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Pennsylvania Business Tax Commis

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					       Pennsylvania Business
      Tax Reform Commission
   Pennsylvania Business Taxes:
    Structure and Major Issues

Eileen H. McNulty
Executive Deputy Secretary
Pennsylvania Department of Revenue
Pennsylvania Budget Overview
            General Fund Revenues                                 General Fund Expenditures

                               Other                                             Other
                Inheritance   Revenue                                          Programs     Direction
                                                                    Protection    2%
                    3%          8%                                                             4%
                                                                      11%

                                                              Debt Service
                                                                  4%
Personal
 Income
   36%                                                                                                  Education
                                            Sales
                                                                                                          42%
                                            34%


                                                              Health and
                                                                Human
                                                               Services
                                                                 35%                      Economic
            Other             Corporate                                                   Develop-
           Business           Net Income                                                    ment
             12%                  7%                                                         2%




4/8/2004                                Pennsylvania Business Tax Reform                                      2
                                                  Commission
       Sources of General Fund Revenue
                    FY 94-95                                            FY 04-05

                               Corporation                               Non-Tax   Corporation
              Non-Tax            Taxes                                     2%        Taxes
                2%                25%
                                                                                      19%




                                                        Other Taxes
                                                           40%
Other Taxes
   36%




                                    Consumption                                       Consumption
                                       Taxes                                             Taxes
                                        37%                                               39%




   4/8/2004                          Pennsylvania Business Tax Reform                               3
                                               Commission
  Tax Collections in Millions of Dollars
                                        FY 02-03 Actual        FY 03-04 Estimate

Corporate Net Income Tax                          $1,397                $1,476
Capital Stock /Franchise Tax                             896                934
Gross Receipts Tax                                       847             1,080
Insurance Premiums Tax                                   331                332
Bank Shares Tax                                          188                199
Mutual Thrift Institutions Tax                           26                  19
Corporate Loans Tax                                      15                  13
All Corporation Taxes                             $3,751                $4,099

4/8/2004              Pennsylvania Business Tax Reform                        4
                                Commission
    Corporate Net Income Tax
• Imposed on C corporations and other entities treated
  as corporations by federal law
• Major exemptions include pass-through entities,
  financial institutions, insurance companies, real estate
  investment trusts and regulated investment companies
  organized as business trusts, and non-profits
• Each separate corporation subject to tax –
  combined/consolidated reporting not permitted under
  Pa law
• Taxable income based on federal taxable income --
  line 28 of federal return, if the corporation files a
  federal return
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                             Commission
Corporate Net Income Tax (Cont.)
• Business income is generally apportioned by 60%
  sales, 20% payroll, 20% property
• Special apportionment for transportation
     – Trucking, pipelines, airlines
     – Revenue-miles apportionment
• Non-business income is allocated to a particular
  state (intangibles to state of commercial domicile)
• Net operating loss (NOL) deduction
     – 20 year carryover beginning with 1998 losses
     – Maximum deduction in a single year of $2 million
• Tax rate is 9.99%
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                               Commission
 Capital Stock and Franchise Taxes
• Imposed on corporations, including S corporations,
  as well as LLCs and business trusts
• Exempt entities include financial institutions,
  insurance companies, non-profits, and real estate
  investment trusts and regulated investment
  companies organized as business trusts
• Tax base is a formula representing the value of the
  company: 5-year average book net income (separate
  company) capitalized at 9.5% and 75% of book net
  worth (consolidated)
• A $125,000 deduction from the base exempts most
  small businesses
 4/8/2004         Pennsylvania Business Tax Reform   7
                            Commission
  Capital Stock and Franchise Taxes
               (Cont.)
• Apportionment by equally-weighted payroll, property
  and sales fractions
• An alternative apportionment formula is allowed
  using a single assets fraction
• Exempt assets include those used exclusively in
  manufacturing, processing, pollution control & R&D
• Exemptions are implemented by removing the exempt
  portion from the numerator of the property and payroll
  apportionment fractions. Since 1999, there is no
  manufacturing exemption in the sales fraction.

