AB 1790: Corporations Tax Law: water’s-edge election: global intangible low-taxed income.

The Corporation Tax Law imposes on every corporation doing business in the state, as defined, a tax according to or measured by net income and, in the case of a corporation with income derived from or attributable to sources both within and without this state, apportions the income between this state and other states and foreign countries in accordance with a single sales formula based on the sales within and without this state, except that in the case of an apportioning trade or business that derives more than 50% of its gross business receipts from conducting one or more qualified business activities, as defined, business income is apportioned in accordance with a specified 3-factor formula. Existing federal law, for purposes of determining a taxpayers gross income for federal income tax purposes, requires that a person who is a United States shareholder of any controlled foreign corporation, as defined, to include in their gross income the net CFC tested income, as provided.

The Corporation Tax Law, for taxable years beginning on or after January 1, 2003, for purposes of determining income derived from or attributable to sources within this state, allows corporations to make a statutory election as to whether their income is determined on a waters-edge basis or on a worldwide unitary basis. Under existing law, the election to report income on a waters-edge basis remains in effect until terminated, and provides conditions for the termination of the election.

This bill, for taxable years beginning on or after January 1, 2026, would require a taxpayer that files on a waters-edge basis to account for net CFC tested income within the waters-edge group, as provided. The bill would require a taxpayer that files on a waters-edge basis to include all income and apportionment factors of any corporation, other than a bank, whose sales factor, instead of the average of 3 factors, in the United States is at least 20%. The bill would also terminate all waters-edge elections for the first taxable year beginning on or after January 1, 2028, and would not allow a taxpayer to make a waters-edge election, or file on a waters-edge basis, for taxable years beginning on or after January 1, 2028. The bill would authorize any taxpayer that has made a waters-edge election to terminate that election without the consent of the Franchise Tax Board for taxable years beginning on or after January 1, 2026, and before January 1, 2028.

This bill would include a change in state statute that would result in a taxpayer paying a higher tax within the meaning of Section 3 of Article XIIIA of the California Constitution, and thus would require for passage the approval of ²/₃ of the membership of each house of the Legislature.

This bill would take effect immediately as a tax levy.