California Assembly Bill AB759 Amended / Bill

 BILL NUMBER: AB 759AMENDED BILL TEXT AMENDED IN SENATE SEPTEMBER 2, 2009 AMENDED IN SENATE JULY 15, 2009 AMENDED IN SENATE JUNE 29, 2009 AMENDED IN ASSEMBLY APRIL 14, 2009 INTRODUCED BY Assembly Member Ma FEBRUARY 26, 2009 An act to amend Section 10286.1 of the Public Contract Code, and to amend Sections 24411 and 25110 of, and to add Section 25117 to, the Revenue and Taxation Code, relating to corporations. LEGISLATIVE COUNSEL'S DIGEST AB 759, as amended, Ma. Public contracts with expatriate corporations: corporation tax law water's-edge election. (1) Existing law regarding contracting between state agencies and private contractors sets forth requirements for the procurement of materials, supplies, equipment, and services by state agencies. Existing law sets out the various responsibilities of the Department of General Services, and other state agencies, in overseeing and implementing state contracting procedures and policies. Existing law prohibits a state agency from entering into any contract with an expatriate corporation, as defined, or its subsidiary, unless certain conditions are met. Existing law defines an expatriate corporation as a foreign incorporated entity that is publicly traded in the United States and that meets specified criteria. This bill would revise the definition of an expatriate corporation to also require that the entity be domiciled in a jurisdiction that does not have an income tax treaty in force with the United States. (2) Existing law provides that, in the case of a business with income derived from, or attributable to, sources both within and without this state, the income is apportioned between this state and other states and foreign countries for tax purposes in accordance with a specified formula based on the property, payroll, and sales within and without this state, except as otherwise provided. Existing law permits certain taxpayers, as provided, to elect to determine their income under a  water's edge   water' s-edge  election and specifies certain requirements under that election. This bill would conform specified provisions relating to, among other things, the water's-edge election to specified federal income tax laws relating to the taxation of certain shareholders of controlled foreign corporations, as provided. Vote: majority. Appropriation: no. Fiscal committee: yes. State-mandated local program: no. THE PEOPLE OF THE STATE OF CALIFORNIA DO ENACT AS FOLLOWS: SECTION 1. It is the intent of the Legislature in enacting this statute to clarify that an expatriate corporation located in a foreign jurisdiction that does not have an income tax treaty with the United States shall not enter into any contracts with a state agency. SEC. 2. Section 10286.1 of the Public Contract Code is amended to read: 10286.1. (a) For purposes of this part, except as otherwise provided in subdivisions (b) and (c), a state agency shall not enter into any contract with an expatriate corporation or its subsidiaries. (b) (1) For purposes of this article, an "expatriate corporation" means a foreign incorporated entity that is publicly traded in the United States to which all of the following apply: (A) The United States is the principal market for the public trading of the foreign incorporated entity. (B) The foreign incorporated entity has no substantial business activities in the place of incorporation. (C) The foreign incorporated entity is domiciled in a jurisdiction that does not have an income tax treaty in force with the United States. (D) Either clause (i) or clause (ii) applies: (i) The foreign entity was established in connection with a transaction or series of related transactions pursuant to which (I) the foreign entity directly or indirectly acquired substantially all of the properties held by a domestic corporation or all of the properties constituting a trade or business of a domestic partnership or related foreign partnership, and (II) immediately after the acquisition, more than 50 percent of the publicly traded stock, by vote or value, of the foreign entity is held by former shareholders of the domestic corporation or by former partners of the domestic partnership or related foreign partnership. For purposes of subclause (II), any stock sold in a public offering related to the transaction or a series of transactions is disregarded. (ii) The foreign entity was established in connection with a transaction or series of related transactions pursuant to which (I) the foreign entity directly or indirectly acquired substantially all of the properties held by a domestic corporation or all of the properties constituting a trade or business of a domestic partnership or related foreign partnership, and (II) the acquiring foreign entity is more than 50 percent owned, by vote or value, by domestic shareholders or partners. (iii) For purposes of this subparagraph, indirect acquisition of property includes the acquisition of a stock share, or any portion thereof, of the owner of that property. (2) Notwithstanding subdivision (a), a state agency may contract with an expatriate corporation, or its subsidiary, if it was an expatriate corporation before January 1, 2004, to which both of the following apply: (A) The foreign entity provides, by operation of law, by provisions of its governing documents, by resolution of its board of directors, or in any other manner, at least the following shareholders' rights: (i) Shareholders of the entity have the right to inspect, at a principal place of business in the United States, copies of the entity's books and records, including, but not limited to, shareholder names, addresses, and shareholdings in accordance with the corporation law, as amended from time to time and as that law is interpreted by the courts, of the United States jurisdiction in which the entity was previously incorporated, or, if the entity was not previously incorporated, in accordance with the terms set forth in the Model Business Corporation Act, as that act may be amended from time to time, provided that, if the corporate law of the United States jurisdiction in which the entity was previously incorporated or the Model Business Corporation Act does not provide access to the shareholder