  4/8/2004         Pennsylvania Business Tax Reform   8
                             Commission
Capital Stock and Franchise Taxes
             (Cont.)
• For the single assets fraction, exempt assets
  are removed from the numerator
• Special election for holding companies
  limits the apportionment fraction to 10%
• Tax rate for 2004 is 6.99 mills, declining by
  1 mill per year until the tax is phased out in
  2010

4/8/2004        Pennsylvania Business Tax Reform   9
                          Commission
            Gross Receipts Tax
• Imposed in addition to the CNI and CSFT
• After deregulation, GRT is often due from
  companies that are not traditional public utilities
• Imposed on gross receipts from:
     – Sales of electric energy within the Commonwealth
     – Transmission of telephone or telegraph messages
       within the Commonwealth
     – Transportation of oil by pipeline within the
       Commonwealth


4/8/2004             Pennsylvania Business Tax Reform     10
                               Commission
       Gross Receipts Tax (Cont.)
• Beginning in 2004, the tax is also imposed on
  mobile telecommunications and interstate landline
  telecommunications sourced to Pa
• Legally imposed on the receipts of the business,
  but is often assumed to be passed on to customers
  in the price
• 50 mills (5%) on telecommunications and pipeline
  gross receipts
• 59 mills (5.9%) on electricity gross receipts

4/8/2004         Pennsylvania Business Tax Reform   11
                           Commission
           Insurance Premiums Tax
 • Imposed in lieu of other corporate taxes
 • Generally 2% of Pa gross premiums, plus any
   retaliatory tax, less credits for guaranty association
   assessments
 • 3% rate on policies written with unlicensed non-
   life insurers (“surplus lines”), and 5% rate on the
   underwriting profits of marine insurance in lieu of
   premiums tax


4/8/2004          Pennsylvania Business Tax Reform    12
                            Commission
Insurance Premiums Tax (Cont.)
• Major exemptions include nonprofit medical
  insurance companies (I.e., Blue Cross, Blue
  Shield), mutual benefit associations, and domestic
  title insurance companies
• Taxes paid by foreign fire and casualty companies
  are distributed to police and fire pension and relief
  funds



4/8/2004          Pennsylvania Business Tax Reform    13
                            Commission
             Bank Shares Tax
• Imposed in lieu of other corporate taxes
• Technically imposed on the shareholder of a bank,
  trust or bank and trust doing business in Pa
• Tax is imposed at 1.25% of the value of shares as of
  January 1
• Value of shares is determined by a six-year moving
  average of book net worth
• Proportional exemption for US obligations
• Apportioned to Pa by an equally-weighted formula
  using payroll, receipts and deposits
• Similar tax is imposed on domestic title insurance
  companies
 4/8/2004         Pennsylvania Business Tax Reform   14
                            Commission
  Mutual Thrift Institutions Tax
• Imposed in lieu of other corporate taxes
• 11.5% on apportioned net income determined on a
  separate company GAAP basis
• Income from US and PA obligations exempt
• Interest expense associated with tax exempt
  income is disallowed
• Apportionment is equally-weighted payroll,
  receipts and deposits
• NOLs may be carried forward 3 years
• Credit unions are exempt

4/8/2004        Pennsylvania Business Tax Reform   15
                          Commission
           Corporate Loans Tax
• Imposed in addition to other corporate taxes
• 4 mills on the nominal value of taxable obligations
  held by Pa individual residents issued by:
     – Pa corporations
     – Foreign corporations having a treasurer resident in Pa
• Exempt issuers: Credit unions, life insurance
  companies, mutual savings institutions, non-
  profits
• Although imposed on resident holders, the tax is
  collected from corporate issuers
4/8/2004             Pennsylvania Business Tax Reform           16
                               Commission
                Tax Credits
• Neighborhood Assistance Tax Credit -- $18
  million
• Employment Incentive Payments -- $25 million
• Job Creation Tax Credit -- $22.5 million
• Research and Development Tax Credit -- $30
  million
• Educational Improvement Tax Credit -- $45
  million
• Keystone Innovation Zones -- $25 million
4/8/2004        Pennsylvania Business Tax Reform   17
                          Commission
    Keystone Opportunity Zones (KOZs)
• Designed to foster economic development on deteriorated or
  underutilized properties
• Include parcel-specific areas in which businesses and residents
  receive state and local tax benefits
• Additional sites added under Keystone Opportunity Expansion
  Zone (KOEZ) and Keystone Opportunity Improvement Zone
  (KOIZ) programs
• Credits available for all state business taxes, including PIT
• Purchases made by companies operating in a zone are exempt
  from sales and use tax
• Local real property taxes, earned income taxes, and business
  occupancy taxes also waived within zones
   4/8/2004            Pennsylvania Business Tax Reform        18
                                 Commission
                   Personal Income Tax
                   By Classes of Income
                          Tax year 2000, before tax credits
                                                          Interest &
                                                          Dividends
                                                              7%


