Amendment 3407 to House Bill 1960 P.N. 2247, Regular Session 2021-2022

H1960B2247A03407 DMS:MAC 01/14/22 #90 A03407

AMENDMENTS TO HOUSE BILL NO. 1960

Sponsor: REPRESENTATIVE BRADFORD

Printer's No. 2247

Amend Bill, page 1, line 11, by inserting after "definitions"

and for imposition of tax, and providing for Secretary's

authority to adjust net income or require a combined return

Amend Bill, page 1, lines 14 through 16, by striking out all

of said lines and inserting

Section 1. Sections 401(3)4(c)(1) and (2) and 403(b) of the

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

of 1971, are amended to read:

Amend Bill, page 5, by inserting between lines 22 and 23

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:

Taxable Year Tax Rate

January 1, 1995,[and each

taxable year thereafter] through

December 31, 2022 9.99%

January 1, 2023, and each

taxable year thereafter 6.99%

* * *

Section 2. The act is amended by adding a section to read:

Section 408.2. Secretary's Authority to Adjust Net Income or

Require a Combined Return.-- (a) When the secretary has reason

to believe that a corporation conducts its trade or business in

a manner that fails to accurately report its State corporate net

income properly attributable to its business carried on in this

Commonwealth through the use of transactions that lack economic

substance or are not at fair market value between members of an

affiliated group of entities, the secretary may, upon written

notice to the corporation, require information reasonably

necessary to determine whether the corporation's intercompany

transactions have economic substance and are at fair market

value and for the accurate computation of the corporation's

State corporate net income properly attributable to its business

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carried on in this Commonwealth. The corporation shall provide

the information requested within ninety (90) days of the date of

the notice.

(b) If upon review of the information provided, the

secretary finds as a fact that the corporation's intercompany

transactions lack economic substance or are not at fair market

value, the secretary may redetermine the State corporate net

income of the corporation properly attributable to its business

carried on in this Commonwealth under this section by:

(1) adding back, eliminating or otherwise adjusting

intercompany transactions to accurately compute the

corporation's State corporate net income properly attributable

to its business carried on in this Commonwealth or, if the

adjustments are not adequate under the circumstances, to

redetermine state net income; or

(2) requiring the corporation to file a return that reflects

the net income on a combined basis of all members of its

affiliated group that are conducting a unitary business.

method proposed by the corporation for redetermining its State

corporate net income attributable to its business carried on in

this Commonwealth. In determining whether the corporation's

intercompany transactions lack economic substance or are not at

fair market value, the secretary shall consider each taxable

year separately.

(d) In addition to the authority granted under subsection

(b), if the secretary has reason to believe that a corporation's

State corporate net income properly attributable to its business

carried on in this Commonwealth is not accurately reported on a

separate return required by this part because of intercompany

transactions, without making a finding that those transactions

lack economic substance or are not at fair market value, the

secretary and the corporation may jointly determine and agree to

an alternative filing methodology that accurately reports State

net income. The secretary may allow a reasonable method for

redetermining the corporation's State corporate net income

attributable to its business carried on in this Commonwealth.

(e) If the secretary finds as a fact that a combined return

is required, the secretary may, upon written notice to the

corporation, require the corporation to submit the combined

return and the corporation shall submit the combined return

within ninety days of the date of the notice. The submission by

the corporation of the combined return required by the secretary

shall not be deemed to be a return or construed as an agreement

by the corporation that an assessment based on the combined

return is correct or that additional tax is due by the

secretary's deadline for submitting the combined return. The

secretary or the corporation may propose a combination of fewer

than all members of the unitary group, and the secretary may

consider whether the proposed combination is a reasonable means

of redetermining State net income; provided, however, the

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secretary may not require a combination of fewer than all

members of the unitary group without the consent of the

corporation.

(f) If the secretary makes an adjustment or requires a

combined return under this section, the secretary shall provide

the corporation with a written statement containing detail of

the facts, circumstances, and reasons for which the secretary

has found as a fact that the corporation did not accurately

report its State corporate net income properly attributable to

its business carried on in this Commonwealth and the secretary's

proposed method for computation of the corporation's State

corporate net income no later than ninety days following the

issuance of a proposed assessment as provided under this

section.

(g) The secretary may require a combined return under this

section regardless of whether the members of the affiliated

group are or are not doing business in this Commonwealth.

(h) A transaction has economic substance if:

(1) the transaction, or the series of transactions of which

the transaction is a part, has one or more reasonable business

purposes other than the creation of State income tax benefits;

and

(2) The transaction, or the series of transactions of which

the transaction is a part, has economic effects beyond the

creation of State income tax benefits.

(i) In determining whether a transaction has economic

substance, all of the following apply:

(1) Reasonable business purposes and economic effects

include, but are not limited to, a material benefit from the

transaction other than State income tax benefits not allowable

under clause (3).

(2) If determining whether to require a combined return,

whether the transaction has economic effects beyond the creation

of State income tax benefits may be satisfied by demonstrating

material business activity of the entities involved in the

transaction.

