A June 24 comments deadline is looming for a proposed tax regulation from the Pennsylvania Department of Revenue (DOR) that has reignited questions around combined reporting.
Pennsylvania is a separate-company filing state for the corporate net income tax (CNIT), meaning that each corporation doing business in the state files its own returns and reports only its income or loss to the PA Department of Revenue to determine state tax liability, according to the Pennsylvania Chamber for Business and Industry.
Comparatively, several other states use unitary combined reporting, a method that determines business income by requiring companies that are part of a group of affiliated companies to report the group’s total income as a unitary group, and then apply certain apportionment factors to determine taxable income in those states, the PA Chamber says.
Proponents of combined reporting contend that it eliminates the possibility of intercompany transactions being used to shift income outside or inside taxing states as a means to avoid paying taxes.
But while combined reporting is one way to address tax avoidance, the PA Chamber points out that it also has several negative attributes, including increased cost and complexity to filing tax returns, more tax appeals and litigation, and creating an overall disincentive to do business in Pennsylvania.
On May 15, the Independent Regulatory Review Commission (IRRC) proposed Regulation #15-462: Business Income and Nonbusiness Income, which would clarify the definitions of “business income” and “nonbusiness income,” and also clarify the rules for Pennsylvania CNIT taxpayers.
Peter Calcara, vice president of government relations at the Pennsylvania Institute of CPAs (PICPA), told Pennsylvania Business Report that only the PA General Assembly, with the governor’s approval, can enact a system of combined reporting for CNIT reporting.
“The PICPA’s major concerns with the proposed regulation are that certain provisions are inconsistent with the CNIT statute and case law, and that the proposed regulations need to provide additional guidance in certain other areas,” Calcara explained, adding that the PICPA will provide more detailed comments on the proposed regulation.
While combined reporting may not have an easily determined fiscal impact (i.e., increase or decrease in overall tax collections), Calcara also pointed out that there would be winners and losers amongst individual taxpayers.
A winner, for example, would be a profitable Pennsylvania company with out-of-state affiliates having significant losses. Another example of a winner would be a profitable entity with no unitary affiliates that benefits from an associated rate reduction with no combined return requirement, according to an issue brief published by the PICPA.
Likewise, a loser could be a Pennsylvania loss company with highly profitable out-of-state affiliates, according to the issue brief.
“The PICPA is neutral on combined reporting,” Calcara said.
Carl Marrara, executive director of the Pennsylvania Manufacturers’ Association (PMA), testified April 11 during a PA House Republican Policy Committee hearing that the commonwealth has one of the least competitive corporate tax environments in the country, ranking 41st out of 50 states in the recently released Tax Foundation’s Corporate Tax Rank. Just nine states were listed as having a worse corporate tax environment, he said.
The two most glaring shortcomings in regard to Pennsylvania’s corporate taxes are the highest flat-rate in the nation at 8.99 percent (to be reduced to 4.99 percent in 2031) CNIT rate, and a 40 percent cap on net operating loss.
Among PMA’s recommendations are for state lawmakers to accelerate the lowering of the CNIT.
“We strongly believe that a reduction of this highly uncompetitive rate will result in greatly enhanced economic growth, which will generate an increase in state tax revenue,” Marrara testified.
PMA also recommended that the committee oppose any proposal including mandatory unitary combined reporting because it would “make Pennsylvania less competitive and have a broad range of negative consequences on the commonwealth’s economic climate,” said Marrara, noting that it has proven to be litigious in other states and creates much uncertainty for businesses.
The public comment period on the proposal closes June 24, with comments from the IRRC due by July 24.