THE GENERAL ASSEMBLY OF PENNSYLVANIA

SENATE BILL

INTRODUCED BY BLAKE, TARTAGLIONE, COSTA, FARNESE, FONTANA, HUGHES, BOSCOLA, SOLOBAY, SCHWANK, YUDICHAK, FERLO AND LEACH, MARCH 23, 2012

REFERRED TO FINANCE, MARCH 23, 2012  

AN ACT

Amending the act of March 4, 1971 (P.L.6, No.2), entitled "An

act relating to tax reform and State taxation by codifying

and enumerating certain subjects of taxation and imposing

taxes thereon; providing procedures for the payment,

collection, administration and enforcement thereof; providing

for tax credits in certain cases; conferring powers and

imposing duties upon the Department of Revenue, certain

employers, fiduciaries, individuals, persons, corporations

and other entities; prescribing crimes, offenses and

penalties," in corporate net income tax, further providing

for definitions, for imposition, for reports and payment and

for consolidated reports; providing for mandatory combined

reporting; and, in general provisions, further providing for

underpayment of estimated tax.

The General Assembly of the Commonwealth of Pennsylvania

hereby enacts as follows:

Section 1.  Section 401(3)1(a) and (b) and 2(a) and (5) of

the act of March 4, 1971 (P.L.6, No.2), known as the Tax Reform

Code of 1971, amended or added December 23, 1983 (P.L.370,

No.90), July 1, 1985 (P.L.78, No.29), August 4, 1991 (P.L.97,

No.22), May 12, 1999 (P.L.26, No.4), June 22, 2001 (P.L.353,

No.23), June 29, 2002 (P.L.559, No.89) and October 9, 2009

(P.L.451, No.48) are amended, clause (3)2 is amended by adding a

phrase and the section is amended by adding clauses to read:

Section 401.  Definitions.--The following words, terms, and

phrases, when used in this article, shall have the meaning

ascribed to them in this section, except where the context

clearly indicates a different meaning:

* * *

(3)  "Taxable income."  1.  (a)  In case the entire business

of the corporation is transacted within this Commonwealth, for

any taxable year which begins on or after January 1, 1971,

taxable income for the calendar year or fiscal year as returned

to and ascertained by the Federal Government, or in the case of

a corporation participating in the filing of consolidated

returns to the Federal Government or that is not required to

file a return with the Federal Government, the taxable income

which would have been returned to and ascertained by the Federal

Government if separate returns had been made to the Federal

Government for the current and prior taxable years, subject,

however, to any correction thereof, for fraud, evasion, or error

as finally ascertained by the Federal Government.

(b)  Additional deductions shall be allowed from taxable

income on account of any dividends received from any other

corporation but only to the extent that such dividends are

included in taxable income as returned to and ascertained by the

Federal Government. For tax years beginning on or after January

1, 1991, additional deductions shall only be allowed for amounts

included, under section 78 of the Internal Revenue Code of 1986

(Public Law 99-514, 26 U.S.C. § 78), in taxable income returned

to and ascertained by the Federal Government and for the amount

of any dividends received from a foreign corporation included in

taxable income to the extent such dividends would be deductible

in arriving at Federal taxable income if received from a

domestic corporation. For taxable years beginning after December

31, 2018, if not otherwise allowed as a deduction, an additional

deduction is allowed for all dividends paid by one to another of

the included corporations of a unitary business to the extent

those dividends are included in business income of a corporation

that is required to determine its business income pursuant to

paragraph (1) of phrase (e) of subclause (2).

* * *

2.  In case the entire business of any corporation, other

than a corporation engaged in doing business as a regulated

investment company as defined by the Internal Revenue Code of

1986, is not transacted within this Commonwealth, the tax

imposed by this article shall be based upon such portion of the

taxable income of such corporation for the fiscal or calendar

year, as defined in subclause 1 hereof, and may be determined as

follows:

(a)  Division of Income.

(1)  As used in this definition, unless the context otherwise

requires:

(A)  "Business income" means income arising from transactions

and activity in the regular course of the taxpayer's trade or

business and includes income from tangible and intangible

property if either the acquisition, the management or the

disposition of the property constitutes an integral part of the

taxpayer's regular trade or business operations. The term

includes all income which is apportionable under the

Constitution of the United States.

(B)  "Commercial domicile" means the principal place from

which the trade or business of the taxpayer is directed or

managed.

(C)  "Compensation" means wages, salaries, commissions and

any other form of remuneration paid to employes for personal

services.

(D)  "Nonbusiness income" means all income other than

business income. The term does not include income which is

apportionable under the Constitution of the United States.

(E)  "Sales" means all gross receipts of the taxpayer not

allocated under this definition other than dividends received,

interest on United States, state or political subdivision

obligations and gross receipts heretofore or hereafter received

from the sale, redemption, maturity or exchange of securities,

except those held by the taxpayer primarily for sale to

customers in the ordinary course of its trade or business.

(F)  "State" means any state of the United States, the

District of Columbia, the Commonwealth of Puerto Rico, any

territory or possession of the United States, and any foreign

country or political subdivision thereof.

(G)  "This state" means the Commonwealth of Pennsylvania or,

in the case of application of this definition to the

apportionment and allocation of income for local tax purposes,

the subdivision or local taxing district in which the relevant

tax return is filed.

(2)  Any taxpayer having income from business activity which

is taxable both within and without this State other than

activity as a corporation whose allocation and apportionment of

income is specifically provided for in section 401(3)2(b)(c) and

(d) shall allocate and apportion taxable income as provided in

this definition.

(3)  For purposes of allocation and apportionment of income

under this definition, a taxpayer is taxable in another state if

in that state the taxpayer is subject to a net income tax, a

franchise tax measured by net income, a franchise tax for the

privilege of doing business, or a corporate stock tax or if that

state has jurisdiction to subject the taxpayer to a net income

tax regardless of whether, in fact, the state does or does not.