                                                              Net Profits
                                                                 8%
                                                                 Other Income
               Net                                                   2%
           Compensation                                         Sale of
              76%                                               Property
                                                                  7%




           About 14% of total PIT is due on business source income

4/8/2004                   Pennsylvania Business Tax Reform                     19
                                     Commission
   Comparison of Gap between Corporate Income Tax Rate and
         Personal Income Tax Rates -- Selected States
                      Tax Year 2004, as of January 1, 2004

               Personal Income Corporate Income Difference in Comparable U.S.
      State     Low       High   Low      High Highest Rates State Rank Rank
 PENNSYLVANIA     3.07      3.07  9.99      9.99         6.92     1       1
    ILLINOIS      3.00      3.00  7.30      7.30         4.30     2       4
   DELAWARE       2.20      5.95  8.70      8.70         2.75     3       7
  NEW JERSEY      1.40      6.37  9.00      9.00         2.63     4       8
 WEST VIRGINIA    3.00      6.50  9.00      9.00         2.50     5       10
   MARYLAND       2.00      4.75  7.00      7.00         2.25     6       12
      OHIO        0.74      7.50  5.10      8.50         1.00     7       18
    VIRGINIA      2.00      5.75  6.00      6.00         0.25     8       24
   NEW YORK       4.00      7.70  7.50      7.50        (0.20)    9       29
NORTH CAROLINA    6.00      8.25  6.90      6.90        (1.35)   10       33
   MICHIGAN *

* Michigan imposes a single business tax on all entities of 1.9% on the sum of federal taxable income
of the business, compensation paid to employees, dividends, interest, royalties paid and other items.




4/8/2004                          Pennsylvania Business Tax Reform                                 20
                                            Commission
More Choices of Business Entity Type
       •   C corporation
       •   S corporation
       •   Professional corporation
       •   Business trust
       •   Limited liability company
       •   Limited liability partnership
       •   Restricted professional company
       •   Limited partnership
       •   Partnership
       •   Sole proprietor
4/8/2004             Pennsylvania Business Tax Reform   21
                               Commission
            Pass-through Businesses
• In a pass-through business, for CNI purposes,
  the income and assets of the business are
  treated as the income and assets of the
  shareholders or partners, even if the income is
  not distributed in cash
• For a business located outside of Pa, an
  interest in a Pa pass-through business
  establishes nexus for Pa tax
• Beginning in 2004, CNI withholding on non-
  resident corporate owner’s income required
 4/8/2004        Pennsylvania Business Tax Reform   22
                           Commission
             S Corporations
•   Over 50% of all corporations
•   Subject to CSFT, but not CNIT in Pa
•   Limited to 75 shareholders by federal law
•   Not “small” corporations, but closely held
•   Requires a Pa election



4/8/2004         Pennsylvania Business Tax Reform   23
                           Commission
              Partnerships
• Treated under Pa law as an aggregate of
  owners, not a separate legal entity
• Usually not subject to CNIT or CSFT, but
  may elect corporate treatment for federal
  purposes, which Pa follows
• Tax liability on the income and assets of the
  partners is imposed on the partners, at the
  individual or corporate rates

