New Illinois Corporate Income Tax

New Illinois Corporate Income Tax Bills Seek to Tax Foreign Income

Enactment of proposed Illinois legislation that would tax worldwide or tax haven income of corporations could prompt international and constitutional controversies.

Proposed legislation in the Illinois General Assembly (S.B. 1115; H.B. 2085) would return Illinois to worldwide combined reporting as the default method for Illinois corporate income tax filers. Since 1984, Illinois has been a water's-edge combined filing state, excluding the combined return from those unitary entities with more than 80 percent of their business activity outside the United States (the so-called 80/20 rule). The proposed legislation allows an election for water's-edge combined filing, but limits the foreign dividends received deduction to 75 percent, as opposed to the current 100 percent deduction. The legislation also eliminates the 80/20 rule, and it contains a tax haven "blacklist" that would include the income and apportionment factors of entities in so-called tax havens despite a water's-edge election.

Worldwide combined reporting is not new to Illinois. In 1974, the Illinois Department of Revenue released administrative guidance stating that the 1969 Illinois Income Tax Act allowed worldwide combined reporting. See Illinois Income Tax Informational Bulletin No. 1974-1 (Oct. 15, 1974). The Illinois Supreme Court agreed in Caterpillar Tractor Co. v. Lenckos, 84 Ill. 2d 102 (1981). In response to the Caterpillar ruling, the General Assembly adopted legislation in 1984 limiting unitary combined reporting to the water's-edge, essentially excluding most foreign entities and income from Illinois tax.

When implemented properly, worldwide combined reporting is constitutional. See Container Corp. of Am. v. Franchise Tax Bd., 463 U.S. 159 (1983). Nevertheless, the proposed legislation in Illinois raises a host of administrative and legal issues. Since 2004, Illinois has had addback provisions for certain payments to unitary foreign members, so it already manages the concerns that worldwide combined reporting and tax haven lists claim to address. Moreover, the tax haven blacklist, which includes Ireland and the Netherlands, invites controversy overseas and constitutional challenges domestically.

The tax impact of the new proposed regime is extremely fact dependent; some taxpayers may pay less, some more. Others might see no change under this new regime. The Illinois legislative session ends in May. Jones Day lawyers will continue to monitor this development closely.

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