Regular Session 2023-2024 Senate Bill 0161 P.N. 0135

PRINTER'S NO. 135

THE GENERAL ASSEMBLY OF PENNSYLVANIA

SENATE BILL

No.

161

Session of

2023

INTRODUCED BY TARTAGLIONE, HAYWOOD, HUGHES, KEARNEY, FONTANA,

BREWSTER, KANE, COLLETT, DILLON, STREET, CAPPELLETTI,

SANTARSIERO AND COMITTA, JANUARY 19, 2023

REFERRED TO FINANCE, JANUARY 19, 2023

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 of tax, for reports and

payment of tax and for consolidated reports; 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), (b), (t) and (5) of the act

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

1971, are amended, (3)2(a)(9)(A) is amended by adding a unit,

(3)1 and (3)4 are amended by adding phrases 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 before special

deductions provided for in 26 U.S.C. Pt. VIII (relating to

special deductions for corporations), 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 before special deductions provided for in 26 U.S.C.

§§ 241, 242, 243, 244, 245, 246, 247, 248, 249 and 250 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

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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, 2023, the additional deduction with respect to dividends

shall not be allowed for dividends between members of a unitary

group.

* * *

(p.1) For taxable years after December 31, 2023, in the case

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

term "taxable income" shall mean the combined unitary income of

the unitary business, as determined on a water's-edge basis.

* * *

(t) (1) Except as provided in paragraph (2), (3) or (4) for

taxable years beginning after December 31, 2014, and in addition

to any authority the department has on the effective date of

this paragraph to deny a deduction related to a fraudulent or

sham transaction, no deduction shall be allowed for an

intangible expense or cost, or an interest expense or cost,

paid, accrued or incurred directly or indirectly in connection

with one or more transactions with an affiliated entity. In

calculating taxable income under this paragraph, when the

taxpayer is engaged in one or more transactions with an

affiliated entity that was subject to tax in this Commonwealth

or another state or possession of the United States on a tax

base that included the intangible expense or cost, or the

interest expense or cost, 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 apportionment factor

of the taxpayer in this Commonwealth multiplied by the greater

of the following:

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(A) the tax liability of the affiliated entity with respect

to the portion of its income representing the intangible expense

or cost, or the interest expense or cost, paid, accrued or

incurred by the taxpayer; or

(B) the tax liability that would have been paid by the

affiliated entity under subparagraph (A) if that tax liability

had not been offset by a credit.

The credit issued under this paragraph shall not exceed the

taxpayer's liability in this Commonwealth attributable to the

net income taxed as a result of the adjustment required by this

paragraph.

(2) The adjustment required by paragraph (1) shall not apply

to a transaction that did not have as [the] a principal purpose

the avoidance of tax due under this article and was done at

arm's length rates and terms.

(3) The adjustment required by paragraph (1) shall not apply

to a transaction between a taxpayer and an affiliated entity

domiciled in a foreign nation which has in force a comprehensive

income tax treaty with the United States providing for the

allocation of all categories of income subject to taxation, or

the withholding of tax, on royalties, licenses, fees and

interest for the prevention of double taxation of the respective

nations' residents and the sharing of information.

(4) The adjustment required by paragraph (1) shall not apply

to a transaction where an affiliated entity directly or

indirectly paid, accrued or incurred a payment to a person who

is not an affiliated entity, if the payment is paid, accrued or

incurred on the intangible expense or cost, or interest expense

or cost, and is equal to or less than the taxpayer's

proportional share of the transaction. The taxpayer's

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proportional share shall be based on relative sales, assets,

liabilities or another reasonable method.

(5) The adjustment required under paragraph (1) shall not

apply to a transaction between the taxpayer and an affiliated

entity, where the taxpayer and the affiliated entity file a

combined annual report in this State.

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.

* * *

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

* * *

(vi) (a) For taxable years beginning after December 31,

2023, all business income of a unitary business shall be

apportioned to this State by multiplying the income by the

member's sales factor, the numerator of which shall be the

member's total sales in this State, and the denominator of which

shall be the combined total sales of all members of the unitary

business everywhere. In computing the sales of each member for

purposes of apportionment, the following sales are excluded from

the numerator and denominator:

(I) sales from transactions between or among members of the

unitary business that are deferred under 26 CFR 1.1502-13

(relating to intercompany transactions) for Federal taxable

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income purposes; and

(II) the sales of each member that are excluded from the

unitary business pursuant to the definition of water's-edge

basis.