4/8/2004       Pennsylvania Business Tax Reform   24
                         Commission
   Limited Liability Companies
• Created under the Associations Code as a hybrid
  business entity
• Provide limited liability for its members like a
  corporation along with some of the tax advantages
  and simplicity of formation of a partnership
• Subject to CNIT only if classified as a corporation
  for federal income tax purposes
• Generally are subject to CSFT
• Use of LLCs is growing rapidly in Pa

4/8/2004         Pennsylvania Business Tax Reform   25
                           Commission
   Number of Business Entities by Type

           160,000

           140,000

           120,000

           100,000

            80,000

            60,000

            40,000

            20,000

               -

                     C Corporations S Corporations             LLCs
           1990         149,784              46,305              -
           2003         114,610              124,403           24,729


4/8/2004                    Pennsylvania Business Tax Reform            26
                                      Commission
Number of Business Entities by Type

            Business Entity                       1990      2003
            C Corporations                       149,784   114,610
            S Corporations                        46,305   124,403
            Limited Liability Companies              -      24,729
            Partnerships                          79,514    85,632
            Sole Proprietorships                 608,492   699,595
            Non Profit Organizations               1,652     2,050




 4/8/2004               Pennsylvania Business Tax Reform             27
                                  Commission
           State and Local Taxes Relative to Personal Income, by Tax Type
                      (FY 2001, Taxes per $1,000 of State Personal Income)


               Corporate Income and
                 Franchise Taxes                                  Property Tax
                          Comparable                                     Comparable
     State      Amount State Rank U.S. Rank          State      Amount State Rank U.S. Rank
  DE              $31.25      1       1           NJ              $44.22     1        3
  NY                $9.55     2       4           NY              $36.80     2        9
  MI                $7.11     3       7           IL              $35.21     3       12
  PA                $6.08     4       9           MI              $32.21     4       16
  IL                $5.75     5      10           OH              $29.13     5       23
  WV                $5.33     6      12           PA              $26.51     6       31
  NC                $4.98     7      14           VA              $25.66     7       32
  NJ                $4.43     8      21           MD              $25.46     8       33
  OH                $2.93     9      34           WV              $20.74     9       41
  MD                $2.73    10      38           NC              $20.46    10       42
  VA                $1.68    11      48           DE              $14.79    11       49

  Source: Pennsylvania 21st Century Tax Policy Project, Table IV-1
  Prepared by Ernst & Young LLP, The Keystone Research Center,
  and the Pennsylvania Economy League, Inc.


4/8/2004                        Pennsylvania Business Tax Reform                        28
                                          Commission
           Business Share of State & Local Taxes, FY2003
           Pennsylvania and Comparable States
           (Billions of dollars)
                                                                  Comparable
                            Business    Total   Business            State      U.S.
           State             Taxes      Taxes    Share              Rank       Rank
           Delaware             1,605     2,882      56%              1         7
           Illinois           21,241     44,440      48%              2         14
           West Virginia        2,364     4,968      48%              3         15
           Michigan           14,027     34,019      41%              4         27
           New Jersey         15,581     37,930      41%              5         29
           Pennsylvania       16,217     40,345      40%              7         33
           New York           38,338     95,785      40%              6         34
           Ohio               14,627     37,053      39%              8         36
           Viriginia            8,198    22,423      37%              9         46
           North Carolina       8,410    23,079      36%             10         47
           Maryland             6,353    19,986      32%             11         50



           Source: Total State and Local Business Taxes, A 50 State Study of the
           Taxes Paid by Business in FY2003, Ernst & Young, January 2004. (E&Y
           Calculations)



4/8/2004                       Pennsylvania Business Tax Reform                       29
                                         Commission
        2002-03 CNIT and CSFT                                                       2001 Private Employment
         Payments by Industry                                                             by Industry
                                                                              Agriculture,
                                                                                M ining,       M anufacturing
                                                                              Construction         15%
                          Manufacturing                                                                              Trans portation,
        Agriculture,                                                              8%
                             16%                     Tra ns po rta tio n,                                           Communications ,
          Mining,                                                                                                        Utilities
                                                    C o m m unic a tio ns ,
        Construction                                      Utilitie s
                                                                                                                           6%
            5%                                              22%
                                                                              Not Classified
                                                                                   0%
Not Classified
     6%                                                                                                                       Wholesale Tra
                                                                                                                                   5%




