One of the revenue raisers in the December 2017 federal tax reform act is a deemed repatriation from certain non-U.S. corporations. This primarily was a 2017 income event but, in limited circumstances, can have an impact in 2018. Oregon corporation excise tax law, as amended in the 2018 legislative session, provides affected corporations with an 80 percent dividends-received deduction for the deemed repatriation. Still, 20 percent of the deemed repatriation can result in a significant increase in the taxpayer’s apportionable income.
On Friday, November 9, 2018, the Oregon Department of Revenue (“Department”) issued Oregon Revenue Bulletin 2018-01. The bulletin discusses the sales factor impact of the deemed repatriation for both (1) tax years beginning before January 1, 2018, when Oregon apportioned receipts from sales other than sales of tangible personal property based on costs of performance and (2) tax years beginning on or after January 1, 2018, for which Oregon applies a market-based sourcing method to such receipts.
- 2017 Deemed Repatriation: The deemed repatriation is excluded from the Oregon sales factor “unless the repatriation gross receipts are derived from the taxpayer’s primary business activity.” The example in the bulletin indicates that this depends on whether the taxpayer’s ownership interest in the non-U.S. corporation is derived from the taxpayer’s primary business.
- 2018 Deemed Repatriation: The deemed repatriation is excluded from the Oregon sales factor “unless the receipts are received from transactions and activities in the regular course of the taxpayer’s trade or business.” In the example in the bulletin, the Department describes how the deemed repatriation is never included in the Oregon sales factor “because the one-time mandatory repatriation * * * isn’t received from transactions and activities in the regular course of” the recipient’s trade or business.
Pursuant to the bulletin, the sales factor impact depends on the taxpayer’s facts and circumstances:
- 2017 Deemed Repatriation: If the ownership of the interests in the non-U.S. corporation is derived from the taxpayer’s primary business, the 2017 deemed repatriation amount may be includible in the denominator of the recipient’s sales factor.
- 2018 Deemed Repatriation: If the non-U.S. corporation regularly pays dividends and/or earns subpart F income, the 2018 deemed repatriation may be from transactions and activities in the regular course of the recipient’s trade or business. Accordingly, it may be includible in the denominator of the recipient’s sales factor. The bulletin appears to treat the deemed repatriation as a standalone event. Despite the one-time nature of the deemed repatriation, federal tax law treats the deemed repatriation as subpart F income, which Oregon tax law treats as a deemed dividend. It is unclear why the deemed repatriation would be treated differently than other subpart F income or dividends.
If you would like to know more about the Oregon sales factor impact of the deemed repatriation, please contact one of our Oregon tax partners: Eric Kodesch, kodesche@lanepowell.com, 503.778.2107, and John Gadon, gadonj@lanepowell.com, 503.778.2130.
This legal update highlights an important current development. It is not intended as legal advice.