Executive summary: Minnesota worldwide combined reporting makes legislative progress
The Minnesota House on April 28 passed House File 1938 that will, among other tax changes, require mandatory worldwide combined reporting for state corporations. If enacted, the law would be effective for tax years beginning on or after Jan. 1, 2024. Although the U.S. Supreme Court has ruled that states can require worldwide reporting, no state currently requires mandatory worldwide reporting.
Minnesota contemplates worldwide combined reporting
What Minnesota’s worldwide combined reporting requirement would mean for taxpayers
All combined reporting states that impose business income taxes use a “water’s edge” approach. Businesses combine the apportionment factors of related unitary parties operating in the United States. No states require mandatory worldwide combined reporting. That may change. The Minnesota House passed House File 1938 by a 69-57 vote. There is support for the measure in the Minnesota Senate, which is currently considering the bill. The bill, which also includes substantial changes to the personal income tax, states that if a business is conducted within Minnesota, the entire worldwide income of the unitary business is subject to apportionment.
RSM’s state and local tax policy specialists discuss the possibility of Minnesota adopting worldwide combined reporting, and what it means for the Minnesota corporate income tax.
David Brunori
To paraphrase President Barack Obama, I would say to Minnesota “the 1980s want their state tax policy back.” Worldwide reporting was all the rage during the Reagan Administration. Those practitioners of a certain age will remember the Barclay’s case and California’s efforts to tax worldwide income. It was not only California; several states gave worldwide reporting a try. But despite the U.S. Supreme Court ruling worldwide reporting was constitutional, California and the other states eventually gave up on the idea. No state has adopted worldwide combined reporting since.
There are many reasons worldwide combined reporting fell out of fashion. Worldwide combined reporting is bad for business. Indeed, the business community universally opposes it. There are practical reasons for the opposition. Worldwide reporting creates enormous administrative burdens. There are additional record keeping and tracking. But the biggest burden would be trying to figure out which related parties are unitary with the Minnesota operations.
Minnesota may not care, but worldwide reporting also creates international affairs issues. American trading partners, most of whom are allies, really dislike worldwide reporting. They believe correctly that worldwide reporting places burdens on companies operating in their countries. They also believe, again correctly, that worldwide reporting is an attempt to tax income earned in their countries.
My personal view is that Minnesota has no business taxing activities outside of the country. And honestly, no one really knows how much profits are being shifted overseas. I doubt that Minnesota will reap the windfall expected by proponents. Indeed, some of those foreign affiliates will lead to less taxable income in the state. I am certain however that adopting worldwide combined reporting will make Minnesota less competitive and less attractive to international business. I cannot imagine why anyone would think that is good.
Mo Bell-Jacobs
David listed a number of reasons why worldwide reporting should stay in the decade of Who’s the Boss? Here is another. Corporate income tax compliance is complicated. It costs a significant amount of time, money and effort, especially considering how little corporate income tax generates for the states—in the aggregate something like 5% of state tax revenue is corporate income tax. But it seemingly feels like a large part of accounting firm compliance anxiety is due to corporate income tax. It is not an easy practice for businesses nor tax professionals —the logistics of including foreign operations would be burdensome, and not offer the ROI the state thinks is available.
Is there an epidemic of profit-shifting on behalf of multinationals avoiding Minnesota tax? I’m not so certain we can assume there is, and COST make this point better than I do. With likely little change in over tax receipts, the only parties benefiting from this type of legislation is tax professionals. Perhaps a “thank you” in advance is deserved for keeping things difficult for business taxpayers and myself and colleagues employed? Maybe more curiously, in an era of fierce competition between the states, Minnesota would rather advertise the business environment of every other state. I’m not sure we will ever know who the boss really was (it was Angela, it was always Angela), but I can sure you it will not be Minnesota with worldwide combined.
Brian Kirkell
With House File 1938, Minnesota is looking to move from a territorial income tax system to a worldwide system. I readily acknowledge the added complexity, increased compliance and controversy costs, and the burden of reconciling federal conformity discussed by both David and Mo. However, a worldwide approach to apportionment is neither inherently unconstitutional nor exceptionally objectionable if done in an intellectually honest manner. With every tax policy decision, there are winners and losers. With worldwide reporting, some businesses will pay more tax. Some will pay less. Most will pay the same under either approach. In the end, Minnesota may gain or lose a little revenue from this move, but it won’t make much of a difference in the grand scheme of the state’s ability to raise revenue. So why do it? The only reason I see is that it’s an opportunity for political posturing. But, when posturing becomes law, it is a repugnant use of the power of government. In tax, politics should never trump good policy.
