BILL ANALYSIS
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THIRD READING
Bill No: AB 759
Author: Ma (D)
Amended: 7/15/09 in Senate
Vote: 21
SENATE REVENUE & TAXATION COMMITTEE : 5-3, 7/8/09
AYES: Wolk, Alquist, Florez, Padilla, Wiggins
NOES: Walters, Ashburn, Runner
ASSEMBLY FLOOR : 52-28, 5/28/09 - See last page for vote
SUBJECT : Corporations and public contracts
SOURCE : Author
DIGEST : This bill changes provisions of law related to
the controlled foreign corporations and the California
Taxpayer and Shareholder Protection Act of 2003.
ANALYSIS :
I. 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.
CONTINUED
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Defines a "controlled foreign corporation" (CFC) 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.
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
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11, Petris), and double-weighted the sales factor in
1993 (SB 1176, Kopp). Conforms to federal definitions
of CFC and U.S. shareholder, 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 percent; in such a case, the CFC is included
in the water's edge group and its income taxed
accordingly.
This bill 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 percent 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 percent 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 previously taxed
income and stock basis adjustments remain the same. The
bill also required that a taxpayer's High Foreign Tax
Rule election must be the same for state purposes as it
is for federal. The Franchise Tax Board (FTB) may also
proscribe regulations as it deems necessary to carry out
these provisions.
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II. 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:
A. The United States is the principal market for the
public trading of the foreign incorporated entity.
B. The foreign incorporated entity has no substantial
business activities in the place of incorporation
compared to the business activity of its subsidiary
or subsidiaries.
C. 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 percent of the
publicly traded stock was transferred to the same
shareholders or partners that owned the domestic
corporation or partnership.
Existing law permits the chief executive of a state
agency or a designee 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."
Existing law 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 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.
Prior/Related Legislation
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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), 2009-10 Session, requires 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. The bill is a two-year bill that requires a
two-thirds vote.
AB 1561 (Calderon), 2007-08 Session. In this state,
calculating a 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 the 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. The
bill died on the Senate Inactive File.
NOTE: Refer to Senate Revenue and Taxation Committee
analysis for
further background.
FISCAL EFFECT : Appropriation: No Fiscal Com.: No
Local: No
Unknown for the public contracts provision. Less than
$500,000 loss for the CFC provision.
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ASSEMBLY FLOOR :
AYES: Ammiano, Arambula, Beall, Block, Blumenfield,
Brownley, Buchanan, Caballero, Charles Calderon, Carter,
Chesbro, Coto, Davis, De La Torre, De Leon, Eng, Evans,
Feuer, Fong, Fuentes, Furutani, Galgiani, Hall, Hayashi,
Hernandez, Hill, Huber, Huffman, Jones, Krekorian, Lieu,
Bonnie Lowenthal, Ma, Mendoza, Monning, Nava, Nielsen,
John A. Perez, V. Manuel Perez, Portantino, Price,
Ruskin, Salas, Saldana, Skinner, Solorio, Swanson,
Torlakson, Torres, Torrico, Yamada, Bass
NOES: Adams, Anderson, Bill Berryhill, Tom Berryhill,
Blakeslee, Conway, Cook, DeVore, Duvall, Emmerson,
Fletcher, Fuller, Gaines, Garrick, Gilmore, Hagman,
Harkey, Jeffries, Knight, Logue, Miller, Nestande,
Niello, Silva, Smyth, Audra Strickland, Tran, Villines
DLW:mw 7/15/09 Senate Floor Analyses
SUPPORT/OPPOSITION: NONE RECEIVED
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