United States: Oregon Tax Court rejects Oregon Department of Revenue position on sales impact of alleged 2017 repatriation
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Oracle Corporation v. Dept. of Rev., TC 5340 (Or Tax, October 6, 2021) concerns, in part, the impact of Subpart F income on a taxpayer’s sales factor in Oregon.1 The Oregon Tax Court rejected the position of the Oregon Department of Revenue (the Department) that old SOR 314.665 (6) (a) (2015)
automatically excludes income from subpart F of the denominator of the sales factor. As described in a item published by the author, the Department, based on this interpretation of ORS 314.665 (6) (a), determined that none of the 2017 deemed repatriations required by IRC § 965 can be included in the Oregon’s sales factor denominator.2 Therefore, taxpayers who report the deemed repatriation in a 2017 return should generally be able to include in the denominator of the Oregon sales factor the portion of the deemed repatriation included in attributable income, provided that (1 ) the deemed repatriation satisfies the “principal business activity” exception, and (2) the income-generating activities for the deemed repatriation can be readily identified and have taken place outside of Oregon.
Under IRC § 965, US parent companies of multinational groups were generally required to include in 2017 federal taxable income, as Subpart F income, the deemed repatriation amount, which was essentially the income accrued after 1986 from a foreign affiliate that was not previously subject to the United States. tax. The Oregon dividend received deduction generally allows an 80% deduction for Subpart F income, including Subpart F income from deemed repatriation. The Oregon Dividend Received Deduction Act also provides that the taxpayer cannot include the amount deducted in the company’s Oregon sales factor.
Questions remained on the 20 percent not deducted. The ministry addressed this issue in Oregon Revenue Bulletin 2018-01. For tax years that begin before January 1, 2018, the Department has determined that
old ORS 314.665 (6) (a) excluded the alleged repatriation of the facto sale from Oregon, in law, without the need to consider the applicable facts and circumstances.
As applicable here, old ORS 314.665 (6) (a) initially excludes from the Oregon sales factor “[g]gross receipts resulting from the holding * * * of intangible assets. “However, an excluded gross receipts are reinstated if the” receipts come from the main business activity of the taxpayer “. Oracle, the Ministry has taken the following positions:
- The income for Subpart F came from the parent company owning the shares of the subsidiary.
- The income of Subpart F came from the holding activity of the subsidiary, which was not its main activity.
Although the tribunal expressed concern that “’detention’ does not fully capture the depth of unitary relations,” it ultimately agreed that the requirement of detention was met. In adopting this broad interpretation of the ‘holding requirement, the court noted “that lawmakers have adequately treated the dividends of a unitary subsidiary in the inclusion provision [the primary business activity
exception]The court then rejected the ministry’s position that the principal business activity exception did not apply, finding that possession of shares is not an “activity.” Instead, the court determined that the income of Subpart F came from the operations of each subsidiary. Accordingly, if these operations were part of the main activity of the parent company, oldORS 314.665 (6) (a) did not exclude Subpart F income from the Oregon sales factor.
In the deemed repatriation revenue bulletin, the Department used the example of an American company (CORP ZYZ) engaged in shipbuilding having a deemed repatriation from a foreign affiliate (SUB XYZ) engaged in finance. The Ministry stated, without analysis, that the principal business activity exception did not apply. However, as stated in the article
“The ministry example cited above does not provide context for SUB XYZ, but what if CORP XYZ formed or acquired SUB XYZ for financial services related to its shipbuilding operations? “
The Oregon Tax Court apparently agrees with this criticism. CORP XYZ and SUB XYZ may each carry on the primary business activity of building and selling ships, including financing such sales. This should generally result in 20% of the alleged repatriation being re-included in the Oregon sales factor denominator.
However, the alleged repatriation of survivors old ORS 314.665 (6) (a) does not completely solve the problem. In accordance with
old ORS 314.665 (4), the taxpayer must also identify the income-generating activities for the deemed repatriation. The decision in Oracle does not address that. However, it does provide indications that generally the income-generating activities are the activities carried out by the subsidiary which resulted in the income and profits deemed to be repatriated. This could help to satisfy old ORS 314.665 (4), removing the remaining hurdle by including 20 percent of the alleged repatriation in the denominator of the Oregon sales factor.
1 Lane Powell represented Oracle in this case, but began that representation after the Oregon Tax Court issued its initial order in December 2020.
2 The article also provides general information on the alleged repatriation of IRC § 965 and the calculation of the Oregon sales factor.
The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.
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