The Administration’s proposed international tax revisions

A look at state income tax issues & consequences

President Obama’s fiscal year 2011 budget includes several proposed revisions to international tax provisions of the Internal Revenue Code—affecting deferred interest expense deductions, Subpart F income, and the ‘‘80/20 company’’ exception. These proposals, if adopted, could pose some complications at the state level.

Complications at the state level

The US Treasury Department released its ‘‘Greenbook’’ in February 2010 describing the tax proposals contained in President Obama’s FY 2011 budget.1 This whitepaper describes state income tax issues and consequences that would result from enactment of three of the proposed international tax provisions. These proposals are referred to throughout this whitepaper as: 

  • Deferred interest expense deductions or interest expense deferral provision
  • Treating excess returns associated with transfers of intangibles offshore as a new category of Subpart F income, and
  • Repeal of the "80/20 company" exception 2

Of the three Obama administration proposals mentioned above, deferred interest expense deductions would appear to be the most widely applicable. This proposal would require US corporate taxpayers to defer interest expense deductions associated with foreign income until the income is repatriated.3

1 See ‘‘General Explanations of the Administration’s Fiscal Year 2011 Revenue Proposals,’’ Department of the Treasury (February 2010) (hereinafter the ‘‘Greenbook’’).
2 Since this article was written, the repeal of the 80/20 company exception for federal purposes has been included in the American Jobs and Closing Tax Loopholes Act of 2010, which passed the House of Representatives on May 28 and was pending in the Senate as of June 14.
3 See FY 2011 Greenbook, at 39. Limiting the deferral to interest expense is a change from the FY 2010 budget proposal. That proposal, which was not pursued, would have deferred interest, general and administrative, and stewardship expenses. See FY 2010 Greenbook, at 29.

By George Barry of Deloitte Tax LLP | Originally published in Bloomberg BNA "Tax Management Weekly State Tax Report" on July 9, 2010
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