Senate Bill text for SB0259

SENATE BILL 259

49th legislature - STATE OF NEW MEXICO - second session, 2010

INTRODUCED BY

Peter Wirth

AN ACT

RELATING TO TAXATION; AMENDING THE CORPORATE INCOME AND FRANCHISE TAX ACT TO REQUIRE DEDUCTIBLE TANGIBLE EXPENSES AND INTEREST TO BE ADDED BACK IN DETERMINING NET INCOME FOR CERTAIN ENTITIES.

BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF NEW MEXICO:

Section 1. Section 7-2A-2 NMSA 1978 (being Laws 1986, Chapter 20, Section 33, as amended) is amended to read:

"7-2A-2. DEFINITIONS.--For the purpose of the Corporate Income and Franchise Tax Act and unless the context requires otherwise:

A. "affiliated group" means that term as it is used in the Internal Revenue Code;

B. "aggregate effective rate of tax" means the sum of the effective rates of tax imposed by a state or United States possession or any combination thereof on a related member;

[B.] C. "bank" means any national bank, national banking association, state bank or bank holding company;

[C.] D. "base income" means that part of the taxpayer's income defined as taxable income and upon which the federal income tax is calculated in the Internal Revenue Code for income tax purposes plus, for taxable years beginning on or after January 1, 1991, the amount of the net operating loss deduction allowed by Section 172(a) of the Internal Revenue Code, as that section may be amended or renumbered, and claimed by the taxpayer for that year; "base income" also includes interest received on a state or local bond;

[D.] E. "corporation" means corporations, joint stock companies, real estate trusts organized and operated under the Real Estate Trust Act, financial corporations and banks, other business associations and, for corporate income tax purposes, partnerships and limited liability companies taxed as corporations under the Internal Revenue Code;

[E.] F. "department" means the taxation and revenue department, the secretary of taxation and revenue or any employee of the department exercising authority lawfully delegated to that employee by the secretary;

G. "effective rate of tax" means, as to any state or United States possession, the maximum statutory rate of tax imposed by the state or possession on a related member's net income multiplied by the apportionment percentage, if any, applicable to the related member under the laws of said jurisdiction. For purposes of this definition, the effective rate of tax as to any state or United States possession is zero where the related member's net income tax liability in said 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. Also, for purposes of this definition, 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 said jurisdiction shall be decreased to reflect the statutory rate of tax that applies to the related member as effectively reduced by such credit or similar adjustment;

[F.] H. "fiscal year" means any accounting period of twelve months ending on the last day of any month other than December;

I. "intangible expense" means:

(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 such 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;

(2) amounts directly or indirectly allowed as deductions under Section 163 of the Internal Revenue Code for purposes of determining taxable income to the extent such expenses and costs are directly or indirectly for, related to or in connection with the expenses, losses and costs referenced in Paragraph (1) of this subsection;

(3) losses related to, or incurred in connection directly or indirectly with, factoring transactions or discounting transactions;

(4) royalty, patent, technical and copyright fees;

(5) licensing fees; and

(6) other similar expenses and costs;

J. "intangible property" includes patents, patent applications, trade names, trademarks, service marks, copyrights, mask works, trade secrets and similar types of intangible assets;

[G.] K. "Internal Revenue Code" means the United States Internal Revenue Code of 1986, as amended;

[H.] L. "net income" means base income adjusted to exclude:

(1) income from obligations of the United States less expenses incurred to earn that income;

(2) other amounts that the state is prohibited from taxing because of the laws or constitution of this state or the United States;

(3) for taxable years that began prior to January 1, 1991, an amount equal to the sum of:

(a) net operating loss carryback deductions to that year from taxable years beginning prior to January 1, 1991 claimed and allowed, as provided by the Internal Revenue Code; and

(b) net operating loss carryover deductions to that year claimed and allowed; and

(4) for taxable years beginning on or after January 1, 1991, an amount equal to the sum of any net operating loss carryover deductions to that year claimed and allowed; provided that the amount of any net operating loss carryover from a taxable year beginning on or after January 1, 1991 may be excluded only as follows:

(a) in the case of a timely filed return, in the taxable year immediately following the taxable year for which the return is filed; or

(b) in the case of amended returns or original returns not timely filed, in the first taxable year beginning after the date on which the return or amended return establishing the net operating loss is filed; and

