H2150B3338A09811     MSP:EAZ  04/03/12     #90        A09811

AMENDMENTS TO HOUSE BILL NO. 2150

Sponsor: REPRESENTATIVE MUNDY

Printer's No. 3338

Amend Bill, page 2, line 24, by striking out "a paragraph"

and inserting

 paragraphs

Amend Bill, page 3, lines 23 through 30; page 4, lines 1 

through 30; page 5, lines 1 through 5, by striking out all of

said lines on said pages and inserting

(t)  For purposes of computing its net income under this

chapter, a taxpayer shall add back all of the following:

(1)  Otherwise deductible intangible expenses directly or

indirectly paid, accrued or incurred in connection with one or

more direct or indirect transactions with one or more related

members.

(2)  Otherwise deductible interest paid, accrued or incurred

to a related member during the taxable year.

(u)  (1)  If the related member was subject to tax in this

Commonwealth, another state or possession of the United States

or a foreign nation or a combination of those governmental

entities on a tax base that included the interest expense or

intangible expense paid, accrued or incurred by the taxpayer,

the taxpayer shall receive a credit against tax due in this

Commonwealth in an amount equal to the higher of the tax paid by

the related member with respect to the portion of its income

representing the interest expense or the intangible expense

paid, accrued or incurred by the taxpayer, or the tax that would

have been paid by the related member with respect to that

portion of its income if:

(A)  that portion of its income had not been offset by

expenses or losses; or

(B)  the tax liability had not been offset by a credit or

credits.

(2)  The credit determined under subparagraph (1) shall be

multiplied by the apportionment factor of the taxpayer in this

Commonwealth, but may not exceed the taxpayer's liability in

this Commonwealth attributable to the net income taxed as a

result of the adjustment required by paragraph (t).

(v)  (1)  The adjustment required under paragraph (t) and the

credit allowed under paragraph (u) shall not apply:

(A)  To the portion of the intangible expense that the

taxpayer establishes by clear and convincing evidence meets both

of the following requirements:

(i)  the related member during the same taxable year directly

or indirectly paid, accrued or incurred the portion to a person

that is not a related member; and

(ii)  the transaction giving rise to the intangible expense

between the taxpayer and the related member was undertaken for a

valid business purpose.

(B)  If the taxpayer establishes by clear and convincing

evidence that:

(i)  the transaction giving rise to interest expense between

the taxpayer and the related member was undertaken for a valid

business purpose; and

(ii)  the interest expense was paid, accrued or incurred

using terms that reflect an arm's length relationship.

(C)  If the taxpayer establishes by clear and convincing

evidence that:

(i)  the related member was subject to tax on its net income

in this Commonwealth, another state or possession of the United

States or a combination of those governmental entities;

(ii)  the tax base for the tax included the interest expense

or the intangible expense paid, accrued or incurred by the

taxpayer; and

(iii)  the aggregate effective rate of tax applied to the

related member is no less than four per cent.

(D)  If the taxpayer establishes by clear and convincing

evidence that:

(i)  the interest expense or the intangible expense was paid,

accrued or incurred to a related member organized under the laws

of a country other than the United States;

(ii)  the related member's income from the transaction was

subject to a comprehensive income tax treaty between the country

and the United States;

(iii)  the related member's income from the transaction was

taxed in the country at a tax rate at least equal to that

imposed by the Commonwealth; and

(iv)  the interest expense or intangible expense was paid,

accrued or incurred pursuant to a transaction that was

undertaken for a valid business purpose and using terms that

reflect an arm's length relationship.

(E)  If the taxpayer and the department agree in writing to

the application or use of alternative adjustments or

computations. The department may, in its discretion, agree to

the application or use of alternative adjustments or

computations when it concludes that in the absence of the

agreement the income of the taxpayer would not be properly

reflected.

(2)  (Reserved).

(w)  Nothing under paragraphs (t), (u) or (v) shall be

construed to limit or negate the department's authority to enter

into agreements and compromises allowed by law.

Amend Bill, page 10, line 30; page 11, lines 1 through 30;

page 12, lines 1 through 20, by striking out all of said lines

on said pages and inserting

(8)  "Aggregate effective rate of tax."  The sum of the

effective rates of tax imposed by the Commonwealth, another

state or a possession of the United States or any combination of

those governmental entities on a related member.

