New Hampshire House Bill 121, introduced on Jan. 4, 2023, would mandate worldwide combined reporting for unitary business groups. New Hampshire currently requires water’s edge combined reporting for its business profits tax. The proposed law would require combined reporting for all foreign affiliates of a unitary group. The bill’s stated intent is to prevent profit shifting overseas and to protect small businesses.
In 2021, New Hampshire created a study commission to consider the costs and benefits of worldwide combined reporting. That commission is due to report its findings on Nov. 1, 2023. But if enacted, House Bill 121 would take effect July 1, 2023, and apply to tax years beginning on or after Dec. 31, 2023.
RSM’s Washington National Tax State and Local Tax (SALT) group weighs in on these unique proposals.
Today, 29 states, including New Hampshire, require or allow water’s edge combined reporting. Yet, there are a lot of reasons to be skeptical of domestic combined reporting. Such laws do not raise as much revenue as proponents predict. They create winners and losers depending on the profitability and location of the members. And, as importantly, combined reporting laws are burdensome and costly in terms of compliance.
Worldwide combined reporting is even worse. All of the problems that accompany water’s edge reporting are magnified on a global scale. There is a greater risk of double taxation. There is the immense problem of determining which affiliates are engaged in a unitary business; many multinationals have hundreds of corporate relatives. And, foreign nations generally dislike American states trying to tax their businesses. These foreign nations include some of America’s closest allies. The New Hampshire proposal is particularly bad. It mandates worldwide reporting. In many states, including California, Massachusetts and Connecticut, taxpayers can elect to file on a worldwide or water’s edge basis. No state requires worldwide reporting without offering a water’s edge election. Thus, New Hampshire would be unique – and not in a good way.
As a tax preparer and taxpayer advocate, I dislike worldwide combined reporting, if for no other reason than it creates a huge compliance burden. To David’s point, no state really requires this without offering some type of election to report on a water’s edge method, so many multi-national groups would be facing the prospect of having to create a federal pro forma return that includes all unitary foreign affiliates simply for the purposes of reporting tax to a single state (New Hampshire). Calculating federal taxable income, state modification amounts, and apportionment for entities that are not normally included in the unitary state reporting group is no easy feat. Companies would be forced to gather information from foreign affiliates that they have never had need to request before and may not readily exist. From a taxpayer perspective, this type of legislation means programming new reports, figuring out currency translation on apportionment data, recomputing depreciation on foreign assets, and all kinds of burdensome logistics that come with complying with a worldwide combined reporting regime. It’s a significant undertaking that usually results in very little difference in tax for many taxpayers (for reasons I’ll explain below).
Aside from my personal experience and distaste for the compliance burdens of worldwide combined reporting, I’m a big proponent of examining whether legislation really accomplishes what it is intended to do. It is all too often the case that the actual effects of policy miss the mark on executing the theoretical outcome. If you read through the section of the bill describing the intent of the legislation, it could lead one to believe that every single multinational taxpayer has been shifting significant profits overseas and shorting the state of New Hampshire on tax revenue for years. In reality, it is a much smaller subset of taxpayers that would be generating any additional tax revenue that would come out of the switch to mandatory worldwide reporting. For any multi-national unitary group that is marginally more profitable in the United States than abroad, the increase in the tax base and state taxable income will likely be entirely offset by the apportionment factor dilution from inclusion of foreign activity in denominators. Some taxpayers may even owe less tax under worldwide combined reporting, for this reason. We are really only discussing taxpayers that are more profitable abroad than in the United States that would be generating additional tax revenue for the state. Even then, you can cue that population down another notch once you consider that many multi-national corporate groups may be able to take legitimate positions that their U.S. and foreign operations are not unitary. The most frustrating part of the proposal is the lack of actual data and analysis. At a minimum, I think the legislation should be tabled until the full economic impacts can be examined. This worldwide combined reporting regime would create a lot of burden for taxpayers, and I think the tax revenue benefits need to be significant to make this an understandable move by New Hampshire.