Determines the portion of a multi-state or multi-national
corporation's net income is taxable by California using
"formulary apportionment," under which three apportionment
factors are computed: a property factor (the amount of
property the corporation has in California divided by it's
total (nation-wide or world-wide) property); a payroll
factor (California payroll divided by total payroll); and a
sales factor (California sales divided by total sales). The
actual amount of income apportioned to California using
this formula is computed by adding the payroll factor, the
property factor and twice the sales factor, then dividing
that sum by four (the so-called "double-weighted sales
factor"). The formula serves to calculate a corporation's
tax due in an amount equal to its demand on public
services, assuming that taxpayers derive profits from the
effective marshalling of labor and capital in the presence
of a market. The formula comes from the Universal
Division of Tax Purposes Act (UDITPA), a model statute
developed by the National Conference on Uniform State Laws
in 1957. California adopted UDITPA and the apportionment
formula in 1966 (AB 11, Petris), and double weighted the
sales factor in 1993 (SB 1176, Kopp).
Conforms to federal definitions of CFC and U.S shareholder,
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but does not conform to federal Subpart F income
provisions, instead requiring a CFC to include a portion of
its net income and apportionment factors included in the
water's edge filing based on an inclusion ratio, which
determines the amount of a CFC's income and apportionment
factors a taxpayer includes in the tax return. The
numerator of the ratio is the CFC's current year Subpart F
income, and the denominator is the CFC's current earnings
and profits. The CFC then multiplies its business income,
nonbusiness income, and apportionment factors by the ratio
to determine its includible income for California tax
purposes. The ratio cannot fall below zero or exceed 100%;
in such a case, the CFC is included in the water's edge
group and its income taxed accordingly.
Public Contracts Code
EXISTING LAW
Prohibits the state from entering into any contract with a
publicly traded foreign incorporated entity or its
subsidiary if all of the following apply:
1) the United States is the principal market for the
public trading of the foreign incorporated entity;
2) the foreign incorporated entity has no substantial
business activities in the place of incorporation
compared to the business activity of its subsidiary or
subsidiaries; and
3) the foreign entity was incorporated through a
transaction or a series of transactions in which it
acquired substantially all of the properties held by a
domestic corporation or partnership and immediately after
the acquisition more than 50% of the publicly traded
stock was transferred to the same shareholders or
partners that owned the domestic corporation or
partnership.
Permits the chief executive of a state agency or a designee
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to waive the ineligibility of a vendor that meets the above
test by making a written finding that the contract is
necessary to meet a "compelling public interest."
Requires each vendor submitting a bid or contract to
certify under penalty of perjury that it is not an
ineligible vendor pursuant to the test described above.
THIS BILL
Controlled Foreign Corporations:
Deletes California's current law for calculating CFC income
by deleting the inclusion ratios and conforming to federal
Subpart F provisions that state that the amount of a CFC's
subpart F income included in a water's edge taxpayer's
income would be treated as a "deemed dividend," and could
be excluded under the state's dividend exclusion and
deduction laws. The measure allows a 27% dividend
deduction against the CFC's Subpart F income. Any income
previously taxed as Subpart F income before the bill's
effective date would be deemed previously taxed for state
purposes, and federal adjustments to the CFC's stock basis
would become the new stock basis for state purposes.
States that state law does not conform to rules guiding the
gain from certain sales or exchanges of CFC stock, the
temporary 85% divided received deduction from CFCs, or the
foreign tax credit. When a taxpayer terminates a water's
edge election, Subpart F rules no longer apply and only the
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previously taxed income and stock basis adjustments remain
the same. The measure also required that a taxpayer's High
Foreign Tax Rule election must be the same for state
purposes as it is for federal. FTB may also proscribe
regulations as it deems necessary to carry out these
provisions.
Public Contracts Code
Adds another requirement to the list of contract
prohibitions as follows:
The foreign incorporated entity is domiciled in a
jurisdiction that does not have an income tax treaty in
force with the United States.
FISCAL EFFECT:
Unknown for the Public Contracts provision
Less than $500,000 loss for the controlled foreign
corporation provision.
COMMENTS:
A.Purpose of the bill
The purpose of this bill is two-fold:
1.Eliminate the complexities with using current state law's
CFC partial inclusion rules for calculating how much of a
CFC's income and factors to include in the taxable income
of a water's-edge taxpayer and allow taxpayer's to use the
federal Subpart F rules-an amount the taxpayers have
already calculated for their federal tax return.
