Bill Text: NJ A1720 | 2016-2017 | Regular Session | Introduced
Bill Title: Updates corporation business tax reporting, reduces tax sheltering, and improves tax enforcement by requiring related corporations to file combined tax return using "water's edge" approach.
Spectrum: Partisan Bill (Republican 1-0)
Status: (Introduced - Dead) 2016-01-27 - Introduced, Referred to Assembly Commerce and Economic Development Committee [A1720 Detail]
Download: New_Jersey-2016-A1720-Introduced.html
STATE OF NEW JERSEY
217th LEGISLATURE
PRE-FILED FOR INTRODUCTION IN THE 2016 SESSION
Sponsored by:
Assemblyman RONALD S. DANCER
District 12 (Burlington, Middlesex, Monmouth and Ocean)
SYNOPSIS
Updates corporation business tax reporting, reduces tax sheltering, and improves tax enforcement by requiring related corporations to file combined tax return using "water's edge" approach.
CURRENT VERSION OF TEXT
Introduced Pending Technical Review by Legislative Counsel.
An Act requiring "water's edge" combined reporting approach for corporation business taxpayers, amending P.L.1945, c.162.
Be It Enacted by the Senate and General Assembly of the State of New Jersey:
1. Section 10 of P.L.1945, c.162 (C.54:10A-10) is amended to read as follows:
10. a. Whenever it shall appear to the director that any taxpayer fails to maintain its records in accordance with sound accounting principles or conducts its business or maintains its records in such manner as either directly or indirectly to distort its true entire net income or its true entire net worth under this act or the proportion thereof properly allocable to this State, or whenever any taxpayer maintains a place of business outside this State, or whenever any agreement, understanding or arrangement exists between a taxpayer and any other corporation or any person or firm, for the purpose of evading tax under this act, or whereby the activity, business, receipts, expenses, assets, liabilities, income or net worth of the taxpayer are improperly or inaccurately reflected, the director is authorized and empowered, in the director's discretion and in such manner as the director may determine, to adjust and redetermine such items, and to adjust items of gross receipts, tangible or intangible property and payrolls within and without the State and the allocation of entire net income or entire net worth or to make any other adjustments in any tax report or tax returns as may be necessary to make a fair and reasonable determination of the amount of tax payable under this act.
b. Where (1) any taxpayer conducts its activity or business under any agreement, arrangement or understanding in such manner as either directly or indirectly to benefit its members or stockholders, or any of them, or any person or persons directly or indirectly interested in such activity or business, by entering into any transaction at more or less than a fair price which, but for such agreement, arrangement or understanding, might have been paid or received therefor, or (2) any taxpayer, a substantial portion of whose capital stock is owned either directly or indirectly by or through another corporation, enters into any transaction with such other corporation on such terms as to create an improper loss or net income, the director may include in the entire net income of the taxpayer the fair profits which, but for such agreement, arrangement or understanding, the taxpayer might have derived from such transaction. The director may require any person or corporation to submit such information under oath or affirmation, or to permit such examination of its books, papers and documents, as may be necessary to enable the director to determine the existence, nature or extent of an agreement, understanding or arrangement to which this section relates, whether or not such person or corporation is subject to the tax imposed by this act.
c. The entire net income of a taxpayer exercising its franchise in this State that is a member of an affiliated group or a controlled group pursuant to section 1504 or 1563 of the federal Internal Revenue Code of 1986, 26 U.S.C. s.1504 or 1563, shall be determined by eliminating all payments to, or charges by, other members of the affiliated or controlled group in excess of fair compensation in all inter-group transactions of any kind. [Notwithstanding the elimination of all inter-group transactions in excess of fair compensation, if the taxpayer cannot demonstrate by clear and convincing evidence that a report by a taxpayer discloses the true earnings of the taxpayer on its business carried on in this State,]
If a corporation is subject to the tax imposed pursuant to section 5 of P.L.1945, c.162 (C.54:10A-5), then the director [may, at the director's discretion,] shall require the taxpayer to file a [consolidated] combined return of the entire operations of the [affiliated group or controlled] combined group, including its own operations and income to the extent permitted under the Constitution and statutes of the United States. The director shall determine the true amount of entire net income earned by the taxpayer in this State. The [consolidated] combined entire net income of the taxpayer and of the other members of its [affiliated group or controlled] combined group shall be allocated to this State by use of the applicable allocation formula that the director requires pursuant to P.L.1945, c.162 (C.54A:10A-1 et seq.) be used by the taxpayer. The return shall include in the allocation formula the [property, payrolls, and] sales of all corporations for which the return is made. The director may require a [consolidated] combined return under this section without regard to whether the other members of the [affiliated or controlled] combined group, other than the taxpayer, are or are not exercising their franchises in this State.
