A growing number of U.S. states have introduced legislative initiatives to expand their taxing jurisdiction outside the borders of the United States.  This extraterritorial taxation threatens to impose significant double taxation on U.S. subsidiaries of companies based abroad; and therefore makes the United States a less competitive location for global businesses to invest and create jobs.  OFII actively works at the state level to ensure policymakers understand the implication of extraterritorial tax policy and advocates for states to abide by the United States’ obligations under its tax treaties with other countries. OFII Documents: America's Worrisome Trend; October 2010 White...

BATSA (H.R. 1439), sponsored by Bob Goodlatte (R-VA-6), would create a uniform nexus standard across all 50 states governing state assessment of corporate income taxes and comparable taxes on business.  A physical presence would be required before an entity could be taxed as part of a combined group.  This would help alleviate concerns of states levying extraterritorial taxes on the foreign parent and affiliate companies of OFII members.  OFII supports passage of this bill and recently signed onto a business coalition letter urging legislative action and submitted comments for the record to the House Judiciary Committee’s Courts, Commercial, and Administrative Law Subcommittee....

In 2010, pending legislation in California (AB 1178) would have imposed an extraterritorial tax on non-U.S. income associated with jurisdictions inappropriately deemed as “tax havens.” This legislation had the potential to harm California’s reputation in the international business community and to provoke disputes with U.S. trading partners including Europe, Canada and Japan.  OFII strongly opposed the bill and worked to educate California legislators on the damaging effects of enacting extraterritorial tax legislation to the state's ability to attract international investment and job creation.  The bill ultimately failed in June of 2010 and was removed from the legislative...

Economic Nexus: Connecticut is the first state to explicitly set parameters on economic nexus as it relates to inbound investors.  On June 21st, the state passed a law, which includes a provision that prevents economic nexus from applying to any company that is “treated as a foreign corporation under the Internal Revenue Code and has no income effectively connected with a United States trade or business.”  Thus, foreign companies will not be taxed on the simple receipt of royalties from their Connecticut affiliates.  This sets an important precedent that OFII will encourage other states to follow.   Combined Reporting: In 2009, confronted with severe budget shortfalls,...

On January 1, 2009, Massachusetts revamped its corporate tax system by enacting a unitary combined reporting law that prevented foreign based companies from deducting interest and royalty payments made to their affiliates abroad. U.S. subsidiaries were now taxed twice on the same intercompany payments. This tax approach, found almost nowhere else in the country, made Massachusetts uncompetitive and less likely to attract foreign direct investment. For almost two years, OFII actively worked to eliminate the double tax on U.S. subsidiaries. OFII met with both state legislators and administrators, testified before the Joint Revenue Committee, wrote letters to state officials, negotiated amendment...

On December 7th, 2011, the New Jersey Department of Treasury released Technical Advisory Memorandum (TAM) 22, new guidance that should help bring an end to aggressive extraterritorial tax activity by the state audit division which began over four years ago.  The TAM clarifies that the state will not attempt to contact foreign companies on the receipt of cross-border royalties and other payments unless their U.S. affiliates fail to comply with documentation requests regarding related party intangible payments.  It establishes clear documentation standards for taxpayer compliance purposes.  The TAM should provide new certainty and protection for U.S. subsidiaries of global companies...

In 2009, West Virginia enacted a mandatory unitary combined reporting tax regime, which was modeled after a statute in Massachusetts.  Foreign affiliates that earn at least 20% of their income from royalties and other payments from their U.S. subsidiaries were to be included in the state’s combined group, effectively resulting in double taxation on this income.  After Massachusetts amended its law in 2010, West Virginia was the only state with this taxation approach for two years, making it highly uncompetitive in attracting foreign direct investment. On March 30, 2012, Governor Earl Ray Tomblin (D) signed SB 386 into law.  The bill is a “water’s edge” clarification bill...