2.Expand a provision of the contracts code to allow
companies with tax treaties to do business in California.
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B. Program History/Background: Foreign Controlled
Corporations
Because of the complexity of the calculations involved in
the state's current treatment of Subpart F income, FTB
finds low taxpayer compliance with the current statutory
method. When calculating includable income for a CFC, many
taxpayers use the federal "deemed Subpart F dividends"
amount as reported on their federal return, rather than
using the inclusion ratio to determine the amount of CFC
income and factors to be included for California purposes.
Compliance with the law requires all unitary taxpayers to
perform the recordkeeping and analysis for each of their
CFCs, regardless of whether the result materially affects
California tax or not. This requirement is particularly
burdensome for taxpayers that do not have a large presence
in California because the computations in the partial
inclusion ratio are unique to California.
In addition, the CFC inclusion ratio rules are burdensome
for the FTB to administer. FTB auditors spend numerous
hours recalculating incorrect methods used by taxpayers to
include a CFC's income and factors in the water's-edge
group tax filing often only to discover that the audit
adjustments have minor tax effect. One reason for the
minor tax effect is because the taxpayer included the
federal Subpart F deemed dividend amount in income, which
sometimes results in almost the same tax amount. In
addition, any adjustments to the amount of a CFC's income
and factors includable in a water's-edge taxpayer's income
affects the calculation of the dividend elimination,
foreign dividend deduction, foreign investment interest
offset, and any deferred intercompany transactions.
This proposal conforms to the federal Subpart F provisions
and allows dividend deductions to offset the Subpart F
"deemed" dividend. Spidell Publishing and Cal-Tax raised
concerns about previous legislation that the proposals
lacked factor relief or a dividend-received deduction; this
proposal includes this dividend received deduction.
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C. Problem & Solution: CFCs
Problem: Calculating a CFC's income and apportionment
factors for a California water's-edge taxpayer is extremely
burdensome-time consuming and expensive-for the taxpayer
and the FTB, resulting in frequent taxpayer misapplications
of the law and the need for audit.
Proposed Solution: Simplify the method used to report a
water's-edge taxpayer's portion of its CFC's income by
conforming to the federal Subpart F rules for computing the
amount of a CFC's income that is included in a
shareholder's income. This proposal would accomplish the
following:
Remove current law's "stand alone"
inclusion ratio method for computing the amount
of a CFC's net income and apportionment factors
that are included in the water's-edge group tax
filing. (Amendment 1)
Conform to the federal Subpart F
provisions and provide that the amount of a CFC's
Subpart F income that would be included in a
water's-edge taxpayer's income would be treated
as a "deemed dividend" eligible for current state
law's dividend exclusion and deductions
relief<1>. (Amendment 3).
Provide that a 27% dividend deduction would
be allowed against the CFC's Subpart F income
included in the water's-edge taxpayer's income.
(Amendment 2).
Add the following transitional rules for
conforming to the federal Subpart F provisions:
(Amendment 3)
Income previously taxed as
Subpart F income before this proposal is
-----------------
<1> Revenue and Taxation Code (R&TC) Section 24344, 24410,
24411, and 25106.
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effective would be considered previously
taxed income for state tax purposes.
Federal adjustments to the
CFC's stock basis before this proposal is
effective would become the new stock basis
for the CFC for state purposes.
Specify that state law would not conform
to the following rules relating to CFCs:
(Amendment 3)
The gain from certain sales or
exchanges of stock in certain foreign
corporations<2>,
The temporary 85% dividend
received deduction for dividends received
from CFCs<3>.
The foreign tax credit<4>,
Specify that if a water's-edge election
is terminated, the Subpart F rules would no
longer apply and only the previously taxed income
and stock basis adjustments accumulated during
the water's-edge election would be allowed.
(Amendment 3).
Add that the High Foreign Tax Rule
election would be valid for state purposes only
if a valid election was made for federal
purposes. (Amendment 3).
Specify that the Franchise Tax Board may
prescribe regulations as may be necessary and
appropriate to carry out the provisions of this
proposal. (Amendment 3)
D. Role of Tax Treaties
------------------------
<2> Internal Revenue Code (IRC) Section 1248.
<3> IRC section 965.
<4> IRC section 960.