(3) If State income tax benefits resulting from a

transaction, or a series of transactions of which the

transaction is a part, are consistent with legislative intent,

the State income tax benefits shall be considered in determining

whether the transaction has business purpose and economic

substance.

(4) Centralized cash management of an affiliated group shall

not constitute evidence of an absence of economic substance.

(5) Achieving a financial accounting benefit shall not be

taken into account as a reasonable business purpose for entering

into a transaction if the origin of the financial accounting

benefit is a reduction of State income tax.

(j) In determining whether transactions between members of

the affiliated group of entities are not at fair market value,

the secretary shall apply the standards contained in the

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regulations adopted under this part.

(k) If the secretary requires a combined return under this

section, the combined State corporate net income of the

corporation and the members of the affiliated group of entities

shall be apportioned to this Commonwealth by use of an

apportionment formula that accurately reports the State

corporate net income properly attributable to the corporation's

business carried on in this Commonwealth and which fairly

reflects the apportionment formula applicable to the corporation

and each member of the affiliated group included in the combined

return.

(l) The following entities may not be included in a combined

return:

(1) A corporation not required to file a Federal income tax

return.

(2) An insurance company, other than an insurer that is part

of an affiliated group where the insurer receives more than

fifty per cent of its net written premiums or other amounts

received as compensation for insurance from members of the

affiliated group.

(3) A corporation exempt from taxation under section 501(c)

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

U.S.C. § 501(c)(3)).

(4) An S corporation.

(5) A foreign corporation within the meaning of section 7701

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

U.S.C. § 7701), other than a domestic branch thereof.

(6) A partnership, limited liability company or other entity

not taxed as a corporation.

(7) A corporation with at least eighty per cent of its gross

income from all sources in the tax year being active foreign

business income as defined in section 861 of the Internal

Revenue Code of 1986 (Public Law 99-514, 26 U.S.C. § 861) in

effect as of July 1, 2009.

(m) If the secretary redetermines the State corporate net

income of the corporation in accordance with this section by

adjusting the State corporate net income of the corporation or

requiring a combined return, the secretary shall issue a

proposed assessment or refund upon making such redetermination.

When a refund is determined in whole or part by a proposed

assessment to an affiliated group member under this section, the

refund shall not be issued until the proposed assessment to the

affiliated group member has become collectable. The amount of

the refund shall reflect any changes made by the Department of

Revenue under this section. Otherwise, the procedures for a

proposed assessment or a refund shall be applicable to proposed

assessments and refunds made under this section.

(n) If a combined return required by this section is not

timely submitted by a corporation, then the corporation is

subject to the penalties provided in Part VII.

(o) A corporation may request in writing from the secretary

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specific advice regarding whether a redetermination of the

corporation's State corporate net income or a combined return

would be required under this section under certain facts and

circumstances. The secretary may request information from the

taxpayer that is required to provide the specific advice. The

secretary shall provide the specific advice within one hundred

twenty days of the receipt of the requested information from the

taxpayer.

(p) The secretary and the taxpayer may extend any time limit

contained in this section by mutual agreement.

(q) The corporation my appeal a final determination by the

department under this section to the Board of Finance and

Revenue to review:

(1) whether the separate income tax returns submitted by the

taxpayer fail to report State corporate net income properly

attributable to its business carried on in this Commonwealth

through the use of intercompany transactions that lack economic

substance or are not at fair market value between members of an

affiliated group of entities;

(2) whether the department's means of determining the

corporation's State corporate net income under this section is

an appropriate means of determining the corporation's State

corporate net income properly attributable to this Commonwealth;

and

(3) if a combined return is required by the department,

whether adjustments other than requiring the corporation to file

a return on a combined basis are adequate under the

circumstances to redetermine State net income.

(r) Nothing in this subsection shall be construed to limit

or negate the secretary's authority to:

(1) add back, eliminate or otherwise adjust intercompany

transactions involving the listed entities to accurately compute

the corporation's State corporate net income properly

attributable to its business carried on in this Commonwealth as

provided in subsection (b); or

(2) make tax adjustments as otherwise permitted by law,

except that the secretary may not make adjustments under this

section that limit a corporation's options for reporting royalty

payments.

(s) For purposes of this section:

(1) "Affiliated group" means a group of two or more

corporations or noncorporate entities in which more than fifty

per cent of the voting stock of each member corporation or

ownership interest of each member noncorporate entity is

directly or indirectly owned or controlled by a common owner or

owners, either corporate or noncorporate, or by one or more of

the member corporations or noncorporate entities.

(2) "Department" means the Department of Revenue of the

Commonwealth.

(3) "Secretary" means the Secretary of Revenue of the

Commonwealth.

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Section 3. The addition of section 408.2 of the act shall

apply to taxable years beginning after December 31, 2021.

Amend Bill, page 5, line 23, by striking out "2" and

inserting

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