names, addresses, and shareholdings, these books and records are available for inspection by shareholders for purposes properly related to their status as shareholders of the entity. (ii) The entity permits its shareholders to bring derivative proceedings on behalf of the entity, provided that these derivative proceedings are brought on a basis and under the terms applicable under the law, as amended from time to time and as interpreted by, or required by, the courts of the United States jurisdiction in which the entity was previously incorporated, or, if the entity was not previously incorporated, on a basis and under the terms set forth in the Model Business Corporations Act as that act may be amended from time to time and as it is interpreted by, or required by, the courts. (iii) Entity transactions in which any director is interested are approved in accordance with the applicable law, as amended from time to time and as interpreted by the courts, of the United States jurisdiction in which the entity was previously incorporated, or, if the entity was not previously incorporated, in accordance with the terms set forth in the Model Business Corporations Act, as may be amended from time to time and as interpreted by the courts. (iv) The entity has consented to the jurisdiction, for any otherwise available cause of action by or on behalf of the entity's shareholders, including any pendent state causes of action, of all of the following courts: (I) The state courts of one or more states. (II) The United States federal courts in any state in which the entity consents to the jurisdiction of that state's courts pursuant to subclause (I). (v) The entity has appointed an agent for service of process in the state or states in which the entity has consented to jurisdiction, as described in clause (iv), and the entity meets at least one of the following conditions: (I) The entity has unencumbered assets in the United States, which assets may include equity or debt investments in United States companies, with a book value in excess of fifty million dollars ($50,000,000), and the entity delivers to the Secretary of State an opinion of an attorney licensed in the United States that judgments rendered against the entity may be satisfied by using these assets. (II) The entity posts a bond or similar security in an amount of at least fifty million dollars ($50,000,000). (III) The entity has directors' and officers' insurance in an amount of at least fifty million dollars ($50,000,000). (vi) The entity agrees that, in connection with any lawsuit brought against it by its shareholders in any court in which the entity has consented to jurisdiction as described in clause (iv), the entity will provide to the court notice of the manner in which the entity complied with clause (v) and, if the entity complied with that clause in the manner specified in subclause (I) of clause (v), a copy of the opinion described in that subclause. (vii) Shareholder approval is required for any sale of all or substantially all of the entity's assets in accordance with the law, as amended from time to time and as it is interpreted by the courts, of the United States jurisdiction in which it was previously incorporated, or, if it was not previously incorporated, in accordance with the terms set forth in the Model Business Corporations Act, as it may be amended from time to time. (viii) The directors and officers of the entity occupy a fiduciary relationship with the entity and its shareholders and these directors and officers, in performing their duties, act in good faith in a manner that a director or officer believes to be in the best interests of the entity and its shareholders, as that standard of care is interpreted by the courts. (ix) The entity agrees to hold no more than one of every four annual shareholder meetings in a location outside the United States and, in the event that the entity holds an annual meeting outside the United States, the entity agrees to provide access to that meeting through a Web cast or other technology that allows the entity's shareholders to do both of the following: (I) Listen to the meeting, watch the meeting, or both. (II) Send questions that will be addressed at the meeting. (x) The entity provides a description of the shareholder rights described in clauses (i) to (ix), inclusive, and any subsequent changes to these rights, on the  entity's   Internet  Web site or in its 10K filings with the United States Securities and Exchange Commission. (B) The entity uses worldwide combined reporting to calculate the income on which it pays taxes to the state. (c) The chief executive officer of a state agency or his or her designee may waive the prohibition specified in subdivision (a) if the executive officer or his or her designee has made a written finding that the contract is necessary to meet a compelling public interest. For purposes of this section, a "compelling public interest" includes, but is not limited to, ensuring the provision of essential services, ensuring the public health and safety, or an emergency as defined in Section 1102. If a waiver is granted to a vendor pursuant to this subdivision, the requirement to submit a declaration of compliance, as set forth in paragraph (1) of subdivision (d), does not apply to that vendor. (d) (1) For purposes of this chapter, "state agency" means every state office, department, division, bureau, board, commission, and the California State University, but does not include the University of California, the Legislature, the courts, or any agency in the judicial branch of government. (2) On or after January 1, 2004, all state agencies shall, as a condition of the contract, require any vendor that is offered a contract to do business with the state to submit a declaration stating that the vendor is eligible to contract with the state pursuant to this section. (3) A vendor that declares as true any material matter in a declaration described in this subdivision that he or she knows to be false is guilty of a misdemeanor. (e) (1) Except as provided in paragraph (2) and subdivision (f), this section applies to contracts that are entered into on or after January 1, 2004. (2) With respect to an entity that was an expatriate corporation, as defined in paragraph (1) of subdivision (b), before January 1, 2004, this section applies to contracts that are entered into on or after April 1, 2004. (f) (1) The declaration requirement set forth in subdivision (d) does not apply to a credit card purchase of goods of two thousand five hundred dollars ($2,500) or less. (2) The total amount of exemption authorized herein shall not exceed seven thousand five hundred dollars ($7,500) per year for each company from which a state agency is purchasing goods by credit card. It shall be the responsibility of each state agency to monitor the use of this exemption and adhere to these restrictions on these purchases.  