(c) in either case, if the net operating loss carryover exceeds the amount of net income exclusive of the net operating loss carryover for the taxable year to which the exclusion first applies, in the next four succeeding taxable years in turn until the net operating loss carryover is exhausted; in no event may a net operating loss carryover be excluded in any taxable year after the fourth taxable year beginning after the taxable year to which the exclusion first applies;

[I.] M. "net operating loss" means any net operating loss, as defined by Section 172(c) of the Internal Revenue Code, as that section may be amended or renumbered, for a taxable year as further increased by the income, if any, from obligations of the United States for that year, less related expenses;

[J.] N. "net operating loss carryover" means the amount, or any portion of the amount, of a net operating loss for any taxable year that, pursuant to Paragraph (3) or (4) of Subsection [H] L of this section, may be excluded from base income;

[K.] O. "person" means any individual, estate, trust, receiver, cooperative association, club, corporation, company, firm, partnership, limited liability company, joint venture, syndicate or other association; "person" also means, to the extent permitted by law, any federal, state or other governmental unit or subdivision or agency, department or instrumentality thereof;

P. "related entity" means:

(1) a stockholder who is an individual, or a member of the stockholder's family as set forth in Section 318 of the Internal Revenue Code, if the stockholder and the members of the stockholder's family own, directly, indirectly, beneficially or constructively, in the aggregate, at least fifty percent 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 percent of the value of the taxpayer's outstanding stock; or

(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, if the taxpayer owns, directly, indirectly, beneficially or constructively, at least fifty percent of the value of the corporation's outstanding stock. The attribution rules of the Internal Revenue Code shall apply for purposes of determining whether the ownership requirements of this definition have been met;

Q. "related member" means a person that, with respect to the taxpayer during all or any portion of the taxable year, is:

(1) a related entity;

(2) a component member as defined in Subsection (b) of section 1563 of the Internal Revenue Code;

(3) a person to or from which there is attribution of stock ownership in accordance with Subsection (e) of Section 1563 of the Internal Revenue Code; or

(4) a person that, notwithstanding its form of organization, bears the same relationship to the taxpayer as a person described in Paragraphs (1) through (3) of this subsection;

[L.] R. "secretary" means the secretary of taxation and revenue or the secretary's delegate;

[M.] S. "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 or political subdivision thereof or any political subdivision of a foreign country;

[N.] T. "state or local bond" means a bond issued by a state other than New Mexico or by a local government other than one of New Mexico's political subdivisions, the interest from which is excluded from income for federal income tax purposes under Section 103 of the Internal Revenue Code, as that section may be amended or renumbered;

[O.] U. "taxable year" means the calendar year or fiscal year upon the basis of which the net income is computed under the Corporate Income and Franchise Tax Act and includes, in the case of the return made for a fractional part of a year under the provisions of that act, the period for which the return is made;

[P.] V. "taxpayer" means any corporation subject to the taxes imposed by the Corporate Income and Franchise Tax Act; [and

Q.] W. "unitary corporations" means two or more integrated corporations, other than any foreign corporation incorporated in a foreign country and not engaged in trade or business in the United States during the taxable year, that are owned in the amount of more than fifty percent and controlled by the same person and for which at least one of the following conditions exists:

(1) there is a unity of operations evidenced by central purchasing, advertising, accounting or other centralized services;

(2) there is a centralized management or executive force and centralized system of operation; or

(3) the operations of the corporations are dependent upon or contribute property or services to one another individually or as a group; and

X. "valid business purpose" means one or more business purposes, other than the avoidance or reduction of taxation, which alone or in combination constitute the primary motivation for a business activity or transaction, which activity or transaction changes in a meaningful way, apart from tax effects, the economic position of the taxpayer. The economic position of the taxpayer includes an increase in the market share of the taxpayer or the entry by the taxpayer into new business markets."

Section 2. Section 7-2A-3 NMSA 1978 (being Laws 1981, Chapter 37, Section 36, as amended) is amended to read:

"7-2A-3. IMPOSITION AND LEVY OF TAXES.--

A. A tax to be known as the "corporate income tax" is imposed at the rate specified in the Corporate Income and Franchise Tax Act upon the net income of every domestic corporation and upon the net income of every foreign corporation employed or engaged in the transaction of business in, into or from this state or deriving any income from any property or employment within this state.

