Wolf seeks corporate-tax changes as 'Delaware loophole' law takes effect

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Gov. Wolf will propose a revamping of the state's corporate tax structure, with plans to cut some rates and eliminate certain deductions. (Bradley C Bower/For the Inquirer)

Gov. Wolf's broad proposal to reshape Pennsylvania's corporate-tax structure comes as a 2013 law takes effect that was adopted specifically to close a tax loophole Wolf has opposed.

In his first budget address Tuesday, Wolf will include corporate-tax rate cuts through 2018 and aim to eliminate certain corporate-tax deductions.

"The governor's proposal will promote economic growth, create strong middle-class jobs, and make companies want to invest and grow in Pennsylvania," spokesman Jeff Sheridan said.

As Gov. Ed Rendell's secretary of revenue in 2007 and as a member of a tax-reform commission in 2004, Wolf wanted to close the "Delaware loophole," which allows corporations to reduce Pennsylvania taxes by funneling revenue to related holding companies in places with low or no corporate taxes.

The idea is to establish what are called intangible holding companies in places like Delaware to own trademarks or intellectual property, for example. The holding company then charges related entities in other states for using the trademarks, creating deductions for corporate-tax purposes in Pennsylvania and other states with similar rules.

The remedy in 25 states has been to require companies to file state returns on a consolidated, or combined, basis, eliminating the payments between related entities that can be used to avoid taxes.

State revenue departments then calculate how much of the multistate corporation's profits should be apportioned to their states - a complicated matter. Since 2013, in Pennsylvania the calculation is based solely on the percentage of a corporation's sales in the state.

Rendell pushed for combined reporting almost every year of his tenure as governor, but never got it through the legislature.

Under Gov. Tom Corbett in 2013, the legislature passed a law, effective Jan. 1, designed to close the Delaware loophole by forcing companies to include royalty and interest expenses that do not have a "valid business purpose" in their taxable income.

"They are kind of jumping the gun and not even giving this a chance to work," said Jason Skrinak, a principal at McKonly & Asbury L.L.P., an accounting firm in Camp Hill, Pa.

"The governor may think that it doesn't go far enough," Skrinak said.

Pennsylvania joined 17 other states in taking a narrower approach to closing the Delaware loophole by requiring companies to add certain expenses back to their income. New Jersey, for example, adopted the "intercompany addback" rule in its Business Tax Reform Act of 2002, a model some other states have followed.

"It would have been easy for [Pennsylvania] just to adopt the legislative language that New Jersey had or some of the other states have utilized," said Matt Wilk, director for state and local taxes at EisnerAmper L.L.P., accountants and advisers in Jenkintown.

"Instead, they adopted language that was much more vague than what other states have done," Wilk said. Because of that, he said, "it's not really not going to capture what other states are getting."

Gene Barr, president and chief executive of the Pennsylvania Chamber of Business and Industry, said his organization worked hard to influence the addback rules to make sure the state's competitiveness was not hurt.

"We got language that we could live with that gave the Department of Revenue some more power to disallow certain deductions," Barr said.

 


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