   Services                                                                      Services
     19%                                                                           38%
                                                          Wholesale
                                                           T rade                                                        Retail Trade
                                                           11%                                                              19%


                                          Retail T rade
                       F.I.R.E.                                                                          F.I.R.E.
                                              8%
                         13%                                                                               9%




       4/8/2004                              Pennsylvania Business Tax Reform                                              30
                                                       Commission
 Percent of Companies Reporting Zero Liability by Tax Type
                                  Tax Year 2000

                Tax Type                            Total       Zero    Percent
Capital Stock and Foreign Franchise Tax           243,795     160,186      66%
Corporate Net Income Tax                          123,182      78,843      64%
Gross Receipts Tax                                    642         223      35%
Bank Shares Tax                                       333          20       6%
Mutual Thrift Institutions Tax                        176          69      39%
Insurance Premiums Tax                              3,821         798      21%




 4/8/2004                  Pennsylvania Business Tax Reform                31
                                     Commission
           CNI Zero Liability Profile
• In 2000, 78,843 or 64% of corporations
  subject to CNI had $0 liability. Of those:
     –     340 had capital stock value >= $1 Billion
     –     11,732 had capital stock value >= $1 Million
     –     9 had federal taxable income >= $1 Billion
     –     2,320 had federal taxable income >= $1 Million
     –     20 had book net income >= $1 billion
     –     3,241 had book net income >= $1 million

4/8/2004               Pennsylvania Business Tax Reform   32
                                 Commission
     CSFT Zero Liability Profile
• In 2000, 160,186 taxpayers or 66% of those
  subject to CSFT had $0 liability. Of those:
     – 96% reported $0 capital stock value after the
       $125,000 base exemption
     – 7% reported 0% PA apportionment after the
       manufacturing exemption



4/8/2004           Pennsylvania Business Tax Reform    33
                             Commission
    CNI Tax Returns By Liability Range
                                   1992 vs. 2000
                       $10,001-                                           $10,001-
             $1,001-    50,000      >$50,001                    $1,001-   $50,000    > $50,001
             10,000      4%           2%                        $10,000     4%          2%
              17%                                                13%




                                                    $1-$1,000
                                                       17%

  $1-1,000
    21%

                                            $0
                                           56%

                                                                                         $0
                                                                                        64%



             1992 CNI Tax Returns                               2000 CNI Tax Returns

4/8/2004                          Pennsylvania Business Tax Reform                               34
                                            Commission
                   C Corporations with $0 CNIT Liability by Capital Stock Value
                                          1992 vs. 2000
             80%
                                                                                   1992       2000
             70%

             60%

             50%
Percentage




             40%

             30%

             20%

             10%

             0%
                   $0        $1 to    $1M to       $10M to           $100M to $1 billion or      Total
                            $0.99M    $9.99M       $99.99M           $999.99M   greater
                                               Capital Stock Value


4/8/2004                         Pennsylvania Business Tax Reform                                        35
                                           Commission
                                    Total CNIT Liabilities and Capital Stock Values
                                            vs. Total US Corporate Profits
                                                                CNIT revenues adjusted to 9.99%
                     2,000

                     1,800

                     1,600

                     1,400

                     1,200
Dollars (Millions)




                     1,000

                      800

                      600

                      400

                      200

                        0
                             1992     1993             1994          1995        1996           1997   1998       1999            2000
                                                                               Tax Year

                                             CNIT Liabilities                   Capital Stock Value           Corporate Profits



4/8/2004                                               Pennsylvania Business Tax Reform                                             36
                                                                 Commission
                                      "Top 100" CNIT Liabilities and Capital Stock Values
                                                vs. Total US Corporate Profits
                                                               CNIT revenues adjusted to 9.99%

                         600




                         500




                         400
    Dollars (Millions)




                         300




                         200




                         100




                           0
                               1992       1993          1994       1995       1996           1997   1998        1999           2000
                                                                             Tax Ye ar


                                           CNIT Liabilities                Capital Stock Value             Corporate Profits