(4)  Rents and royalties from real or tangible personal

property, gains, interest, patent or copyright royalties, to the

extent that they constitute nonbusiness income, shall be

allocated as provided in paragraphs (5) through (8).

(5)  (A)  Net rents and royalties from real property located

in this State are allocable to this State.

(B)  Net rents and royalties from tangible personal property

are allocable to this State if and to the extent that the

property is utilized in this State, or in their entirety if the

taxpayer's commercial domicile is in this State and the taxpayer

is not organized under the laws of or taxable in the state in

which the property is utilized.

(C)  The extent of utilization of tangible personal property

in a state is determined by multiplying the rents and royalties

by a fraction, the numerator of which is the number of days of

physical location of the property in the state during the rental

or royalty period in the taxable year and the denominator of

which is the number of days of physical location of the property

everywhere during all rental or royalty periods in the taxable

year. If the physical location of the property during the rental

or royalty period is unknown or unascertainable by the taxpayer,

tangible personal property is utilized in the state in which the

property was located at the time the rental or royalty payer

obtained possession.

(6)  (A)  Gains and losses from sales or other disposition of

real property located in this State are allocable to this State.

(B)  Gains and losses from sales or other disposition of

tangible personal property are allocable to this State if the

property had a situs in this State at the time of the sale, or

the taxpayer's commercial domicile is in this State and the

taxpayer is not taxable in the state in which the property had a

situs.

(C)  Gains and losses from sales or other disposition of

intangible personal property are allocable to this State if the

taxpayer's commercial domicile is in this State.

(7)  Interest is allocable to this State if the taxpayer's

commercial domicile is in this State.

(8)  (A)  Patent and copyright royalties are allocable to

this State if and to the extent that the patent or copyright is

utilized by the payer in this State, or if and to the extent

that the patent copyright is utilized by the payer in a state in

which the taxpayer is not taxable and the taxpayer's commercial

domicile is in this State.

(B)  A patent is utilized in a state to the extent that it is

employed in production, fabrication, manufacturing, or other

processing in the state or to the extent that a patented product

is produced in the state. If the basis of receipts from patent

royalties does not permit allocation to states or if the

accounting procedures do not reflect states of utilization, the

patent is utilized in the state in which the taxpayer's

commercial domicile is located.

(C)  A copyright is utilized in a state to the extent that

printing or other publication originates in the state. If the

basis of receipts from copyright royalties does not permit

allocation to states or if the accounting procedures do not

reflect states of utilization, the copyright is utilized in the

state in which the taxpayer's commercial domicile is located.

(9)  (A)  Except as provided in subparagraph (B):

(i)  For taxable years beginning before January 1, 2007, all

business income shall be apportioned to this State by

multiplying the income by a fraction, the numerator of which is

the property factor plus the payroll factor plus three times the

sales factor and the denominator of which is five.

(ii)  For taxable years beginning after December 31, 2006,

all business income shall be apportioned to this State by

multiplying the income by a fraction, the numerator of which is

the sum of fifteen times the property factor, fifteen times the

payroll factor and seventy times the sales factor and the

denominator of which is one hundred.

(iii)  For taxable years beginning after December 31, 2008,

all business income shall be apportioned to this State by

multiplying the income by a fraction, the numerator of which is

the sum of eight and a half times the property factor, eight and

a half times the payroll factor and eighty-three times the sales

factor and the denominator of which is one hundred.

(iv)  For taxable years beginning after December 31, 2009,

all business income shall be apportioned to this State by

multiplying the income by a fraction, the numerator of which is

the sum of five times the property factor, five times the

payroll factor and ninety times the sales factor and the

denominator of which is one hundred.

(B)  For purposes of apportionment of the capital stock -

franchise tax as provided in section 602 of Article VI of this

act, the apportionment fraction shall be the property factor

plus the payroll factor plus the sales factor as the numerator,

and the denominator shall be three.

(10)  The property factor is a fraction, the numerator of

which is the average value of the taxpayer's real and tangible

personal property owned or rented and used in this State during

the tax period and the denominator of which is the average value

of all the taxpayer's real and tangible personal property owned

or rented and used during the tax period but shall not include

the security interest of any corporation as seller or lessor in

personal property sold or leased under a conditional sale,

bailment lease, chattel mortgage or other contract providing for

the retention of a lien or title as security for the sales price

of the property.

(11)  Property owned by the taxpayer is valued at its

original cost. Property rented by the taxpayer is valued at

eight times the net annual rental rate. Net annual rental rate

is the annual rental rate paid by the taxpayer less any annual

rental rate received by the taxpayer from subrentals.

(12)  The average value of property shall be determined by

averaging the values at the beginning and ending of the tax

period but the tax administrator may require the averaging of

monthly values during the tax period if reasonably required to

reflect properly the average value of the taxpayer's property.

(13)  The payroll factor is a fraction, the numerator of

which is the total amount paid in this State during the tax

period by the taxpayer for compensation and the denominator of

which is the total compensation paid everywhere during the tax

period.

(14)  Compensation is paid in this State if:

(A)  The individual's service is performed entirely within

the State;

(B)  The individual's service is performed both within and

without this State, but the service performed without the State

is incidental to the individual's service within this State; or

(C)  Some of the service is performed in this State and the

base of operations or if there is no base of operations, the

place from which the service is directed or controlled is in

this State, or the base of operations or the place from which

the service is directed or controlled is not in any state in

which some part of the service is performed, but the

individual's residence is in this State.

(15)  The sales factor is a fraction, the numerator of which

is the total sales of the taxpayer in this State during the tax

period, and the denominator of which is the total sales of the

taxpayer everywhere during the tax period.

