Section 280-RICR-20-25-10.7 - Combined Group - Composition; Water's Edge; Tax HavensA. "Combined group" means a group of two or more entities treated as C corporations for federal income tax purposes in which more than 50 percent (50%) of the voting stock of each member corporation is directly or indirectly owned by a common owner or owners, either corporate or non-corporate, or by one or more of the member corporations, and that are engaged in a unitary business. Common ownership is determined without regard to the location, residence, or domicile of the owner(s). 1. Example: Parent Corp. is organized and based in Japan. Its two subsidiaries - Unit One Corp. and Unit Two Corp. - are U.S. corporations and are treated as C corporations for federal tax purposes. Unit One Corp. and Unit Two Corp. have Rhode Island nexus. Parent Corp. owns seventy-five percent (75%) of each subsidiary. Because of their common ownership, Unit One Corp. and Unit Two Corp. are deemed to comprise a combined group for purposes of Rhode Island's mandatory unitary combined reporting regime. Common ownership is determined without regard to the location, residence, or domicile of the owner(s). (The entities in this example must be engaged in a unitary business to file a combined return for Rhode Island.)B. The use of a combined return does not disregard the separate identities of the taxpayer members of the combined group; each taxpayer member is responsible for tax based on its taxable income or loss apportioned to Rhode Island.C. A group shall be deemed a combined group even if the group is not eligible to apportion its income because all corporations in the group do business solely in Rhode Island.D. Combined group remains in existence for as long as two or more corporations are under common ownership and are engaged in a unitary business - and at least one member of the combined group has nexus in Rhode Island.E. The mere addition of new members or departure of existing members does not create a new combined group.F. In some cases, a taxpayer may make an election to treat, as its combined group for Rhode Island corporate income tax purposes, all of the members of its federal consolidated group. For an explanation of the election and the related requirements and limitations, please see § 10.9 of this Part. 1. If a corporation is not includible in a combined return, or in a consolidated group for Rhode Island combined reporting purposes, it must still file a Rhode Island return on a separate entity basis and pay any required tax if it has nexus in Rhode Island.G. For additional information about non-U.S. corporations, please see the flow chart in the example at § 10.7(T) of this PartH. Included corporations. 1. All of the income and apportionment factors must be included for the taxpayer members of a combined group. The list of members to be included in a combined group includes, but is not limited to, the following: a. U.S. corporations; andb. Any member, regardless of where it is incorporated or formed, if the average of its sales factor within the United States is twenty percent (20%) or more.2. The following members that are not described above are included in the combined group only to the extent of any U.S. source income and factors:a. Any member that is a resident of a country that does not have a comprehensive income tax treaty with the United States and earns more than twenty percent (20%) of its income, directly or indirectly, from intangible property or service-related activities that are deductible against the business income of the other members of the water's-edge group, to the extent of that income and the apportionment factor related thereto.I. Excluded corporations. Members of a combined group shall exclude as a member and disregard the income and apportionment factor of any corporation not incorporated in the United States (a "non-U.S. corporation") if its sales factor for total receipts outside the United States is eighty percent (80%) or more 1. Example: Bristol Biz Corp., Kent Biz Corp., Newport Biz Corp., Providence Biz Corp., and Washington Biz Corp. are all C corporations under common ownership engaged in a unitary business and subject to Rhode Island combined reporting. Bristol, Kent, and Newport are all non-U.S. corporations; Providence and Washington are both U.S. corporations Combined Reporting Group |
Entity: | Sales Factor for Receipts in U.S. | Part of Combined Group |
Bristol Biz Corp. | 10% | No |
Kent Biz Corp. | 10% | No |
Newport Biz Corp. | 25% | Yes |
Providence Biz Corp. | 100% | Yes |
Washington Biz Corp. | 100% | Yes |
a. In this example, Bristol and Kent are not part of the combined group because they are non-U.S. corporations and their sales factors for total receipts outside the U.S. are 80 percent (80%) or more. Newport is a non-U.S. corporation, but its sales factor for total receipts outside the U.S. is only 75 percent (75%), so it is part of the combined group. Providence and Washington are part of the combined group because they are U.S. corporations; a U.S. corporation is subject to combined reporting regardless of its U.S. sales factor.b. Note, also, that the sales factor - also known as the receipts factor - takes into account total receipts and includes rents, royalties, licensing fees, and other revenue. For purposes of Rhode Island combined reporting, receipts include -- but are not limited to -- gross sales of tangible personal property, gross income from services, gross income from intangible personal property, gross income from rentals, net income from the sale of real and personal property, and