RIPEC warns against combined reporting

ACCORDING TO THE CHART, which identifies taxes by type as a a share of Rhode Island’s fiscal 2012 projected taxes, the business corporation tax would generate 5 percent of the projected tax revenue. For a larger version of this image, CLICK HERE.
Posted 6/15/11

PROVIDENCE – The Rhode Island Public Expenditure Council said Tuesday that Rhode Island does not have enough data to determine the appropriate form of implementing combined reporting for tax purposes.

The business-backed think tank issued an analysis on combined reporting in response to Gov. Lincoln D. Chafee’s proposed 2012 budget, which outlines its implementation.

The intent of combined reporting, RIPEC said, is to address tax-planning strategies by multi-state corporations so they gain little or no advantage by shifting profits out of state; to generate additional revenue for the state without raising nominal rates or imposing additional taxes; to “level the playing field” between in-state and multi-state corporations; or to lower the overall corporate tax rate in order to become more competitive.

Twenty-six of the 46 states that levy taxes on corporate income use combined reporting, by which a group of related companies combine their income for tax purposes. In New England, Maine, Massachusetts, New Hampshire and Vermont all require combined reporting.

“Combined reporting represents a significant change in the structure of the state’s corporate tax that heretofore has been based on the concept that every individual corporation in a multi-corporate group is taxed as a ‘separate entity,’ ” said RIPEC.

“Accordingly, policymakers ought to study the proposed change to combined reporting in more depth than they would with regard to less sweeping changes in corporate tax law.”

RIPEC pointed to three factors that affect combined reporting statues, including: extent, apportionment and the calculation of apportionment.

  • First, the extent of the definition of combined reporting for tax purposes – states may elect to limit operations to within the U.S. or to include foreign operations.

  • Second, apportionment, or basis upon which business or operating income is allocated to a state for purposes of taxation, which could be a combination of payroll, sales and property taxes or a variation thereof.

  • Third, in order to calculate apportionment, there are two methods: the “Joyce” method, under which the numerator of each factor includes only amounts attributable to the state by members of the related group of companies that have a physical nexus in the state or “Finnegan,” which disregards whether the group has a physical nexus in the state.

Rhode Island may have a competitive advantage if it does not require combined reporting, RIPEC said, while recommending a study period in order to generate data on how the requirement would affect businesses.

During the study period, businesses would file two sets of returns, the regular corporate tax income return and a hypothetical return for those that are part of a unitary group.

For the full report, “An Analysis of Combined Reporting,” click here.

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