(16)  Sales of tangible personal property are in this State

if the property is delivered or shipped to a purchaser, within

this State regardless of the f.o.b. point or other conditions of

the sale.

(17)  Sales, other than sales of tangible personal property

and sales set forth under paragraphs (17.1) and (17.2), are in

this State if:

(A)  The income-producing activity is performed in this

State; or

(B)  The income-producing activity is performed both in and

outside this State and a greater proportion of the income-

producing activity is performed in this State than in any other

state, based on costs of performance.

(17.1)  Sales of services are in this State if sales are

derived from customers within this State. If part of the sales

with respect to a specific contract or other agreement to

perform services is derived from customers from within this

State, sales are in this State in proportion to the sales

derived from customers within this State to total sales with

respect to that contract or agreement.

(17.2)  In order to determine sales in this State of any

railroad, truck, bus, airline, pipeline, natural gas or water

transportation company that is required to determine its

business income under paragraph (1) of phrase (e) of this

subclause, the company must convert the relevant fraction set

forth under phrase (b), (c) or (d) of this subclause to gross

receipts. Sales in this State are the result of multiplying

total gross receipts from relevant transportation activities by

the decimal equivalent of the relevant fraction set forth under

phrase (b), (c) or (d) of this subclause.

(18)  If the allocation and apportionment provisions of this

definition do not fairly represent the extent of the taxpayer's

business activity in this State, the taxpayer may petition the

Secretary of Revenue or the Secretary of Revenue may require, in

respect to all or any part of the taxpayer's business activity:

(A)  Separate accounting;

(B)  The exclusion of any one or more of the factors;

(C)  The inclusion of one or more additional factors which

will fairly represent the taxpayer's business activity in this

State; or

(D)  The employment of any other method to effectuate an

equitable allocation and apportionment of the taxpayer's income.

In determining the fairness of any allocation or apportionment,

the Secretary of Revenue may give consideration to the

taxpayer's previous reporting and its consistency with the

requested relief.

* * *

(e)  Corporations That are Members of a Unitary Business.

(1)  Notwithstanding any contrary provisions of this article,

for taxable years that begin after December 31, 2018, business

income of a corporation that is a member of a unitary business

that consists of two or more corporations, at least one of which

does not transact its entire business in this State, is

determined by combining the business income of either all

corporations, other than as provided under this paragraph, that

are water's-edge basis members or all corporations, other than

as provided under this paragraph, that are worldwide members of

the unitary business. Business income from an intercompany

transaction between included corporations of a unitary business

shall be deferred in the manner set forth under 26 CFR 1.1502-13

(relating to intercompany transactions) in determining the

business income of a corporation that is a member of that

unitary business. Business income of the following corporations

is not included in the determination of combined business

income:

(i)  any corporation subject to taxation under Article VII,

VIII, IX or XV;

(ii)  any corporation specified in the definition of

"institution" in section 701.5 that would be subject to taxation

under Article VII if it was located, as defined in section

701.5, in this State;

(iii)  any corporation commonly known as a title insurance

company that would be subject to taxation under Article VIII if

it was incorporated in this State;

(iv)  any corporation specified as an insurance company,

association or exchange in Article IX that would be subject to

taxation under Article IX if its insurance business was

transacted in this State;

(v)  any corporation specified in the definition of

"institution" in section 1501 that would be subject to taxation

under Article XV if it was located, as defined in section 1501,

in this State; or

(vi)  any corporation that is a small corporation, as defined

in section 301(s.2), or a qualified Subchapter S subsidiary, as

defined in section 301(o.3).

(2)  Notwithstanding any contrary provisions of this article,

all corporations that are required to compute business income

under paragraph (1) are entitled to apportion the business

income when one corporation of the same unitary business is

entitled to apportion the business income. Notwithstanding any

contrary provisions of this article, for taxable years that

begin after December 31, 2018, the denominator of the

apportionment fraction of a corporation that is required to

compute its business income under paragraph (1) shall be

computed on a combined basis for all included corporations of

the unitary business. Gross receipts from an intercompany

transaction between included corporations of a unitary business

shall be eliminated unless the gross receipts are derived from

transactions that are deferred in the manner set forth under 26

CFR 1.1502-13 in computing the numerator and denominator of the

apportionment fraction of a corporation that is required to

compute its business income under paragraph (1). Gross receipts

from transactions that had been deferred in the manner set forth

under 26 CFR 1.1502-13 are included in a corporation's

apportionment fraction during the same taxable year that it

realizes business income that had been deferred due to the

transaction. The apportionment fraction of the following

corporations shall not be included in the determination of the

combined apportionment fraction:

(i)  any corporation subject to taxation under Article VII,

VIII, IX or XV;

(ii)  any corporation specified in the definition of

"institution" in section 701.5 that would be subject to taxation

under Article VII if it was located, as defined in section

701.5, in this State;

(iii)  any corporation commonly known as a title insurance

company that would be subject to taxation under Article VIII if

it was incorporated in this State;

(iv)  any corporation specified as an insurance company,

association or exchange in Article IX that would be subject to

taxation under Article IX if its insurance business was

transacted in this State;

(v)  any corporation specified in the definition of

"institution" in section 1501 that would be subject to taxation

under Article XV if it was located, as defined in section 1501,

in this State;

(vi)  any corporation that is a small corporation, as defined

in section 301(s.2), or a qualified Subchapter S subsidiary, as

defined in section 301(o.3).

(3)  A corporation that is required to compute its business

income under paragraph (1) shall apportion the combined business

income by multiplying the combined business income by a fraction

which is the combined apportionment fraction set forth under

paragraph (2).

(4)  Nonbusiness income of a corporation that is required to

compute business income under paragraph (1) shall be allocated

as provided in paragraphs (5), (6), (7) and (8) of phrase (a) of

subclause 2 of the definition of "taxable income."