[A consolidated return required by this section shall be filed within 60 days after it is demanded, subject to the penalties of the State Uniform Tax Procedure Law, R.S.54:48-1 et seq.]
The member of [an affiliated group or] a [controlled] combined group shall incorporate in its return required under this section information needed to determine under this section its taxable entire net income, and shall furnish any additional information the director requires, subject to the penalties of the State Uniform Tax Procedure Law, R.S.54:48-1 et seq. [A taxpayer shall furnish any additional information requested within 30 days after it is demanded, subject to the penalties of the State Uniform Tax Procedure Law, R.S.54:48-1 et seq.]
d. For the purposes of this section:
"Combined group" means the members of the group of entities that have common ownership and are engaged in a unitary business, and are subject to the tax imposed pursuant to section 5 of P.L.1945, c.162 (C.54:10A-5), or, if not subject to the tax imposed pursuant to section 5 of P.L.1945, c.162 (C.54:10A-5), meet one or more of the following:
(1) a member incorporated in the United States, or formed under the laws of the United States, any state, the District of Columbia, or a territory or possession of the United States, unless 80 percent or more of the member's sales during the privilege period are assigned outside of the United States and any territory or possession of the United States;
(2) a member wherever incorporated or formed, if more than 20 percent of the member's sales during the privilege period are assigned to the United States or any territory or possession of the United States; or
(3) a member that is incorporated in a jurisdiction that is determined by the director to be a tax haven, unless it is proven to the satisfaction of the director that the member is incorporated in a tax haven for a non-tax business purpose.
"Common ownership" means that not less than 50 percent of the voting control of each member of a combined group is directly or indirectly owned by a common owner or owners, either corporate or noncorporate, whether or not the owner or owners are members of the combined group. Whether voting control is indirectly owned shall be determined pursuant to section 318 of the federal Internal Revenue Code (26 U.S.C. s.318).
(cf: P.L.2002, c.40, s.10)
2. This act shall take effect immediately and apply to privilege periods ending after its date of enactment.
STATEMENT
This bill updates the corporation business tax reporting system to reduce tax sheltering and improve the efficiency of corporate tax code enforcement. It requires related corporations to file a combined tax return using an income reporting system that is similar to those currently in place in a majority of states.
Most large businesses are structured as a family of corporations under common ownership and control. This type of structure facilitates the sheltering of corporate income from taxation through transactions among various related corporate entities.
This bill improves tax fairness by eliminating opportunities for corporate tax avoidance strategies. The bill adopts a combined reporting system that effectively treats a group of interrelated companies as a single corporation for state corporation business tax purposes, thereby reducing or eliminating the use of inter-corporate transactions to shelter income from taxation.
The bill is structured to avoid constitutional issues that may arise from other forms of combined reporting by instead following the widely-used "water's edge" approach, omitting from the combined return corporations that do not independently conduct activity in New Jersey and that do very little business in the United States. However, the bill requires the combined tax return to include a related company that is incorporated in a tax haven jurisdiction. Such a company may be excluded from the combined return only if it is proven, to the satisfaction of the Director of the Division of Taxation, that incorporation in that jurisdiction was for a non-tax business purpose.
Combined reporting is the next generation corporate income tax compliance technique, and is presently in use by 28 states.