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The United States has tax treaties with a
number of foreign countries. Under these
treaties, residents (not necessarily citizens) of
foreign countries are taxed at a reduced rate, or
are exempt from U.S. taxes on certain items of
income they receive from sources within the
United States. These reduced rates and exemptions
vary among countries and specific items of
income. Under these same treaties, residents or
citizens of the United States are taxed at a
reduced rate, or are exempt from foreign taxes,
on certain items of income they receive from
sources within foreign countries. Most income tax
treaties contain what is known as a "saving
clause" which prevents a citizen or resident of
the United States from using the provisions of a
tax treaty in order to avoid taxation of U.S.
source income.
If the treaty does not cover a
particular kind of income, or if there is no
treaty between a specific country and the United
States, the taxpayer must pay tax on the income
in the same way and at the same rates shown in
the instructions for the applicable U.S. tax
return.
Objectives of Bilateral Income Tax Treaties
The United States, like other countries, maintains an
extensive network of bilateral income tax treaties. The
U.S. network currently includes comprehensive treaties
covering 66 countries, including the vast majority of (but
by no means all) key U.S. trading partners.
Bilateral income tax treaties remove barriers to
cross-border investment and trade by allocating taxing
jurisdiction between countries with residence-and
source-based claims to tax the income from such investment
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and trade. Bilateral income tax treaties also provide a
framework for the exchange of information between taxing
authorities in an effort to prevent tax avoidance and
evasion.
E. What is a tax haven-it is actually paradise (for
some)?
Extensive hearings on corporate inversions or
expatriations have been held in Congress in connection with
the Homeland Security Act then being debated in Congress.
The hearings centered on whether an American company should
be allowed to take advantage of tax benefits when it
reincorporates in a foreign jurisdiction where the
corporate taxes are lower and protection of shareholders
and investors are limited compared to the protections
afforded by the state where the corporation was originally
organized. The problem is accentuated by the fact that
many American corporations have in fact gone global, with
income and profits coming from business ventures around the
world, and the taxation scheme of the United States Tax
Code have encouraged many of them to be "creative" in
seeking ways to minimize taxes.
Bermuda and the Cayman Islands have been identified as
favorite tax havens for corporate expatriations although
there are others in Europe and Asia. Early last year news
about Stanley Works, for example, seeking to reincorporate
in Bermuda to save some $30 million in taxes when it only
paid $7 million in U.S. taxes on foreign income last year,
led to the conclusion that three quarters of the
anticipated tax savings would have come from U.S. profits.
Amid the hue and cry, Stanley Works opted to remain a
Connecticut corporation. More recently, Ingersoll-Rand,
formerly of New Jersey but now operating as a Bermuda
corporation, is reported to have avoided $50 million in
U.S. taxes alone in 2002, almost as much as its U.S.
defense and homeland security federal contracts. Thus, the
outcry to restructure the tax code to recapture these taxes
and to force domestic companies to stay in-country led to
various measures proposed in Congress last year, though
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none was actually passed. Rep. Neal, in reintroducing his
measure this year, stated that corporate expatriation is a
$4 billion problem for the federal treasury.
Besides the tax implications of corporate
expatriation, concerns about its detrimental effect on
shareholder rights have bolstered the cry for reform.
Especially in light of rampant corporate irresponsibility
exposed by accounting scandals and sleight-of-hand business
dealings by major American companies of global stature,
corporate expatriation of a publicly held company to a tax
haven where shareholder rights are diminished is seen as
another insult to the American public.
The Senate Office of Oversight and Outcomes provided
the following list of federal actions as they relate to tax
havens:
The GAO reported in December on large U.S.
corporations with subsidiaries in jurisdictions listed
as foreign tax havens. A quick examination shows
several are headquartered in California: Oracle (77
subsidiaries), Cisco Systems (38), Chevron (23), Wells
Fargo (18), Hewlett-Packard (14), Intel (6), Disney
(3), and Apple (1).
http://www.globalpolicy.org/nations/launder/haven/2008/
12GAOReport.pdf
Senator Levin estimates the federal government
loses $100 billion each year "from U.S. taxpayers
using offshore tax schemes to dodge their U.S. tax
obligations." California taxpayers' share would be
about $11 billion annually based on our state's
percentage of federal revenues.
