United States

Massachusetts updates guidance on reporting treaty-exempt income

TAX ALERT  | 

On Aug. 25, 2017, the Massachusetts Department of Revenue released TIR 17-7: Non-U.S. Corporation with U.S. Income Exempt from U.S. Tax Pursuant to a Bilateral U.S. Income Tax Treaty, a revision and restatement of TIR 10-16, which is now superseded. TIR 10-16 generally discussed a 2010 statutory change applicable to water’s edge combined groups when the combined group includes a non-U.S. corporation that has one or more items of income that are exempt from federal income tax pursuant to the provisions of a bilateral U.S. income tax treaty. TIR 17-7 announces a change in department policy regarding the calculation of the non-U.S. corporation’s non-income measure (net worth). Specifically, TIR 17-7 amends sections IV and V of TIR 10-16, with minor changes to other portions of the release. Sections IV and V discuss the calculation of the non-income measure of the corporate excise, consistent with the state apportionment regulations amended in 2014. Those regulations provide that any receipts, property or payroll related to items excluded from a corporation’s federal gross income are excluded from the computation of the corporation’s apportionment percentage.

The following discussion relates to the more significant changes made by TIR 17-7 in sections IV and V.

Exclusion of factors related to treaty-exempt income

As previously provided by TIR 10-16, a taxable member of a combined group is required to file a tax return reporting its non-income measure on a separate entity basis as part of the combined group’s combined report. TIR 17-7 now explains that a member of a combined group that has income exempt under a Federal treaty may also be required to file a tax return reporting its non-income measure of the corporate excise and determine its apportionment percentage on a separate entity basis as part of the combined group’s combined report. Accordingly, a combined group member will exclude in the determination of its apportionment percentage to be applied for non-income measure purposes any of its property, payroll and receipts that are attributable to the treaty-exempt income.

Similarly, in the instance of a taxable corporation that is not included in a combined group, TIR 17-7 provides that when determining the apportionment formula for purposes of both the income and non-income measure components of the corporate excise, the taxable corporation must exclude any property, payroll and receipts that relate to excluded treaty-exempt income. This is a revision from TIR 10-16 which previously required the inclusion of any property, payroll and receipts that were excluded from the computation of its income measure excise when determining its non-income measure excise.

Exclusion of treaty-exempt income of a non-member taxable corporation

Lastly, TIR 10-16 provided that a corporation that is subject to tax in Massachusetts and not a member of a combined group was responsible for both an income and non-income measure tax filing. Additionally, there is no statutory provision addressing the treatment of an item of treaty-exempt income in the instance of a corporation that is not a member of a combined group.

TIR 17-7 explains that the commissioner will apply the statutory principles relating to the treatment of treaty-exempt income of a combined group member to the treaty-exempt income of a corporation that is not a combined group member, and accordingly, the taxpayer may exclude that income from Massachusetts taxable income. Under TIR 10-16, that treatment was under the discretion of the commissioner. Additionally, a taxable corporation must also exclude any expenses related to that income for consistency purposes.

The Commissioner will apply the changes announced in this TIR going forward and to all open taxable years within the statute of limitations for assessment or abatement.

Takeaways

TIR 17-7 is applicable to all open taxable years within the statues of limitations and supersedes TIR 10-16. Accordingly, taxpayer’s that calculated a non-income tax using apportionment factors related to items of treaty-exempt income may be entitled to a refund. The policy change will be welcome to taxpayers, providing consistent treatment of treaty-exempt income in context of the updated regulations.  

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