Reed Smith Client Alerts

On January 24, Pennsylvania’s Department of Revenue released Corporate Tax Bulletin 2019-02, addressing the Pennsylvania tax treatment of global intangible low-taxed income (“GILTI”) and foreign-derived intangible income (“FDII”).  In the Bulletin, the Department concludes that GILTI is included in the corporate income tax base, and is treated as a dividend.  Therefore, taxpayers will be able to deduct 100% of included GILTI from wholly-owned subsidiaries from Pennsylvania taxable income.  The Department also concludes that taxpayers do not get the GILTI or FDII deductions for Pennsylvania income tax purposes.  However, that conclusion is not supported by statute.  Under a plain reading of Pennsylvania’s corporate net income tax statute, taxpayers should be able to claim GILTI and FDII deductions in computing their Pennsylvania taxable income.1

The federal tax reform legislation enacted in 2017 created GILTI as a new inclusion in gross income.2 The legislation also created two new deductions from federal taxable income, a 50% GILTI deduction, and a FDII deduction.3 GILTI effectively imposes a minimum tax on profits from certain “intangible” income of a U.S. shareholder’s controlled foreign corporations (“CFCs”).4 The FDII deduction effectively creates an incentive for income from U.S.-held “intangibles” exploited off-shore.

For states that conform to the federal definition of taxable income, the GILTI inclusion is generally reflected in state taxable income.  On this point, we have argued that Pennsylvania does not conform automatically to federal tax reform because automatic conformity would be an unlawful delegation of legislative power by Pennsylvania’s legislature to the federal Congress.5 The principles underlining that non-delegation theory were recently sustained by the Pennsylvania Commonwealth Court in Phantom Fireworks.6 Thus, the features of tax reform—like GILTI—may not be automatically included in Pennsylvania law.