For many years, Pennsylvania taxpayers have heard the calls and threats to end the Delaware Holding Company “loophole.” In this time of significant budget challenges, the ability of taxpayers to shift income out of the Commonwealth of Pennsylvania to tax-advantageous jurisdictions (e.g., Delaware or Nevada) may be nearing its end.
In the past, the proposals to close this “loophole” had little or no republican support in the Commonwealth and went nowhere. However, Pennsylvania Representative David Reed (R-Indiana) is proposing legislation to add-back certain intercompany expenses paid to a Delaware Holding Company (DHC) or similar structure. The apparent bipartisan support should have taxpayers and practitioners paying close attention, because such a change will be measurable for many and significant for others.
This proposed legislation is targeted to produce $1 billion of additional taxes over ten years. However, Rep. Reed’s proposed legislation also provides business tax cuts in the same or similar amount.
First, the corporate net income tax rate is targeted to be reduced from 9.99% to 6.99% over a phase-in period. This reduction in the tax rate is estimated at a cost of $700 million.
Second, the remaining $300 million of additional tax revenues from the closing of the “loophole” is targeted for the uncapping of the net operating loss carry-forward over a ten-year period.
There will be much debate as to how best to spend the additional tax revenues from closing the “loophole.” As of January 23, Governor Tom Corbett had not yet reacted to this proposed legislation. Business groups have called for other priorities such as the full repeal of the Capital Stock/Franchise Tax and the immediate uncapping the of the net operating loss carry-forward.
The one certainty that we can all agree on is that we have not seen bipartisan support for DHC “loophole” legislation previously, and, as a result, taxpayers and practitioners should all take notice.
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