(5)  Each corporation that is a member of a unitary business

that consists of two or more corporation shall determine its tax

liability based on its apportioned share of the combined

business income of the unitary business plus its nonbusiness

income or loss allocated to this State, minus its net loss

deduction.

(6)  If any provision of this phrase operates so that an

amount is added to or deducted from taxable income for a taxable

year for any corporation of a unitary business that previously

had been added to or deducted from taxable income of any

corporation of the same unitary business, an appropriate

adjustment shall be made for the taxable year in order to

prevent double taxation or double deduction. If this adjustment

is not made by the appropriate corporation of the unitary

business, the Secretary of Revenue is authorized to make this

adjustment.

(7)  The Secretary of Revenue shall have the authority and

responsibility to make adjustments to insure that a corporation

does not incur an unfair penalty nor realize an unfair benefit

because it is required to compute its business income under

paragraph (1). Fairness shall be measured by whether the

corporation's income allocated and apportioned to this State

fairly reflects the corporation's share of the unitary business

conducted in this State in the taxable year.

* * *

(5)  "Taxable year."  [The] 1.  Except as set forth in

subclause 2, the taxable year which the corporation, or any

consolidated group with which the corporation participates in

the filing of consolidated returns, actually uses in reporting

taxable income to the Federal Government[.], or which the

corporation would have used in reporting taxable income to the

Federal Government had it been required to report its taxable

income to the Federal Government. With regard to the tax imposed

by Article IV of this act (relating to the Corporate Net Income

Tax), the terms "annual year," "fiscal year," "annual or fiscal

year," "tax year" and "tax period" shall be the same as the

corporation's taxable year, as defined in this [paragraph.]

subclause or subclause 2.

2.  All corporations of a unitary business shall have a

common taxable year for purposes of computing tax due under this

article. The taxable year for the purposes shall be the common

taxable year adopted, in a manner prescribed by the department,

by all corporations of a unitary business. The common taxable

year must be used by all corporations of that unitary business

in the year of adoption and all future years unless otherwise

permitted by the department.

* * *

(8)  "Tax haven."  A jurisdiction that at the beginning of a

taxable year is a tax haven as identified by the Organization

for Economic Co-operation and Development, plus the

sovereignties of Bermuda, the Cayman Islands, the Bailiwick of

Jersey and the Grand Duchy of Luxembourg.

(9)  "Unitary business."  A single economic enterprise that

is made up of separate parts of a single corporation, of a

commonly controlled group of corporations, or both, that are

sufficiently interdependent, integrated and interrelated through

their activities so as to provide a synergy and mutual benefit

that produces a sharing or exchange of value among them and a

significant flow of value to the separate parts. A unitary

business shall include only those parts and corporations which

may be included as a unitary business under the Constitution of

the United States.

(10)  "Water's-edge basis."  A system of reporting that

includes the business income and apportionment factor of certain

corporations of a unitary business, described as follows:

1.  The business income and apportionment factor of any

member incorporated in the United States or formed under the

laws of any state of the United States, the District of

Columbia, any territory or possession of the United States or

the Commonwealth of Puerto Rico.

2.  The business income and apportionment factor of any

member, regardless of the place incorporated or formed, if the

average of its property, payroll and sales factors within the

United States is twenty per cent or more.

3.  The business income and apportionment factor of any

member which is a domestic international sales corporation as

described in sections 991, 992, 993 and 994 of the Internal

Revenue Code of 1986 (Public Law 99-514, 26 U.S.C. §§ 991, 992,

993 and 994); a foreign sales corporation as described in former

sections 921, 922, 923, 924, 925, 926 and 927 of the Internal

Revenue Code of 1986 (formerly 26 U.S.C. §§ 921, 922, 923, 924,

925, 926 and 927); or any member which is an export trade

corporation, as described in sections 970 and 971 of the

Internal Revenue Code of 1986 (26 U.S.C. §§ 970 and 971).

4.  Any member not described in subclauses 1, 2 and 3 shall

include the portion of its business income derived from or

attributable to sources within the United States, as determined

under the Internal Revenue Code of 1986 without regard to

Federal treaties, and its apportionment factor related thereto.

5.  Any member that is a "controlled foreign corporation" as

defined in section 957 of the Internal Revenue Code of 1986 (26

U.S.C. § 957), to the extent the business income of that member

is income defined in section 952 of the Internal Revenue Code of

1986 (26 U.S.C. § 952), Subpart F income, not excluding lower-

tier subsidiaries' distributions of the income which were

previously taxed, determined without regard to Federal treaties,

and the apportionment factor related to that income; any item of

income received by a controlled foreign corporation and the

apportionment factor related to the income shall be excluded if

the corporation establishes to the satisfaction of the Secretary

of Revenue that the income was subject to an effective rate of

income tax imposed by a foreign country greater than ninety per

cent of the maximum rate of tax specified in section 11 of the

Internal Revenue Code of 1986 (26 U.S.C. § 11). The effective

rate of income tax determination shall be based upon the

methodology set forth under 26 CFR 1.954-1 (relating to foreign

base company income).

6.  The business income and apportionment factor of any

member that is not described in subclause 1, 2, 3, 4 and 5 and

that is doing business in a tax haven. The business income and

apportionment factor of a corporation doing business in a tax

haven shall be excluded if the corporation establishes to the

satisfaction of the Secretary of Revenue that its income was

subject to an effective rate of income tax imposed by a country

greater than ninety per cent of the maximum rate of tax

specified in section 11 of the Internal Revenue Code of 1986 (26

U.S.C. § 11).

(11)  "Commonly controlled group."  For a corporation, the

corporation is a member of a group of two or more corporations

and more than fifty per cent of the voting stock of each member

of the group is directly or indirectly owned by a common owner

or by common owners, either corporate or noncorporate, or by one

or more of the member corporations of the group.