net income from the sale or other disposition of securities or financial obligations. In this example, Newport Biz Corp. is organized and located in the Republic of Ireland, licensing intangibles to the U.S. - so revenue from such licensing represents a U.S. sale for combined reporting purposes.c. For further information about excluding and including non-U.S. corporations, please see the flow chart in the example at the end of this Part.J. A water's edge election is not allowed for purposes of Rhode Island combined reporting. Water's edge treatment is mandatory. Thus, members of the combined group must exclude as a member and disregard the income and apportionment factor of any corporation incorporated in a foreign jurisdiction - a foreign corporation - if its sales factor for total receipts outside the United States is eighty percent (80%) or more.K. If an entity is treated as a C corporation for federal income tax purposes, is included on a group's federal consolidated return, and is also taxed by Rhode Island under R.I. Gen. Laws Chapter 44-13 ("Public Service Corporation Tax"), Chapter 44-13.1 ("Taxation of Railroad Corporations"), Chapter 44-14 ("Taxation of Banks"), Chapter 44-17 ("Taxation of Insurance Companies"), or Chapter 27-43 ("Captive Insurance Companies"), said entity shall be excluded from the combined group. Furthermore, neither the income or loss nor the apportionment factor of such a person or entity shall be included - directly or indirectly - in the combined return.L. Corporations that are not taxable under the Internal Revenue Code shall not be included in the combined group.M. When a partnership, limited liability company, S corporation, estate, trust, or other such entity is treated as a pass-through entity for federal tax purposes, such an entity shall not be part of the combined group. However, the combined group's share of such a pass-through entity's income, normally reported on federal Schedule K-1, must be reported as part of the combined group's income. When income is reported or recognized by the pass-through entity to the combined group, and thus becomes included in the group filing, only the sales of the pass-through entity shall be used for apportionment purposes at the group level.N. In summary: 1. The following entities are not subject to combined reporting:c. federal savings banks;e. national banking associations;f. building and loan associations;h. loan and investment companies;i. public service corporations;k. captive insurance companies taxed under R.I. Gen. Laws Chapter 27-43;m. partnerships treated as pass-through entities for federal tax purposes;n. limited liability companies treated as pass-through entities for federal tax purposes;o. any sole proprietorship or similar such entity that is treated as an entity disregarded as separate from its owner for federal income tax purposes ("disregarded entities"); andp. in general, any corporation incorporated in a foreign jurisdiction if its sales factor for total receipts outside the United States is eighty percent (80%) or more.2. For additional information on which entities must be included or excluded from the federal consolidated group for purposes of Rhode Island combined reporting, please see § 10.9 of this Part.O. Fifty percent test 1. The fifty percent (50%) ownership test is satisfied in the following circumstances: a. A parent corporation and one or more corporations or chains of corporations which are connected through voting stock ownership with the parent, whether such ownership is direct or indirect, but only if - (1) the parent owns more than fifty percent (50%) of the outstanding voting stock of at least one corporation, and(2) more than fifty percent (50%) of the outstanding voting stock of each of the corporations, other than the parent, is owned directly or indirectly by one or more of the other corporations.2. Any two or more corporations, if more than fifty percent (50%) of the outstanding voting stock of each of the corporations is owned, or indirectly owned, by the same person.3. Any two or more corporations, more than fifty percent (50%) of whose voting stock is cumulatively owned (without regard to indirect ownership rules), or for the benefit of, members of the same family.4. Members of the same family include an individual, his or her spouse, a party to a civil union, ancestors, brothers or sisters, lineal descendants, and their respective spouses.P. Except as otherwise provided, voting stock is "owned" when title to the stock is directly held or if the voting stock is indirectly owned. 1. An individual indirectly owns voting stock that is owned by any of the following:a. his or her spouse (other than a spouse who is legally separated from the individual);b. party to a civil union;c. his or her children, grandchildren, and parents;d. an estate or trust, of which the individual is an executor, trustee, or grantor, to the extent that the estate or trust is for the benefit of that individual's spouse, party to a civil union, children, grandchildren or parents.2. Voting stock owned by a partnership, other than a limited partnership, is indirectly owned by a partner in proportion to the partner's capital interest in the partnership. For this purpose, a partnership other than a limited partnership is treated as owning proportionately the stock owned by any other partnership or limited partnership in which it has a tiered interest. Voting stock owned by a limited partnership is indirectly owned by the general partner who has authority to determine how the stock is voted. (This section shall also apply to