B. A tax to be known as the "corporate franchise tax" is imposed in the amount specified in the Corporate Income and Franchise Tax Act upon every domestic corporation and upon every foreign corporation employed or engaged in the transaction of business in, into or from this state or deriving any income from any property or employment within this state and upon every domestic or foreign corporation, whether engaged in active business or not, but having or exercising its corporate franchise in this state.

C. For purposes of determining net income subject to the tax imposed pursuant to this section, a taxpayer shall add back otherwise deductible intangible expense directly or indirectly paid, accrued or incurred in connection with one or more direct or indirect transactions with one or more related members. For the purposes of this subsection:

(1) if the related member was subject to tax in this state or another state or a possession of the United States or a foreign nation or some combination thereof on a tax base that included the intangible expense paid, accrued or incurred by the taxpayer, the taxpayer shall receive a credit against tax due in this state 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 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 that portion of its income had not been offset by expenses or losses, or the tax liability had not been offset by a credit or credits. The credit so determined shall be multiplied by the apportionment factor of the taxpayer in this state. However, in no case shall the credit exceed the taxpayer's liability in this state attributable to the net income taxed as a result of the adjustment required by this subsection; and

(2) the adjustment required by this subsection and the credit allowed in Paragraph (1) of this subsection 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: 1) the related member during the same taxable year directly or indirectly paid, accrued or incurred such portion to a person that is not a related member; and 2) 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 of the type and in the form specified by the secretary that: 1) the related member was subject to tax on its net income in this state or another state or a possession of the United States or some combination thereof; 2) the tax base for said tax included the intangible expense paid, accrued or incurred by the taxpayer; and 3) the aggregate effective rate of tax applied to the related member is no less than the tax rate imposed pursuant to Section 7-2A-5 NMSA 1978;

(c) if the taxpayer establishes by clear and convincing evidence of the type and in the form specified by the secretary that: 1) the intangible expense was paid, accrued or incurred to a related member organized under the laws of a country other than the United States; 2) the related member's income from the transaction was subject to a comprehensive income tax treaty between such country and the United States; 3) the related member's income from the transaction was taxed in such country at a tax rate at least equal to that imposed by this state; and 4) the 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; or

(d) if the taxpayer and the secretary agree in writing to the application or use of alternative adjustments or computations. The secretary may agree to the application or use of alternative adjustments or computations when the secretary concludes that, in the absence of such agreement, the income of the taxpayer would not be properly reflected.

D. For purposes of determining net income subject to the tax imposed pursuant to this section, a taxpayer shall add back otherwise deductible interest paid, accrued or incurred to a related member during the taxable year. For the purposes of this subsection:

(1) if the related member was subject to tax in this state or another state or a possession of the United States or a foreign nation or some combination thereof on a tax base that included the interest expense paid, accrued or incurred by the taxpayer, the taxpayer shall receive a credit against tax due in this state 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 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 that portion of its income had not been offset by expenses or losses, or the tax liability had not been offset by a credit or credits. The credit so determined shall be multiplied by the apportionment factor of the taxpayer in this state. However, in no case shall the credit exceed the taxpayer's liability in this state attributable to the net income taxed as a result of the adjustment required by this subsection; and

(2) the adjustment required by this subsection and the credit allowed in Paragraph (1) of this subsection shall not apply:

(a) if the taxpayer establishes by clear and convincing evidence of the type and in the form determined by the secretary that the transaction giving rise to the interest expense between the taxpayer and the related member was undertaken for a valid business purpose and the interest expense was paid, accrued or incurred using terms that reflect an arm's length relationship;

(b) if the taxpayer establishes by clear and convincing evidence of the type and in the form specified by the secretary that: 1) the related member was subject to tax on its net income in this state or another state or a possession of the United States or some combination thereof; 2) the tax base for said tax included the interest expense paid, accrued or incurred by the taxpayer; and 3) the aggregate effective rate of tax applied to the related member is no less than the tax rate imposed pursuant to Section 7-2A-5 NMSA 1978;

(c) if the taxpayer establishes by clear and convincing evidence of the type and in the form specified by the secretary that: 1) the interest expense was paid, accrued or incurred to a related member organized under the laws of a country other than the United States; 2) the related member's income from the transaction was subject to a comprehensive income tax treaty between such country and the United States; 3) the related member's income from the transaction was taxed in such country at a tax rate at least equal to that imposed by this state; and 4) the interest 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; or

Section 3. APPLICABILITY.--The provisions of this act are applicable to taxable years beginning on or after January 1, 2011.

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