(12)  "Separate company."  A corporation that is not a member

of a unitary business that consists of two or more corporations.

(13)  "Tax."  Includes interest, penalties and additions to

tax unless a more limited meaning is disclosed by the context.

Section 2.  Section 402(b) of the act, amended June 29, 2002

(P.L.559, No.89), is amended to read:

Section 402.  Imposition of Tax.--* * *

(b)  The annual rate of tax on corporate net income imposed

by subsection (a) for taxable years beginning for the calendar

year or fiscal year on or after the dates set forth shall be as

follows:

* * *

Section 3.  Section 403 of the act is amended by adding

subsections to read:

Section 403.  Reports and Payment of Tax.--* * *

(a.1)  The following apply:

(1)  Each corporation subject to tax under this article shall

file an annual report in accordance with this section. Each

corporation that is a member of a unitary business that consists

of two or more corporations, unless excluded by the provisions

of this article, shall file as part of a combined annual report.

The corporations of the unitary business shall designate one

member that is subject to tax under this article to file the

combined annual report and to act as agent on behalf of all

other corporations that are members of the unitary business.

Each corporation that is a member of a unitary business shall be

responsible for its tax liability under this article.

(2)  The oath or affirmation of the designated member's

president, vice president or other principal officer, and of its

treasurer or assistant treasurer shall constitute the oath or

affirmation of each corporation that is a member of that unitary

business.

(3)  The designated member shall transmit to the department

upon a form prescribed by the department, an annual combined

report under oath or affirmation of its president, vice

president or other principal officer, and of its treasurer or

assistant treasurer. The report shall set forth:

(i)  All corporations included in the unitary business.

(ii)  All necessary data, both in the aggregate and for each

corporation of the unitary business, that sets forth the

determination of tax liability for each corporation of the

unitary business.

(iii)  Any other information that the department may require.

(a.2)  The following apply:

(1)  Activities that evidence a significant flow of value

among commonly controlled corporations shall include the

following:

(i)  Assisting in the acquisition of equipment.

(ii)  Assisting with filling personnel needs.

(iii)  Lending funds or guaranteeing loans.

(iv)  Interplay in the area of corporate expansion.

(v)  Providing technical assistance.

(vi)  Supervising.

(vii)  Providing general operational guidance.

(viii)  Providing overall operational strategic advice.

(ix)  Common use of trade names and patents.

(2)  Significant flow of value must be more than the flow of

funds arising out of passive investment and shall consist of

more than periodic financial oversight.

(a.3)  The following apply:

(1)  With respect to a commonly controlled group of

corporations, the presence of any of these factors creates a

presumption of a unitary business:

(i)  Corporations engaged in the same type of business.

(ii)  Corporations engaged in different steps in a vertically

structured enterprise.

(iii)  Strong centralized management of corporations.

(2)  A corporation newly formed by a corporation that is a

member of a unitary business is rebuttably presumed to be a

member of the unitary business.

(3)  A corporation that owns a controlling interest in two or

more corporations of a unitary business is rebuttably presumed

to be a member of the unitary business.

(4)  A corporation that permits one or more other

corporations of a unitary business to substantially use its

patents, trademarks, service marks, logo-types, trade secrets,

copyrights or other proprietary assets or that is principally

engaged in loaning money to one or more other corporations of a

unitary business is rebuttably presumed to be a member of the

unitary business. This presumption only applies to a commonly

controlled group of corporations.

(a.4)  As far as applicable to a specific unitary business,

unless there is a revision of applicable State law or unless a

corporation is not included under the provisions of this

article, there is a rebuttable presumption for all tax years

that begin in years 2018 and 2019 that a unitary business of two

or more corporations includes at least all corporations that are

part of a unitary business under the law of any state of the

United States in which the corporation files a tax report or tax

return of combined net income for the same tax year.

(a.5)  Unless an election is made to use a worldwide basis of

accounting, a corporation that is a member of a unitary business

of two or more corporations must determine its business income

and apportionment factor upon a water's-edge basis. This basis

shall apply to all corporations of the unitary business. If an

election is made to use a worldwide basis of accounting, all

corporations of the unitary business must make the election,

upon a form, prescribed, prepared and furnished by the

department. This election shall bind all corporations of the

unitary business for the period of time that the election

remains in effect. An initial election is binding for a period

of seven years. Subsequent elections shall be binding for a

period of five years.

* * *

Section 4.  Section 404 of the act is amended to read:

Section 404.  Consolidated Reports.--The department shall not

permit any corporation owning or controlling, directly or

indirectly, any of the voting capital stock of another

corporation or of other corporations, subject to the provisions

of this article, to make a consolidated report[, showing the

combined net income].

Section 4.1.  The act is amended by adding an article to

read:

ARTICLE IV-A

MANDATORY COMBINED REPORTING

Section 401-A.  Definitions.

The following words and phrases when used in this article

shall have the meanings given to them in this section unless the

context clearly indicates otherwise:

"Commonly controlled group."  For a corporation, the

corporation is a member of a group of two or more corporations

and more than 50% of the voting stock of each member of the

group is directly or indirectly owned by a common owner or by

common owners, either corporate or noncorporate, or by one or

more of the member corporations of the group.

"Corporation."  As defined in section 401.

"Department."  The Department of Revenue of the Commonwealth.

"Secretary."  The Secretary of Revenue of the Commonwealth.

"Separate company."  A corporation that is not a member of a

unitary business that consists of two or more corporations.

"Tax."  Includes interest, penalties and additions to tax,

unless a more limited meaning is disclosed by the context.

"Tax haven."  Any of the following:

(1)  A jurisdiction which, at the beginning of a taxable

year, is a tax haven as identified by the Organization for

Economic Co-operation and Development.