(9)  "Effective rate of tax."  The maximum statutory rate of

tax imposed by the Commonwealth, another state or a possession

of the United States on a related member's net income multiplied

by the apportionment percentage, if any, applicable to the

related member under the laws of that jurisdiction. For purposes

of this definition, the following shall apply:

(A)  The effective rate of tax shall be zero if the related

member's net income tax liability in the jurisdiction is

reported on a combined or consolidated return including both the

taxpayer and the related member where the reported transactions

between the taxpayer and the related member are eliminated or

offset.

(B)  When computing the effective rate of tax for a

jurisdiction in which a related member's net income is

eliminated or offset by a credit or similar adjustment that is

dependent upon the related member either maintaining or managing

intangible property or collecting interest income in that

jurisdiction, the maximum statutory rate of tax imposed by the

jurisdiction shall be decreased to reflect the statutory rate of

tax that applies to the related member as effectively reduced by

the credit or similar adjustment.

(10)  "Interest expense."  Amounts directly or indirectly

allowed as deductions under section 163 of the Internal Revenue

Code of 1986 (26 U.S.C. § 163) for purposes of determining

taxable income under the Internal Revenue Code of 1986.

(11)  "Intangible expense."  The term includes:

1.  Expenses, losses and costs for, related to, or in

connection directly or indirectly with, the direct or indirect

acquisition, use, maintenance or management, ownership, sale,

exchange, or any other disposition of intangible property to the

extent the amounts are allowed as deductions or costs in

determining taxable income before operating loss deductions and

special deductions for the taxable year under the Internal

Revenue Code of 1986.

2.  Losses related to, or incurred in connection directly or

indirectly with, factoring transactions or discounting

transactions.

3.  Royalty, patent, technical and copyright fees.

4.  Licensing fees.

5.  Other similar expenses and costs.

(12)  "Intangible property."  The term includes patents,

patent applications, trade names, trademarks, service marks,

copyrights, mask works, trade secrets and similar types of

intangible assets.

(13)  "Related entity."  Any of the following:

1.  A stockholder who is an individual or a member of the

stockholder's family under section 318 of the Internal Revenue

Code of 1986 (26 U.S.C. § 318) if the stockholder and the

members of the stockholder's family own, directly, indirectly,

beneficially or constructively, in the aggregate, at least fifty

per cent of the value of the taxpayer's outstanding stock.

2.  A stockholder or a stockholder's partnership, limited

liability company, estate, trust or corporation, if the

stockholder and the stockholder's partnerships, limited

liability companies, estates, trusts and corporations own

directly, indirectly, beneficially or constructively, in the

aggregate, at least fifty per cent of the value of the

taxpayer's outstanding stock.

3.  A corporation or a party related to the corporation in a

manner that would require an attribution of stock from the

corporation to the party or from the party to the corporation

under the attribution rules of the Internal Revenue Code of 1986

if the taxpayer owns, directly, indirectly, beneficially or

constructively, at least fifty per cent of the value of the

corporation's outstanding stock. The attribution rules of the

Internal Revenue Code of 1986 shall apply for purposes of

determining whether the ownership requirements of this

definition have been met.

(14)  "Related member."  A person that, with respect to the

taxpayer during all or any portion of the taxable year, is any

of the following:

1.  A related entity.

2.  A component member as defined in section 1563(b) of the

Internal Revenue Code of 1986 (26 U.S.C. § 1563(b)).

3.  A person to or from whom there is attribution of stock

ownership in accordance with section 1563(e) of the Internal

Revenue Code of 1986 (26 U.S.C. § 1563(e)).

4.  A person that, notwithstanding its form of organization,

bears the same relationship to the taxpayer as a person

described in subclauses 1, 2 and 3.

(15)  "Valid business purpose."  As follows:

1.  One or more business purposes which alone or in

combination constitute the primary motivation for a business

activity or transaction and the activity or transaction changes

in a meaningful way, apart from tax effects, the economic

position of the taxpayer.

2.  For the purpose of subclause 1, the following shall

apply:

(A)  A business purpose shall not include the avoidance or

reduction of taxation.

(B)  The economic position of the taxpayer shall include an

increase in the market share of the taxpayer or the entry by the

taxpayer into new business markets.

Amend Bill, page 13, by inserting between lines 24 and 25

Section 4.  The addition of section 401(3)1(t), (u), (v) and

(w) and (8), (9), (10), (11), (12), (13), (14) and (15) of the

act shall apply to taxable years beginning after December 31,

2012.

Amend Bill, page 13, line 25, by striking out "4" and

inserting

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