Background: Many multinational corporations engage in an abusive form of tax avoidance known as “international profit-shifting”. These corporations move profits off the books of their U.S. subsidiaries and onto the books of subsidiaries located in offshore tax havens. The purpose and effect of these accounting maneuvers has been to remove these profits from U.S. tax calculations. Recognizing the scope and scale of the problem, the federal government added the Global Intangible Low-Taxed Income (GILTI) provision to the federal tax code in 2017. The GILTI provision helps identify shifted profits and then requires multinational corporations to include a portion of these profits in their federal tax calculations. In 2017, that portion was set at 50 percent, though recent federal tax changes have increased that portion to 60 percent.1 (With the recent passage of the federal budget reconciliation bill, shifted profits now technically are referred to as NCTI (Net Controlled Foreign Corporation Tested Income), though they continue commonly to be referred to as “GILTI” profits (Global Intangible Low-Taxed Income).)
Click here to learn more about GILTI.
While many federal tax provisions flow automatically into state tax codes, unfortunately, in 2018, Massachusetts adopted a technical, definition change for GILTI profits that had the effect of requiring multinational corporations to include only 5 percent of their GILTI profits in their state tax calculations. By requiring the full, 50 percent GILTI inclusion defined in the 2017 federal law – as most New England states have done – Massachusetts could collect hundreds of millions of additional tax dollars each year, entirely from multinational corporations. This change also would make our state tax code more fair, both economically and racially.
Single Sales Factor Apportionment: Opponents of corporate taxes often push the claim that businesses will respond to any attempt to raise their state taxes by shifting their business activities out of state. While such claims were never compelling – state and local taxes together average less than 2 percent of business expenses for most U.S. businesses and thus are an unlikely driver of major business decisions – these arguments are irrelevant now.2 Like most other states, Massachusetts now uses a formula called “single sales factor apportionment” (SSF) to determine what share of each corporation’s total profits are taxable by the Commonwealth.3 As the name suggests, with SSF this determination depends only on the share of a corporation’s total sales that are made to Massachusetts customers.
Prior to January 1, 2025, Massachusetts used a three-factor apportionment formula to determine how much of a corporation’s profits to tax.4 Three-factor apportionment takes into account both the size of a corporation’s in-state payroll and the value of a corporation’s in-state capital investments (e.g., factories, machinery, warehouses, inventory, etc.), along with the value of its in-state sales. With the adoption of SSF, however, payroll and property both ceased to factor into Massachusetts corporate income tax calculations.
Whether a corporation grows or shrinks its in-state workforce has no impact on the share of a corporation’s profits that is subject to the Commonwealth’s corporate income tax. Likewise, whether a corporation builds large, new facilities in Massachusetts or sells its existing in-state property has no effect on how much of the corporation’s profits will be taxed by the Commonwealth.
Under SSF, the only factor that matters is how much of a corporation’s total sales are made up of sales to Massachusetts customers. While in theory a corporation could choose to reduce its sales to Massachusetts customers in order to reduce its Massachusetts income taxes, this strategy would reduce the corporation’s after-tax profits. It’s a money losing proposition for the corporation and not one that any corporation is likely to adopt.
In short, with SSF in place, the Commonwealth can require multinational corporations to pay something closer to their fair share of state taxes without creating any incentive – real or imagined – for corporations to downsize their workforce or reduce their capital investments in Massachusetts. There is no downside for the Commonwealth in adopting 50 percent GILTI inclusion. Instead, it will generate much-needed revenue for public investments and help level the playing field for the vast majority of Massachusetts businesses, most of which do not engage in international profit-shifting.
Click here to learn more about GILTI.
Endnotes
1 The recent federal reconciliation bill makes a number of changes to the federal approach to measuring and taxing GILTI profits. These changes, however, while affecting some of the mechanics of how the relevant federal tax provisions operate, do not change the fundamental purpose or end result of the 2017 GILTI provision. Federal law still provides a process for taxing a portion of the shifted profits of multinational corporations.
2 Looking more narrowly, at the Massachusetts context alone, the level of business taxation in Massachusetts in fact compares favorably with that of other states, by several important measures.
3 The goal of the state-level apportionment process is to divide fairly, for state tax purposes, 100 percent of a corporation’s taxable profits among those states in which the corporation engages in more than an insubstantial amount of business activity. This division – or “apportionment” – is based on some measure of the share of a corporation’s total business activity that takes place in a given state. Every state with a corporate income tax uses some formula for apportioning corporate profits for tax purposes. Most states presently use SSF apportionment.
4 Prior to adoption in Massachusetts of universal, mandatory SSF, corporations operating in several industries – manufacturing, defense contracting, and financial services – were allowed to use SSF apportionment. For businesses with a large Massachusetts workforce and/or a large physical footprint in Massachusetts, the switch to SSF often resulted in a significant reduction in state corporate income taxes. This was – and remains – especially true if a large percentage of the business’s sales were to out-of-state customers. For decades, this special business tax break has cost the Commonwealth hundreds of millions of dollars in forgone corporate income tax revenue.
Now, businesses are required to use SSF, irrespective of the industry in which they operate. For some multi-state businesses – for example, those that sell primarily to Massachusetts customers or whose productive activities are predominantly outside Massachusetts – the switch to mandatory SSF apportionment likely will result in higher state taxes. For many businesses, however – especially those with a substantial workforce and/or physical presence in Massachusetts and whose customer base is largely outside Massachusetts – the switch will reduce their state tax obligations. Taken together, the Department of Revenue estimates that the switch to universal, mandatory SSF will result in a net revenue loss for the Commonwealth of over $80 million a year.