(2)  Bermuda.

(3)  The Cayman Islands.

(4)  The Bailiwick of Jersey.

(5)  The Grand Duchy of Luxembourg.

"Unitary business."  A single economic enterprise that is

made up of separate parts of a single corporation, of a commonly

controlled group of corporations, or both, which are

sufficiently interdependent, integrated and interrelated through

their activities so as to provide a synergy and mutual benefit

that produces a sharing or exchange of value among them and a

significant flow of value to the separate parts. The term

includes only those parts and corporations which may be included

as a unitary business under the Constitution of the United

States.

"Water's-edge basis."  The system of reporting required under

section 402-A.

Section 402-A.  Water's-edge basis.

A unitary business shall report as follows:

(1)  The business income and apportionment factor of each

member incorporated in the United States or formed under the

laws of a state, the District of Columbia, a territory or

possession of the United States or the Commonwealth of Puerto

Rico.

(2)  The business income and apportionment factor of

every member, regardless of the place incorporated or formed,

if the average of the corporation's or unitary business's

property, payroll and sales factors within the United States

is at least 20%.

(3)  The business income and apportionment factor of each

member which is:

(i)  a domestic international sales corporation, as

described in sections 991, 992, 993 and 994 of the

Internal Revenue Code of 1986 (Public Law 99-514, 26

U.S.C. §§ 991, 992, 993 and 994);

(ii)  a foreign sales corporation as described in

former sections 921, 922, 923, 924, 925, 926 and 927 of

the Internal Revenue Code of 1986 (98 Stat. 985); or

(iii)  an export trade corporation, as described in

sections 970 and 971 of the Internal Revenue Code of 1986

(26 U.S.C. §§ 970 and 971).

(4)  For each member which is a "controlled foreign

corporation," as defined in section 957 of the Internal

Revenue Code of 1986 (26 U.S.C. § 957), to the extent the

business income of that member is income defined in section

952 of the Internal Revenue Code of 1986 (26 U.S.C. § 952),

all of the following:

(i)  Subpart F income, not excluding lower-tier

subsidiaries' distributions of the income which were

previously taxed, determined without regard to a Federal

treaty, and the apportionment factor related to that

income.

(ii)  Any item of income received by a controlled

foreign corporation and the apportionment factor related

to the income shall be excluded if the corporation

establishes to the satisfaction of the secretary that the

income was subject to an effective rate of income tax

imposed by a foreign country greater than 90% of the

maximum rate of tax specified in section 11 of the

Internal Revenue Code of 1986 (26 U.S.C. § 11). The

effective rate of income tax determination shall be based

upon the methodology set forth under 26 CFR 1.954-1

(relating to foreign base company income).

(5)  For each member which is not described in paragraph

(1), (2) or (3):

(i)  the portion of its business income derived from

or attributable to sources within the United States, as

determined under the Internal Revenue Code of 1986,

without regard to a Federal treaty; and

(ii)  its apportionment factor related to the portion

of income under subparagraph (i).

(6)  For each member which is not described in paragraph

(1), (2), (3) or (4) and which is doing business in a tax

haven:

(i)  Except as set forth in subparagraph (ii), the

business income and apportionment factor.

(ii)  If the member establishes to the satisfaction

of the secretary that its income was subject to an

effective rate of income tax imposed by a country greater

than 90% of the maximum rate of tax specified in section

11 of the Internal Revenue Code of 1986 (26 U.S.C. § 11),

subparagraph (i) shall not apply.

Section 403-A.  Corporate members of unitary businesses.

(a)  Scope.--This section applies to a corporation that is a

member of a unitary business which consists of two or more

corporations, at least one of which does not transact its entire

business in this Commonwealth.

(b)  Returns.--For taxable years beginning after December 31,

2012, a corporation subject to this section shall, in addition

to the tax return filed under Article IV, file a return in

accordance with this section. For a taxable year which begins

after December 31, 2012, and ends before January 1, 2014, the

return filed under this subsection shall be for informational

purposes only and shall not be subject to section 404-A(b) or

(c).

(c)  Business income.--

(1)  For purposes of the return under subsection (b),

business income of a corporation shall be computed, subject

to paragraph (2) and subsections (d), (e) and (f), by

combining the business income of:

(i)  each corporation required to report on a

water's-edge basis; or

(ii)  each corporation that is a worldwide member of

the unitary business.

(2)  The following shall apply:

(i)  Business income from an intercompany transaction

between included corporations of a unitary business shall

be deferred in the manner set forth under 26 CFR

1.1502-13 (relating to intercompany transactions) in

determining the business income of a corporation which is

a member of that unitary business.

(ii)  Business income of the following corporations

shall not be included in the determination of combined

business income:

(A)  A corporation subject to taxation under

Article VII, VIII, IX or XV.

(B)  An institution, as defined in section 701.5,

that would be subject to taxation under Article VII

if it was located, as defined in section 701.5, in

this Commonwealth.

(C)  A corporation commonly known as a title

insurance company that would be subject to taxation

under Article VIII if it was incorporated in this

Commonwealth.

(D)  A corporation specified as an insurance

company, association or exchange in Article IX that

would be subject to taxation under Article IX if its

insurance business was transacted in this

Commonwealth.

(E)  A mutual thrift institution, as defined in

section 1501, that would be subject to taxation under

Article XV if it was located, as defined in section

1501, in this Commonwealth.

(F)  A small corporation, as defined in section

301(s.2).

(G)  A qualified Subchapter S subsidiary, as

defined in section 301(o.3).

(d)  Apportionment.--Notwithstanding any provision of this

act to the contrary, a corporation computing business income

under subsection (c) may apportion the business income when one

corporation of the same unitary business is entitled to

apportion the business income.