4/8/2004                                               Pennsylvania Business Tax Reform                                           37
                                                                 Commission
           Major Business Tax Issues

• High nominal tax rate
• Two general business taxes
• Majority of corporations owe no CNI or
  CSFT tax
• Tax revenues don’t track profits
• Gap of almost 7% between personal and
  corporate rates
4/8/2004          Pennsylvania Business Tax Reform   38
                            Commission
Long-term Shift From Manufacturing
   to Service Sector Employment
                                                Manufacturing and Services Employment 1969-2002

                              2,500
 NUmber of Jobs (thousands)




                              2,000


                              1,500


                              1,000


                               500


                                -
                                     69

                                           71

                                                 73

                                                       75

                                                             77

                                                                   79

                                                                         81

                                                                               83

                                                                                     85

                                                                                            87

                                                                                                  89

                                                                                                        91

                                                                                                              93

                                                                                                                    95

                                                                                                                          97

                                                                                                                                99

                                                                                                                                      01
                                    19

                                          19

                                                19

                                                      19

                                                            19

                                                                  19

                                                                        19

                                                                              19

                                                                                    19

                                                                                          19

                                                                                                 19

                                                                                                       19

                                                                                                             19

                                                                                                                   19

                                                                                                                         19

                                                                                                                               19

                                                                                                                                     20
                                                                                          Year


                                                                    Manufacturing Employment      Services Employment



4/8/2004                                                          Pennsylvania Business Tax Reform                                         39
                                                                            Commission
    Deregulation and Restructuring
• Telecommunications, trucking, banking and energy sectors
  have been deregulated or restructured within the last
  decade
• Vertically integrated electric companies have been broken
  into generators, transmission companies, distributors, and a
  variety of services
• Book values of former monopolies (subject to CSFT in
  PA) have been marked to market
• Competition has encouraged interstate & international
  mergers and acquisitions
• Result is fewer large “PA-only” businesses and much more
  complex corporate structures in previously regulated
  industries
4/8/2004            Pennsylvania Business Tax Reform        40
                              Commission
                           Corporation Tax Electric Sector Payments
                               Difference From FY 1995-96 Base
             $200
                                                                                        CNIT
             $150                                                                       CSFT
                                                                                        TOTAL
             $100


              $50
$ Millions




               $0

              ($50)

             ($100)


             ($150)

             ($200)

             ($250)
                      1996-97   1997-98     1998-99     1999-00     2000-01   2001-02          2002-03
                                                      Fiscal Year




     4/8/2004                             Pennsylvania Business Tax Reform                               41
                                                    Commission
                   Nexus Issues
• How much physical presence must a company have in
  a state before it is required to pay or collect tax in that
  state?
• Under Complete Auto Transit (1977) the US Supreme
  Court established that a state or local tax may only be
  imposed on a business with a “substantial nexus” with
  the taxing state
• Federal law P.L. 86-272 provides immunity from an
  income tax based on mere solicitation
• P.L. 86-272 does not provide immunity from other
  taxes including the CSFT or sales tax
• Technology changes allow Internet delivery of services
  4/8/2004           Pennsylvania Business Tax Reform    42
                               Commission
  Separate Company Reporting
• Widespread use of pass-through forms of
  business creates complex corporate group
  structures
• Transactions among corporate group
  members creates opportunities for tax
  planning


4/8/2004      Pennsylvania Business Tax Reform   43
                        Commission
Separate Company Reporting (Cont.)

• CNI was designed to be based on the federal tax
  base
• Federal reporting and compliance activity benefits
  state
• A corporate group files pro-forma separate federal
  returns in separate company states
• Pro-forma returns are not filed with or subject to
  audit by the IRS

4/8/2004         Pennsylvania Business Tax Reform   44
                           Commission
Separate Company Reporting (Cont.)

• Accounting transactions between affiliates may
  not be priced at arms-length
• May be structured to minimize tax in high-rate
  states
• Includes pricing of goods, licensing of intangibles,
  loans, and assignments
• Creates difficult subjective decisions for tax
  administrators regarding how transactions should
  be priced, distinguishing legitimate vs. abusive
  transactions
4/8/2004          Pennsylvania Business Tax Reform   45
                            Commission
Separate Company Reporting (Cont.)

