This website will be unavailable from Thursday, May 30, 2024 at 6:00 p.m. through Monday, June 3, 2024 at 7:00 a.m. due to data center maintenance.
By: Dunnam H.B. No. 69
A BILL TO BE ENTITLED
AN ACT
relating to the allocation and apportionment of certain payments
used in the determination of the taxable earned surplus of a
corporation.
BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF TEXAS:
SECTION 1. Subchapter C, Chapter 171, Tax Code, is amended
by adding Section 171.1001 to read as follows:
Sec. 171.1001. DEFINITIONS. In this subchapter:
(1) "Arm's length" means the standard of conduct under
which unrelated parties having substantially equal bargaining
power, each acting in its own interest, would negotiate or carry out
a particular transaction.
(2) "Controlling interest" means:
(A) for a corporation, either 50 percent or more,
owned directly or indirectly, of the total combined voting power of
all classes of stock of the corporation, or 50 percent or more,
owned directly or indirectly, of the beneficial ownership interest
in the voting stock of the corporation; and
(B) for a partnership, association, trust, or
other entity, 50 percent or more, owned directly or indirectly, of
the capital, profits, or beneficial interest in the partnership,
association, trust, or other entity.
(3) "Interest payment" means an amount allowable as an
interest deduction under Section 163, Internal Revenue Code.
(4) "Management fee" means a fee for services of a
managerial or administrative nature, including services pertaining
to management, accounts receivable and payable, employee benefit
plans, insurance, legal matters, payroll, data processing,
purchasing, taxes, financial matters, securities, accounting,
reporting, and compliance.
(5) "Related party" means a person, corporation, or
other entity, including an entity that is treated as a pass-through
or disregarded entity for purposes of federal taxation, whether the
person, corporation, or entity is subject to the tax under this
chapter or not, in which one person, corporation, or entity, or set
of related persons, corporations, or entities, directly or
indirectly owns or controls a controlling interest in another
entity. To the extent necessary to carry out this section, the
comptroller shall adopt rules defining "related party" using
principles substantially similar to Section 318, Internal Revenue
Code.
(6) "Royalty payment" means a payment directly
connected to the acquisition, use, maintenance or management,
ownership, sale, exchange, or any other disposition of licenses,
trademarks, copyrights, trade names, trade dress, service marks,
mask works, trade secrets, patents, or any other similar types of
intangible assets as determined by the comptroller.
(7) "Valid business purpose" means one or more
business purposes, other than the avoidance or reduction of taxes,
that alone or in combination constitute the primary motivation for
a business activity or transaction that changes in a meaningful
way, apart from tax effects, the economic position of the entity. A
valid business purpose includes compliance with a regulatory
requirement of:
(A) the federal government;
(B) a state or local government;
(C) a foreign nation; or
(D) an agency or political subdivision of any
entity listed in Paragraphs (A)-(C).
SECTION 2. Subchapter C, Chapter 171, Tax Code, is amended
by adding Sections 171.1101-171.1103 to read as follows:
Sec. 171.1101. ADD-BACK OF PAYMENTS TO RELATED PARTY.
Except as provided by Section 171.1102, a corporation shall add
back to reportable federal taxable income any royalty payments,
interest payments, and management fees made to a related party
during the period on which earned surplus is based to the extent
deducted in computing reportable federal taxable income.
Sec. 171.1102. SAFE HARBORS FOR CERTAIN PAYMENTS AND FEES.
(a) A corporation is not required to add back royalty payments to a
related party to the extent:
(1) the related party during the period on which
earned surplus is based directly or indirectly paid or incurred the
amount to a person or entity that is not a related party, the
transaction was done for a valid business purpose, and the payments
were made at arm's length; or
(2) the royalty payments are paid or incurred to a
related party organized under the laws of a foreign nation, are
subject to a comprehensive income tax treaty between the foreign
nation and the United States, and are taxed in the foreign nation at
a tax rate equal to or greater than the rate under Section
171.002(a)(2).
(b) A corporation is not required to add back interest
payments to a related party to the extent:
(1) the interest is at or below the applicable federal
rate compounded annually for debt instruments under Section
1274(d), Internal Revenue Code, that was in effect at the time of
the agreement; or
(2) the related party during the period on which
earned surplus is based directly or indirectly paid or incurred the
amount to a person or entity that is not a related party, the
transaction was done for a valid business purpose, and the payments
were made at arm's length.
(c) A corporation is not required to add back a royalty
payment or an interest payment made to a related party, or a
management fee paid to a related party, if the combined tax paid to
this state, or to this state and one or more other states each of
which has a tax rate equal to or greater than the rate under Section
171.002(a)(2), by the corporation and the related party exceeds the
tax that would have been paid by the corporation if the royalty
payment or interest payment had not been made.
(d) A corporation is not required to add back a management
fee paid to a related party to the extent that the transaction was
done for a valid business purpose and the fee was paid at arm's
length.
Sec. 171.1103. ADJUSTMENT TO INCOME AND EXPENSES BY
COMPTROLLER. (a) The comptroller may distribute, apportion, or
allocate gross income, deductions, credits, or allowances between
or among two or more organizations, trades, or businesses, whether
or not incorporated, whether or not organized in the United States,
and whether or not affiliated, if:
(1) the organizations, trades, or businesses are owned
or controlled directly or indirectly by the same interests; and
(2) the comptroller determines that the distribution,
apportionment, or allocation is necessary to reflect an arm's
length standard, within the meaning of 26 C.F.R. Section 1.482-1,
and to clearly reflect the income of those organizations, trades,
or businesses.
(b) The comptroller shall apply the administrative and
judicial interpretations of Section 482, Internal Revenue Code, in
administering this section.
SECTION 3. (a) This Act takes effect January 1, 2007.