(e)  Apportionment fraction.--For a corporation computing

business income under subsection (c), subject to subsection (f),

the following apply:

(1)  Computation shall be as follows:

(i)  The denominator of the apportionment fraction

shall be computed on a combined basis for all included

corporations of the unitary business.

(ii)  Gross receipts from an intercompany transaction

between included corporations of a unitary business shall

be eliminated unless the gross receipts are derived from

transactions that are deferred in the manner set forth

under 26 CFR 1.1502-13, in computing the numerator and

denominator of the apportionment fraction.

(iii)  Gross receipts from transactions which were

deferred under 26 CFR 1.1502-13 shall be included in a

corporation's apportionment fraction during the same

taxable year in which it realizes business income which

was deferred due to the transaction.

(2)  Apportionment shall be accomplished by multiplying:

(i)  the combined business income; by

(ii)  a fraction which is the combined apportionment

fraction under paragraph (1).

(f)  Exclusions.--For purposes of subsection (e), the

apportionment fraction of the following corporations shall not

be included in the determination of the combined apportionment

fraction:

(1)  A corporation subject to taxation under Article VII,

VIII, IX or XV.

(2)  An institution, as defined in section 701.5, that

would be subject to taxation under Article VII if it was

located, as defined in section 701.5, in this Commonwealth.

(3)  A corporation commonly known as a title insurance

company that would be subject to taxation under Article VIII

if it was incorporated in this Commonwealth.

(4)  A corporation specified as an insurance company,

association or exchange in Article IX that would be subject

to taxation under Article IX if its insurance business was

transacted in this Commonwealth.

(5)  A mutual thrift institution, as defined in section

1501, that would be subject to taxation under Article XV if

it was located, as defined in section 1501, in this

Commonwealth.

(6)  A small corporation, as defined in section 301(s.2).

(7)  A qualified Subchapter S subsidiary, as defined in

section 301(o.3).

(g)  Nonbusiness income.--A corporation subject to this

section shall allocate nonbusiness income as provided in section

401(3)2(a)(5), (6), (7) and (8).

Section 404-A.  Surtax.

(a)  Estimated tax liability.--Each corporation that is

required to submit a return under this article shall determine

its estimated tax liability under this article based on its

apportioned share of the combined business income of the unitary

business plus its nonbusiness income or loss allocated to this

State, minus its net loss deduction, multiplied by the tax rate

applicable to the taxable year being reported in Article IV.

(b)  Surtax.--If, after determining its estimated tax

liability under subsection (a), the corporation determines that

its estimated tax liability calculated under subsection (a) is

greater than the corporation's tax liability calculated under

Article IV, the corporation shall pay a surtax to the department

in an amount equal to the following:

(1)  For a taxable year which begins after December 31,

2012, and ends before January 1, 2014, 20% of the difference

between the tax liability calculated under subsection (a) and

the tax paid to the department for that taxable year as set

forth in the return filed under Article IV.

(2)  For a taxable year which begins after December 31,

2013, and ends before January 1, 2015, 40% of the difference

between the tax liability calculated under subsection (a) and

the tax paid to the department for that taxable year as set

forth in the return filed under Article IV.

(3)  For a taxable year which begins after December 31,

2014, and ends before January 1, 2016, 60% of the difference

between the tax liability calculated under subsection (a) and

the tax paid to the department for that taxable year as set

forth in the return filed under Article IV.

(4)  For a taxable year which begins after December 31,

2015, and ends before January 1, 2017, 80% of the difference

between the tax liability calculated under subsection (a) and

the tax paid to the department for that taxable year as set

forth in the return filed under Article IV.

(5)  For a taxable year which begins after December 31,

2016, and ends before January 1, 2018, 100% of the difference

between the tax liability calculated under subsection (a) and

the tax paid to the department for that taxable year as set

forth in the return filed under Article IV.

(c)  Credit.--If, after determining its estimated tax

liability under subsection (a), the corporation determines that

its estimated tax liability calculated under subsection (a) is

less than the corporation's tax liability calculated under

Article IV, the corporation shall be entitled to a credit

against the tax paid under Article IV in an amount equal to the

difference between the two calculations.

(d)  Unitary business adjustment.--If any provision of this

article operates so that an amount is added to or deducted from

taxable income for a taxable year for any corporation of a

unitary business that previously had been added to or deducted

from taxable income of any corporation of the same unitary

business, an appropriate adjustment shall be made for the

taxable year in order to prevent double taxation or double

deduction. If the adjustment is not made by the appropriate

corporation of the unitary business, the secretary is authorized

to make the adjustment.

(e)  Secretary.--The secretary shall have the duty to make

adjustments to insure that a corporation does not incur an

unfair penalty nor realize an unfair benefit because it is

required to compute its business income under this article.

Fairness shall be measured by whether the corporation's income

allocated and apportioned to this Commonwealth fairly reflects

the corporation's share of the unitary business conducted in

this Commonwealth in the taxable year.

Section 405-A.  Common tax year.

All corporations of a unitary business shall have a common

taxable year for purposes of computing tax due under this

article. The taxable year shall be the common taxable year

adopted, in a manner prescribed by the department, by all

corporations of a unitary business. The common taxable year must

be used by all corporations of that unitary business in the year

of adoption and all future years unless otherwise permitted by

the department.

Section 406-A.  Reports and payment of surtax.

(a)  Designation.--The corporations of the unitary business

shall designate one member that is subject to tax under Article

IV to file the annual report and remit the surtax required under

this article and to act as agent on behalf of all other

corporations that are members of the unitary business. Each

corporation that is a member of a unitary business shall be

responsible for its tax liability under Article IV and the

surtax under this article.

(b)  Oath or affirmation.--The oath or affirmation of the

designated member's president, vice president or other principal

officer, and of its treasurer or assistant treasurer shall

constitute the oath or affirmation of each corporation that is a

member of that unitary business.