(b) The Pennsylvania sales of each nontaxable member shall

be determined based upon the apportionment rules applicable to

the member and shall be aggregated. Each taxable member of the

group shall include in its sales factor numerator a portion of

the aggregate Pennsylvania sales of nontaxable members based on

a ratio, the numerator of which is the taxable member's

Pennsylvania sales and the denominator of which is the aggregate

Pennsylvania sales of all the taxable members of the group.

shall be allocated as provided in paragraphs (5) through (8) of

phrase (a) of subclause 2 of this definition. A member of the

unitary business is subject to tax on its apportioned share of

all business income of the unitary business, plus its

nonbusiness income or loss allocated to this State, minus the

member's net loss deduction.

(d) The Secretary of Revenue has the authority to

distribute, apportion or allocate gross income, deductions,

credits or allowances between and among two or more

corporations, persons, entities, members or unitary businesses,

whether or not incorporated, whether or not organized in the

United States and whether or not affiliated, if:

(I) the corporations, persons, entities, members or unitary

businesses are owned or controlled directly or indirectly by the

same interests within the meaning of 26 U.S.C. § 482 (relating

to allocation of income and deductions among taxpayers); and

(II) the Secretary of Revenue determines that the

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distribution, apportionment or allocation is necessary in order

to reflect an arm's length standard within the meaning of 26 CFR

1.482-1 (relating to allocation of income and deductions among

taxpayers) and to reflect clearly the income of those

corporations, persons, entities, members or unitary businesses.

(e) The Secretary of Revenue shall apply the administrative

and judicial interpretations of 26 U.S.C. § 482 in administering

this section.

(f) For taxable years beginning after December 31, 2023, any

member of a unitary group that would otherwise apportion its

business income under phrase (b), (c), (d) or (e) of subclause 2

of this definition shall determine its apportionment formula

using a single sales fraction.

* * *

4. * * *

(h) Subject to the limitations of this subclause, any member

of a unitary business that has unused net loss from taxable

years that began prior to January 1, 2024, or that generates net

losses while a member of a unitary business may only take the

net loss deduction for taxable years beginning after December

31, 2023, to the extent of the member's share of combined

unitary income after apportionment and the net losses may not be

used by other members of the same unitary business.

(i) Any net loss realized for a taxable year unused by a

corporation which subsequently becomes a member of another

unitary business, may only be used by that corporation.

* * *

(5) "Taxable year." [The taxable year which the

corporation, or any consolidated group with which the

corporation participates in the filing of consolidated returns,

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actually uses in reporting 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.]

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, 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 subclause or subclause 2.

2. All members of a unitary business shall have a common

taxable year for purposes of computing tax due under this

article. The taxable year for such purposes is the common

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

by all members of the unitary business. The common taxable year

must be used by all members of the unitary business in the year

of adoption and all future years unless otherwise permitted by

the department.

* * *

(12) "Tax haven." Means any of the following:

(A) Andorra.

(B) Anguilla.

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(D) Aruba.

(E) The Bahamas.

(F) Bahrain.

(G) Barbados.

(H) Belize.

(I) Bermuda.

(J) The British Virgin Islands.

(K) The Cayman Islands.

(L) The Cook Islands.

(M) Cyprus.

(N) Dominica.

(O) Gibraltar.

(P) Grenada.

(Q) Guernsey-Sark-Alderney.

(R) The Isle of Man.

(S) Jersey.

(T) Liberia.

(U) Liechtenstein.

(V) Luxembourg.

(W) Malta.

(X) The Marshall Islands.

(Y) Mauritius.

(Z) Monaco.

(AA) Montserrat.

(BB) Nauru.

(CC) Netherlands Antilles.

(DD) Niue.

(EE) Panama.

(FF) Samoa.

(GG) San Marino.

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(HH) Seychelles.

(II) St. Kitts and Nevis.

(JJ) St. Lucia.

(KK) St. Vincent and the Grenadines.

(LL) Turks and Caicos Islands.

(MM) Vanuatu.

(NN) A jurisdiction that is identified as a tax haven by the

Organization for Economic Co-operation and Development.

(13) "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

flow of value to the separate parts. A unitary business includes

all those parts and corporations that are included in a unitary

business under the Constitution of the United States.

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

includes the income and apportionment factors of certain members

of a unitary business, described as follows:

(A) 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.

(B) Any member, regardless of the place incorporated or

formed, if at least twenty per cent of the member's sales factor

is within the United States, and the following shall apply:

(i) For purposes of determining whether at least twenty per

cent of a member's sales factor is within the United States, the

calculation must be performed on a stand-alone basis. Sales

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shall be gross figures without eliminations for transactions

with other members of any unitary business.

(ii) Whether sales are within the United States is based on

the sales factor sourcing rules contained in section 401(3).

(i) A domestic international sales corporation as described

in 26 U.S.C. Pt. IV Subpt. A (relating to treatment of

qualifying corporations).

(ii) A foreign sales corporation as described in 26 U.S.C.

§§ 921, 922, 923, 924, 925, 926 and 927.