The Permanent Subcommittee on Investigations
released a report last summer on tax haven banks. The
heart of the report is a series of case studies that
demonstrate the machinations millionaire tax evaders
and their bankers use to thwart the IRS. Four of the
eight cases involve California residents, including
Igor Olinicoff, an Orange County billionaire who has
admitted to hiding $200 million in assets offshore (as
well as the title to a 147-foot yacht).
http://hsgac.senate.gov/public/_files/071708PSIReport.p
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df
A.Related Legislation
SB 640 (Burton, chapter 657, statutes of 2003) was a
method to compel businesses to either repatriate back to
the United States or not be allowed to do business with the
state; according to the author at the time, it is
"[P]articularly reprehensible that these publicly held U.S.
expatriate corporations are reaping the benefits of their
relocations at a time when the State is struggling to pay
for critical needs such as education, mental health and
public safety, and when the nation is shouldering the heavy
responsibilities of national defense and national
security."
AB 1178 (Block, 2009) would have required
multinational corporations that elect to file tax returns
based only on income earned inside the U.S. (known as the
water's edge method) to include the income of related
corporations in a tax haven country. If enacted, the
analysis projects revenue gains of $130 million in 2010-11
and $160 million in 2011-12. This bill is a two-year bill
that requires a 2/3 vote.
AB 1561 (Calderon, 2008): In this state, calculating a
controlled foreign corporation's (CFC) income and
apportionment factors for a California water's-edge
taxpayer is extremely burdensome-time consuming and
expensive-for the taxpayer and the department, resulting in
frequent taxpayer misapplications of the law and the need
for audit. In this bill, the state simplified the method
used to report a water's-edge taxpayer's portion of its
CFC's income by conforming to the federal Subpart F rules
for computing the amount of a CFC's income that is included
in a shareholder's income.
G. Amendments:
The bill will be amended to include the following language:
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AMENDMENT 1
SECTION 1: Section 25110 of the Revenue and Taxation
Code is amended to read:
25110. (a) Notwithstanding Section 25101, a qualified
taxpayer, as defined in paragraph (2) of subdivision (b),
that is
subject to the tax imposed under this part, may elect to
determine its income derived from or attributable to
sources
within this state pursuant to a water's-edge election in
accordance with the provisions of this part, as modified by
this
article. A taxpayer, that makes a water's-edge election on
or
after January 1, 2006, shall take into account that portion
of
its own income and apportionment factors and the income and
apportionment factors of its affiliated entities to the
extent
provided below:
(1) The entire income and apportionment factors of any
of the following corporations:
(A) Domestic international sales corporations, as
described in Sections 991 to 994, inclusive, of the
Internal
Revenue Code and foreign sales corporations as described in
Sections 921 to 927, inclusive, of the Internal Revenue
Code.
(B) Any corporation (other than a bank), regardless of
the place where it is incorporated if the average of its
property, payroll, and sales factors within the United
States is
20 percent or more.
(C) Corporations that are incorporated in the United
States, excluding corporations making an election pursuant
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to
Sections 931 to 936, inclusive, of the Internal Revenue
Code.
(D) Export trade corporations, as described in
Sections 970 to 972, inclusive, of the Internal Revenue
Code.
(2) (A) With respect to a corporation that is not
described in subparagraphs (A), (B), (C), and (D) of
paragraph
(1), as provided in either one or both of the following
clauses:
(i) T t he income and apportionment factors of that
corporation to the extent of its income derived from or
attributable to sources within the United States and its
factors
assignable to a location within the United States in
accordance
with paragraph (3) of subdivision (b). Income of that
corporation
derived from or attributable to sources within the United
States
as determined by federal income tax laws shall be limited
to, and
determined from, the books of account maintained by the
corporation with respect to its activities conducted within
the
United States.
(ii) The income and apportionment factors of
that
corporation that is a "controlled foreign corporation,"
as
defined in Section 957 of the Internal Revenue Code, to the
extent determined by multiplying the income and
apportionment
factors of that corporation without application of this
subparagraph by a fraction not to exceed one, the numerator
of
which is the "Subpart F income" of that corporation for
that
taxable year and the denominator of which is the "earnings
and
profits" of that corporation for that taxable year.
(B) For purposes of this paragraph, both of the
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following apply:
(i) "Subpart F income" means "Subpart F
income" as
defined in Section 952 of the Internal Revenue Code.
(ii) "Earnings and profits" means "earnings
and
profits" as described in Section 964 of the Internal
Revenue
Code.