LLCs.)3. Voting stock owned by a corporation, or a member of a controlled group of which the corporation is the parent corporation, is indirectly owned by any shareholder owning more than fifty percent (50%) of the voting stock of the corporation.Q. In determining ownership, effective control over election of the board of directors will be considered. For example, a group of shareholders acting in concert who collectively own over fifty percent (50%) of the voting stock of each of two or more corporations will be considered to be common owners of more than fifty percent (50%) of the voting stock of each of those corporations. "Voting stock" refers only to those shares of voting stock having the power to elect the corporation's board of directors. If the power otherwise held in corporate stock to vote the membership of the board is transferred to another, other than a transfer of proxy only, the holder of that power will be considered to be the owner of that stock to the exclusion of the transferor of such power.R. In addition to the tests enumerated above, the Tax Administrator may consider any other circumstance that tends to demonstrate that the fifty percent (50%) direct or indirect common ownership test was met or was not met. The Tax Administrator may rely on constructive ownership rules under 26 U.S.C.§ 318.S. The following example illustrates certain principles outlined in this § 10.7 of this Part: 1. Example: Corporation D owns stock representing ten percent (10%) of the voting power of Corporation E and has a seventy-five percent (75%) interest in Partnership F. Partnership F owns stock representing forty-five percent (45%) of the voting power of Corporation E. Corporation D is considered to constructively own stock representing fifty-five percent (55%) (10% + 45%) of the voting power of Corporation E. This is because Corporation D owns more than fifty percent (50%) of Partnership F and is therefore considered to own all of the Corporation E stock owned by Partnership F.T. The following flow chart is intended to assist corporations and their tax advisers in determining the composition of a combined group - and whether to include or exclude a member's gross receipts in the apportionment computation - for purposes of Rhode Island's mandatory unitary combined reporting regime. Image Not Available
U. The following provides further information for interpreting the flow chart above. 1. As noted elsewhere in this regulation, members of a combined group shall exclude as a member and disregard the income and apportionment factor of any corporation not incorporated in the United States (a "non-U.S. corporation") if its sales factor for total receipts outside the United States is eighty percent (80%) or more.2. If a non-U.S. corporation is includible as a member in the combined group, to the extent that such non-U.S. corporation's income is subject to the provisions of a federal income tax treaty, such income is not includible in the combined group's net income. Such member shall also not include in the combined return any expenses or apportionment factor attributable to income that is subject to the provisions of a federal income tax treaty.3. For purposes of this § 10.7 of this Part, the term "federal income tax treaty" means a comprehensive income tax treaty between the United States and a foreign jurisdiction, other than a foreign jurisdiction which is defined as a tax haven; provided, however, that if the Tax Administrator determines that a combined group member non-U.S. corporation is organized in a tax haven that has a federal income tax treaty with the United States, its income subject to a federal income tax treaty, and any expenses or apportionment factor attributable to such income, shall not be included in the combined group net income or combined return if: a. the transactions conducted between such non-U.S. corporation and other members of the combined group are done on an arm's length basis and not with the principal purpose to avoid the payment of taxes due under R.I. Gen. Laws Chapter 44-11; orb. the member establishes that the inclusion of such net income in combined group net income is unreasonable.4. The term "tax haven' means a jurisdiction that, during the tax year in question, has no or nominal effective tax on the relevant income and: a. has laws or practices that prevent effective exchange of information for tax purposes with other governments on taxpayers benefiting from the tax regime;b. has a tax regime which lacks transparency. A tax regime lacks transparency if the details of legislative, legal or administrative provisions are not open and apparent or are not consistently applied among similarly situated taxpayers, or if the information needed by tax authorities to determine a taxpayer's correct tax liability, such as accounting records and underlying documentation, is not adequately available;c. facilitates the establishment of foreign-owned entities without the need for a local substantive presence or prohibits these entities from having any commercial impact on the local economy;d. explicitly or implicitly excludes the jurisdiction's resident taxpayers from taking advantage of the tax regime benefits, or prohibits enterprises that benefit from the regime from operating in the jurisdiction's domestic market; ore. has created a tax regime which is favorable for tax avoidance, based upon an overall assessment of relevant factors, including whether the jurisdiction has a significant untaxed offshore financial/other services sector relative to its overall economy.280 R.I. Code R. § 280-RICR-20-25-10.7