(iii) An export trade corporation as described in 26 U.S.C.

Pt. IV Subpt. G (relating to export trade corporations).

(D) Any member not described in subparagraph (A), (B) or (C)

shall include the portion of the member's taxable income derived

from or attributable to sources within the United States, as

determined under 26 U.S.C. (relating to Internal Revenue Code)

without regard to Federal treaties, and its apportionment

factors related thereto.

(E) Any member that is a "controlled foreign corporation" as

defined in 26 U.S.C. § 957 (relating to foreign corporations;

United States persons), to the extent the income of that member

is income defined in 26 U.S.C. § 952 (relating to Subpart F

income defined) as Subpart F income, not excluding lower-tier

subsidiaries' distributions of such income which were previously

taxed, determined without regard to Federal treaties, and the

apportionment factors related to that income; any item of income

received by a controlled foreign corporation and the

apportionment factors related to such income shall be excluded

if the corporation establishes to the satisfaction of the

Secretary of Revenue that such income was subject to an

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effective rate of income tax imposed by a foreign country

greater than ninety per cent of the maximum rate of tax

specified in 26 U.S.C. § 11 (relating to tax imposed). 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).

(F) Any member that is incorporated in or is doing business

in a tax haven. The income and apportionment factors of a member

doing business in a tax haven shall be excluded if the member

establishes to the satisfaction of the Secretary of Revenue that

the member's 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 26 U.S.C. § 11.

(15) "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 or controlling

interest 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.

(16) "Combined unitary income." The aggregate taxable

income or loss of all members of a unitary business, subject to

apportionment, except:

(A) Income from an intercompany transaction between members

of a unitary business shall be deferred in a manner similar to

26 CFR 1.1502-13 (relating to intercompany transactions) for

Federal taxable income purposes.

(B) Dividends paid by one member of a unitary business to

another.

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determination of combined unitary income:

(i) any member subject to taxation under Article VII, VIII,

IX or XV;

(ii) any member specified in the definition of "institution"

in section 701.5 that would be subject to taxation under Article

VII, were it doing business in this State, as defined in section

701.5;

(iii) any member commonly known as a title insurance company

that would be subject to taxation under Article VIII, were it

incorporated in this State;

(iv) any member specified as an insurance company,

association or exchange in Article IX that would be subject to

taxation under Article IX, were it transacting insurance

business in this State;

(v) any member specified in the definition of "institution"

in section 1501 that would be subject to taxation under Article

XV, were it located, as defined in section 1501, in this State;

(vi) any member that is a small corporation as defined in

section 301(s.2) except to the extent of such small

corporation's net recognized built-in gain to the extent of and

as determined for Federal income tax purposes under 26 U.S.C. §

1374(d)(2) (relating to tax imposed on certain built-in gains).

(17) "Member." A corporation that is a member of a unitary

business. The term does not include a corporation listed in

clause (15)(C).

Section 2. Section 402(b) of the act 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

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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, 2023 9.99%

January 1, 2024,

through December

31, 2024 8 .99%

January 1, 2025,

through December

31, 2025 7.99%

January 1, 2026,

through December

31, 2026, and each

taxable year

thereafter

6.99%

* * *

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

subsections to read:

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

(a.1) (1) 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 member 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 members of the unitary business. Each

corporation that is a member of a unitary business is liable for

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its tax liability under this article. The agent is also liable

for the aggregate amount of the unitary business' tax liability

pursuant to this article.

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

president, vice president, treasurer, assistant treasurer or

other authorized officer 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 a combined annual

report under oath or affirmation of the member's president, vice

president, treasurer, assistant treasurer or other authorized

officer.

(4) In addition to the information required in subsection

(a), the combined annual report shall set forth:

(i) All members included in the unitary business.

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

member of the unitary business, that sets forth the

determination of tax liability for each member of the unitary

business.

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

(a.2) A member of a unitary business of two or more

corporations must determine the member's income and

apportionment factors on a water's-edge basis.

* * *

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

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

combined net income].

Section 5. Section 3003.3(d) of the act is amended and the

section is amended by adding a subsection to read:

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

(d) Notwithstanding the provisions of [the preceding

subsections,] this section, other than as set forth in

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

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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) With respect to any underpayment of an installment of

estimated corporate net income tax for any tax year that begins

in taxable year 2024 or 2025 by a corporation required to file a

combined annual report pursuant to section 403(a.1)(1), interest

shall not be imposed if the total amount of all payments of

estimated corporate net income 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 combined tax shown on the reports of all the members of the

unitary business for the safe harbor base year computed at the

rate applicable to the taxable year.

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Section 6. The amendment of sections 401, 402, 403, 404 and

3003.3 of the act shall apply to taxable years beginning after

December 31, 2023.

Section 7. This act shall take effect immediately.

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