(3) The income and apportionment factors of the
corporations described in this subdivision shall be taken
into
account only to the extent that they would have been taken
into
account had no election under this section been made.
(4) The Franchise Tax Board shall prescribe
regulations to coordinate implementation of subparagraph
(A) of
paragraph (2) to prevent multiple inclusion or exclusion of
income and factors in situations where the same item of
income is
described in both clauses.
(b) For purposes of this article and Section 24411,
all of the following definitions apply:
(1) An "affiliated corporation" means a corporation
that is a member of a commonly controlled group as defined
in
Section 25105.
(2) A "qualified taxpayer" means a corporation that
does both of the following:
(A) Files with the state tax return, on which the
water's-edge election is made, a consent to the taking of
depositions, at the time and place most reasonably
convenient to
all parties, from key domestic corporate individuals and to
the
acceptance of subpoenas duces tecum requiring reasonable
production of documents to the Franchise Tax Board, as
provided
in Section 19504, by the State Board of Equalization, as
provided
in Section 5005 of Title 18 of the California Code of
Regulations, or by the courts of this state, as provided in
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Chapter 2 (commencing with Section 1985) of Title 3 of Part
4 of,
and Chapter 9 (commencing with Section 2025.010) of Title 4
of
Part 4 of, the Code of Civil Procedure. The consent relates
to
issues of jurisdiction and service and does not waive any
defenses that a taxpayer may otherwise have. The consent
shall
remain in effect as long as the water's-edge election is in
effect, and shall be limited to providing that information
necessary to review or adjust income or deductions in a
manner
authorized by Section 482, 861, Subpart F of Part III of
Subchapter N, or similar provisions, of the Internal
Revenue
Code, together with the regulations adopted pursuant to
those
provisions, and for the conduct of an investigation with
respect
to any unitary business in which the taxpayer may be
involved.
(B) Agrees that, for purposes of this article,
dividends received by any corporation whose income and
apportionment factors are taken into account pursuant to
subdivision (a) from either of the following are
functionally
related dividends and shall be presumed to be business
income:
(i) A corporation of which more than 50 percent of the
voting stock is owned, directly or indirectly, by members
of the
unitary group and which is engaged in the same general line
of
business.
(ii) Any corporation that is either a significant
source of supply for the unitary business or a significant
purchaser of the output of the unitary business, or that
sells a
significant part of its output or obtains a significant
part of
its raw materials or input from the unitary business.
"Significant," as used in this subparagraph, means an
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amount of
15 percent or more of either input or output.
All other dividends shall be classified as business or
nonbusiness income without regard to this subparagraph.
(3) The definitions and locations of property,
payroll, and sales shall be determined under the laws and
regulations that set forth the apportionment formulas used
by the
individual states to assign net income subject to taxes on,
or
measured by, net income in that state. If a state does not
impose
a tax on, or measured by, net income or does not have laws
or
regulations with respect to the assignment of property,
payroll,
and sales, the laws and regulations provided in Article 2
(commencing with Section 25120) shall apply.
Sales shall be considered to be made to a state only
if the corporation making the sale may otherwise be subject
to a
tax on, or measured by, net income under the Constitution
or laws
of the United States, and shall not include sales made to a
corporation whose income and apportionment factors are
taken into
account pursuant to subdivision (a) in determining the
amount of
income of the taxpayer derived from or attributable to
sources
within this state.
(4) "The United States" means the 50 states of the
United States and the District of Columbia.
(c) All references in this part to income determined
pursuant to Section 25101 shall also mean income determined
pursuant to this section.
AMENDMENT 2
SEC. 2 Section 24411 of the Revenue and Taxation Code
is amended to read:
24411. (a) For purposes of those taxpayers electing
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to compute income under Section 25110, to the extent not
otherwise allowed as a deduction or eliminated from income:
(1) 100 percent of the qualifying dividends described
in subdivision (c) (d), and
(2) 27 percent of qualifying dividends described in
Section 25117, and
(3) 75 percent of other qualifying dividends , other
than those referred to in paragraphs (1)or(2). to the
extent not otherwise allowed as a deduction or eliminated
from income .
(b) "Qualifying dividends" means those received by the
water's-edge group from corporations if both of the
following conditions are satisfied:
(1) The average of the property, payroll, and sales
factors within the United States for the corporation is
less than
20 percent.