(c)  Annual report.--The designated member shall transmit to

the department upon a form prescribed by the department, an

annual report under oath or affirmation of its president, vice

president or other principal officer, and of its treasurer or

assistant treasurer. The report shall set forth:

(1)  All corporations included in the unitary business.

(2)  All necessary data, both in the aggregate and for

each corporation of the unitary business, that sets forth the

determination of tax liability for each corporation of the

unitary business.

(3)  Any other information that the department may

require.

(d)  Activities.--

(1)  Activities that evidence a significant flow of value

among commonly controlled corporations shall include the

following:

(i)  Assisting in the acquisition of equipment.

(ii)  Assisting with filling personnel needs.

(iii)  Lending funds or guaranteeing loans.

(iv)  Interplay in the area of corporate expansion.

(v)  Providing technical assistance.

(vi)  Supervising.

(vii)  Providing general operational guidance.

(viii)  Providing overall operational strategic

advice.

(ix)  Common use of trade names and patents.

(2)  Significant flow of value must be more than the flow

of funds arising out of passive investment and must consist

of more than periodic financial oversight.

Section 407-A.  Rebuttable presumptions for unitary business.

(a)  Commonly controlled group of corporations.--With respect

to a commonly controlled group of corporations, the presence of

any of these factors creates a presumption of a unitary

business:

(1)  Corporations engaged in the same type of business.

(2)  Corporations engaged in different steps in a

vertically structured enterprise.

(3)  Strong centralized management of corporations.

(b)  Newly formed corporation.--A corporation newly formed by

a corporation that is a member of a unitary business shall be

rebuttably presumed to be a member of the unitary business.

(c)  Controlling interest.--A corporation that owns a

controlling interest in at least two corporations of a unitary

business shall be rebuttably presumed to be a member of the

unitary business.

(d)  Substantial use.--A corporation that permits at least

one other corporation of a unitary business to substantially use

its patents, trademarks, service marks, logo-types, trade

secrets, copyrights or other proprietary assets or that is

principally engaged in loaning money to at least one other

corporation of a unitary business shall be rebuttably presumed

to be a member of the unitary business. The presumption under

this subsection shall only apply to a commonly controlled group

of corporations.

(e)  Specific unitary business.--As far as applicable to a

specific unitary business, unless there is a revision of

applicable State law or unless a corporation is not included

under the provisions of this article, there is a rebuttable

presumption for all tax years that begin in years 2013 and 2014

that a unitary business of at least two corporations includes at

least all of the corporations that are part of a unitary

business under the law of any state in which the corporation

files a tax report or tax return of combined net income for the

same tax year.

Section 408-A.  Election.

(a)  Nonworldwide basis.--Unless an election is made to use a

worldwide basis of accounting, a corporation that is a member of

a unitary business of at least two corporations shall determine

its business income and apportionment factor upon a water's-edge

basis. The basis shall apply to all corporations of the unitary

business.

(b)  Worldwide basis.--If an election is made to use a

worldwide basis of accounting, all corporations of the unitary

business must make the election, upon a form, prescribed,

prepared and furnished by the department. The election shall

bind all corporations of the unitary business for the period of

time that the election remains in effect. An initial election

shall be binding for a period of seven years. Subsequent

elections shall be binding for a period of five years.

Section 409-A.  Expiration.

This article shall expire January 1, 2019.

Section 5.  Section 3003.3(d) of the act, amended October 18,

2006 (P.L.1149, No.119), is amended and the section is amended

by adding subsections to read:

Section 3003.3.  Underpayment of Estimated Tax.--* * *

(d)  Notwithstanding the provisions of the preceding

subsections, other than as set forth under subsection (d.1), 

interest with respect to any underpayment of any installment of

estimated tax shall not be imposed if the total amount of all

payments of estimated tax made on or before the last date

prescribed for the payment of such installment equals or exceeds

the amount which would have been required to be paid on or

before such date if the estimated tax were an amount equal to

the tax computed at the rates applicable to the taxable year,

including any minimum tax imposed, but otherwise on the basis of

the facts shown on the report of the taxpayer for, and the law

applicable to, the safe harbor base year, adjusted for any

changes to sections 401, 601, 602 and 1101 enacted for the

taxable year, if a report showing a liability for tax was filed

by the taxpayer for the safe harbor base year. If the total

amount of all payments of estimated tax made on or before the

last date prescribed for the payment of such installment does

not equal or exceed the amount required to be paid per the

preceding sentence, but such amount is paid after the date the

installment was required to be paid, then the period of

underpayment shall run from the date the installment was

required to be paid to the date the amount required to be paid

per the preceding sentence is paid. Provided, that if the total

tax for the safe harbor base year exceeds the tax shown on such

report by ten per cent or more, the total tax adjusted to

reflect the current tax rate shall be used for purposes of this

subsection. In the event that the total tax for the safe harbor

base year exceeds the tax shown on the report by ten per cent or

more, interest resulting from the utilization of such total tax

in the application of the provisions of this subsection shall

not be imposed if, within forty-five days of the mailing date of

each assessment, payments are made such that the total amount of

all payments of estimated tax equals or exceeds the amount which

would have been required to be paid on or before such date if

the estimated tax were an amount equal to the total tax adjusted

to reflect the current tax rate. In any case in which the

taxable year for which an underpayment of estimated tax may

exist is a short taxable year, in determining the tax shown on

the report or the total tax for the safe harbor base year, the

tax will be reduced by multiplying it by the ratio of the number

of installment payments made in the short taxable year to the

number of installment payments required to be made for the full

taxable year.

(d.1)  (1)  Notwithstanding subsections (a), (b) and (c),

interest with respect to any underpayment of any installment of

estimated corporate net income tax for any tax year that begins

in year 2018 or 2019 shall not be imposed if the total amount of