• Transfer pricing refers to the setting of non-
  arms-length prices for the sales of goods
  and services between affiliates
     – Transfer pricing can be used to minimize the
       reported profit of affiliates in high-tax
       jurisdictions
     – The IRS scrutinizes transfer prices under the
       authority of IRC 482

4/8/2004           Pennsylvania Business Tax Reform    46
                             Commission
Separate Company Reporting (Cont.)
 • Passive Investment Companies (PICs) are
   companies formed to hold passive investments
   within a corporate group
 • Investments may include intangible assets such as
   stocks, bonds, patents or trademarks
 • The PIC may license the intangibles to others for
   royalty income or loan funds to others for interest
   income


 4/8/2004         Pennsylvania Business Tax Reform   47
                            Commission
Separate Company Reporting (Cont.)

 • The PIC can be used to minimize the reported
   profits of separate entities in separate company
   reporting states
 • The PIC itself is usually located in a state that
   does not tax corporate income, or does not tax
   income from intangible assets
 • A “Delaware holding company” is a form of PIC


 4/8/2004         Pennsylvania Business Tax Reform     48
                            Commission
                       Hypothetical Inc.
                           Corporate Structure Example

                                        Parent Co.
                                      Headquarters, CEO,
                                       And Executives




Finance Co.          Management Co.                 Operating Co. Brandname Co.
Payroll, Banking,      Advertising, Product            Manufacturing,         Owns Patents,
And Investments     Development, Administration       Shipping, Billing        Trademarks

                             Management Fees
                                                                          Royalties
                     Interest
   4/8/2004                     Pennsylvania Business Tax Reform                         49
                                          Commission
Multiformity and Unrelated Assets

• Judicial doctrines arising out of ACF
  Industries and similar cases
• Taxpayers can exclude income or value
  from tax that is --
     – Engaged in business outside of Pa that is
       unrelated to its Pa business, or
     – Owns an asset unrelated to its Pa business

4/8/2004           Pennsylvania Business Tax Reform   50
                             Commission
                      Summary of Corporate Income Tax
                          Reporting Requirements
States without a Corporate Income Tax

     Mandatory Combined Reporting

 Related-Party Transaction Legislation

   Discretionary Combined Reporting

              IRC § 482-type Powers

                     Throwback Rule

                   Economic Presence

                                None

                                         0               5                 10                15                 20                25                  30
                                                                                      Number of States

States   without an income tax: NV, SD, WA, WY
States   that require combined reporting: AK, AZ, CA, CO, HI, ID, IL, KS, ME, MN, MT, NE, NH, ND, OR, UT
States   with expense disallowance provisions: AL, AR, CT, MA, MS, NJ, NY, NC, OH
States   with discretionary combined reporting: FL, GA, IN, IA, KY, LA, MA, MI, MS, NJ, NM, NY, NC, OH, TN
States   with IRC § 482-type powers: AK, AR, CA, CO, CT, FL, GA, HI, IL, IA, KS, KY, LA, MA, MS, MO, NJ, NY, NC, OK, RI, SC, TN, TX, UT, VT, VA, WI
States   with a throwback rule: AL, AK, AR, CA, CO, HI, ID, IL, IN, KS, ME, MA, MS, MO, MT, NH, NJ, NM, ND, OK, OR, TX, UT, VT, WV, WI
States   that have won court cases that determined economic presence as nexus: MD and SC
States   that have none of the above: DE and PA


     4/8/2004                                          Pennsylvania Business Tax Reform                                                               51
                                                                 Commission
                          Summary
• Cost to lower CNI rate by 1% = $160 M
• Potential Base Broadeners
      – Minimum tax
      – Subject pass-through entities to taxation or fees
      – Address tax planning
           • Combined reporting
           • Addbacks
           • Economic nexus
      – Alternative tax bases
           • VAT
           • Net Worth
      – Expansion of existing tax base
           • Limit dividend received deduction
           • Limit deductions for corporate officer compensation
4/8/2004                 Pennsylvania Business Tax Reform          52
                                   Commission

				
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