(2) More than 50 percent of the total combined voting
power of all classes of stock entitled to vote is owned
directly
or indirectly by the water's-edge group.
(b) (c) The water's-edge group consists of
corporations
whose income and apportionment factors are taken into
account
pursuant to Section 25110.
(c) (d) Dividends derived from a construction project,
the
location of which is not subject to the taxpayer's control.
For purposes of this subdivision:
(1) "Construction project" means any activity
which
meets the following requirements:
(A) Is undertaken for any entity, including a
governmental entity, which is not affiliated with the
taxpayer.
(B) The majority of its cost of performance is
attributable to an addition to real property or an
alteration of
land or any improvement thereto as those terms are utilized
for
purposes of this code.
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"Construction project" does not include the
operation, rental, leasing, or depletion of real property,
land,
or any improvement thereto.
(2) "Location of which is not subject to the
taxpayer's control" means that the place at which the
majority
of the construction takes place results from the nature or
character of the construction project and not as a result
of the
terms of the contract or agreement governing the
construction
project.
AMENDMENT 3
SEC. 3. Section 25117 of the Revenue and Taxation Code
is added to read:
25117. (a) Except as otherwise provided, income
taken into account by all affiliated entities whose income
and apportionment factors are determined pursuant to
Section 25110 shall include income described in Subpart F
of the Internal Revenue Code (commencing with Section 951).
The income that is taken into account shall for all
purposes be treated as a dividend actually paid, and be
subject to any provision or limitation related to the
treatment of dividends, including, but not limited to,
Sections 24344, 24410, 24411, and 25106. The amount taken
into account shall be treated as business or nonbusiness
income (as defined in Section 25120), as the case may be.
(b) In the application of Subpart F of the Internal
Revenue Code:
(1) Exclusions from gross income under Section 959 of
the Internal Revenue Code, relating to previously taxed
income, shall apply, including amounts related to income
previously taxed under federal law in years prior to the
water's edge election.
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(2) Federal adjustments to stock basis made pursuant
to Section 961 of the Internal Revenue Code, relating to
adjustments to basis of stock in controlled foreign
corporations and of other property, including adjustments
made prior to the water's edge election, shall apply.
(3) The provisions of and any reference to Section
1248 of the Internal Revenue Code, relating to gain from
certain sales or exchanges of stock in certain foreign
corporations, shall not apply.
(4) Section 960 of the Internal Revenue Code, relating
to special rules for foreign tax credit, shall not apply.
(5) Section 965 of the Internal Revenue Code, relating
to temporary dividends received deduction, shall not apply.
(6) For purposes of this section, a federal election
to exclude from Subpart F income the income described in
Section 954(b)(4) of the Internal Revenue Code shall apply,
including amounts related to income previously taxed under
federal law in years prior to the water's edge election.
No election under this subparagraph shall be allowed for
state purposes unless a valid election was made for federal
purposes.
(c) In the event that a water's-edge election is
terminated, for taxable years thereafter, the following
rules apply:
(1) Subpart F of the Internal Revenue Code shall not
apply, except as provided in this subdivision.
(2) Section 959 of the Internal Revenue Code, relating
to exclusion from gross income of previously taxed earnings
and profits, shall apply, but only to the extent
attributable to income that has been taken into account
pursuant to subdivision (a) during the period of the
water's edge election.
(3) Stock basis shall be determined as if this section
did not apply, except that stock basis shall be--
(A) Increased by income taken into account pursuant to
subdivision (a) during the period of the water's edge
election, and
(B) Reduced by the following:
(i) That portion of amounts excluded from income under
paragraph (2) of subdivision (b) that are attributable to
income taken into account pursuant to subdivision (a)
during the period of the water's edge election, and
AB 759-Ma Page 13
(ii) Amounts described by paragraph (2) of subdivision
(c) excluded from income after termination of the water's
edge election.
(d)(1) Except as provided in paragraph (2) this
section shall apply to taxable years beginning on or after
January 1, 2008.
(2) In the event that two or more taxpayers subject to
the same election under section 25110 have different
taxable years, this section shall apply as of the first day
of the first taxable year of those respective taxpayers
that begins on or after January 1, 2008.
(e) The Franchise Tax Board may prescribe regulations
as may be necessary and appropriate to carry out the
purposes of this Section
Support and Opposition
Support:None Received
Oppose:None Received
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Consultant: Gayle Miller