SEC. 2.   SEC. 3.  Section 24411 of the Revenue and Taxation Code is amended to read: 24411. (a) For purposes of those taxpayers electing to compute income under Section 25110, to the extent not otherwise allowed as a deduction or eliminated from income: (1) One hundred percent of the qualifying dividends described in subdivision (d). (2) Twenty-seven percent of qualifying dividends described in Section 25117. (3) Seventy-five percent of qualifying dividends, other than those referred to in paragraph (1) or (2). (b) "Qualifying dividends" means those received by the water' s-edge group from corporations if both of the following conditions are satisfied: (1) The average of the property, payroll, and sales factors within the United States for the corporation is less than 20 percent. (2) More than 50 percent of the total combined voting power of all classes of stock entitled to vote is owned directly or indirectly by the water's-edge group. (c) The water's-edge group consists of corporations whose income and apportionment factors are taken into account pursuant to Section 25110. (d) Dividends derived from a construction project, the location of which is not subject to the taxpayer's control. For purposes of this subdivision: (1) "Construction project" means any activity which meets the following requirements: (A) Is undertaken for any entity, including a governmental entity, which is not affiliated with the taxpayer. (B) The majority of its cost of performance is attributable to an addition to real property or an alteration of land or any improvement thereto as those terms are utilized for purposes of this code. "Construction project" does not include the operation, rental, leasing, or depletion of real property, land, or any improvement thereto. (2) "Location of which is not subject to the taxpayer's control" means that the place at which the majority of the construction takes place results from the nature or character of the construction project and not as a result of the terms of the contract or agreement governing the construction project.  SEC. 3.   SEC. 4.  Section 25110 of the Revenue and Taxation Code, as amended by Section 1 of Chapter 22 of the Statutes of 2006, is amended to read: 25110. (a) Notwithstanding Section 25101, a qualified taxpayer, as defined in paragraph (2) of subdivision (b), that is subject to the tax imposed under this part, may elect to determine its income derived from or attributable to sources within this state pursuant to a water's-edge election in accordance with the provisions of this part, as modified by this article. A taxpayer, that made a water' s-edge election prior to January 1, 2006, shall take into account the income and apportionment factors of the following affiliated entities only: (1) Domestic international sales corporations, as described in Sections 991 to 994, inclusive, of the Internal Revenue Code and foreign sales corporations as described in Sections 921 to 927, inclusive, of the Internal Revenue Code. (2) Any corporation (other than a bank), regardless of the place where it is incorporated if the average of its property, payroll, and sales factors within the United States is 20 percent or more. (3) Corporations that are incorporated in the United States, excluding corporations making an election pursuant to Sections 931 to 936, inclusive, of the Internal Revenue Code, of which more than 50 percent of their voting stock is owned or controlled directly or indirectly by the same interests. (4) A corporation that is not described in paragraphs (1) to (3), inclusive, or paragraph (5), but only to the extent of its income derived from or attributable to sources within the United States and its factors assignable to a location within the United States in accordance with paragraph (3) of subdivision (b). Income of that corporation derived from or attributable to sources within the United States as determined by federal income tax laws shall be limited to and determined from the books of account maintained by the corporation with respect to its activities conducted within the United States. (5) Export trade corporations, as described in Sections 970 to 972, inclusive, of the Internal Revenue Code. (6) (A) The income and factors of the above-enumerated corporations shall be taken into account only if the income and factors would have been taken into account under Section 25101 if this section had not been enacted. (B) The income and factors of a corporation that is not described in paragraphs (1) to (3), inclusive, and paragraph (5) and that is an electing taxpayer under this subdivision shall be taken into account in determining its income only to the extent set forth in paragraph (4). (b) For purposes of this article and Section 24411 all of the following definitions apply: (1) An "affiliated corporation" means a corporation that is a member of a commonly controlled group as defined in Section 25105. (2) A "qualified taxpayer" means a corporation which does both of the following: (A) Files with the state tax return on which the water's-edge election is made a consent to the taking of depositions at the time and place most reasonably convenient to all parties from key domestic corporate individuals and to the acceptance of subpoenas duces tecum requiring reasonable production of documents to the Franchise Tax Board as provided in Section 19504 or by the State Board of Equalization as provided in Title 18, California Code of Regulations, Section 5005, or by the courts of this state as provided in Chapter 2 (commencing with Section 1985) of Title 3 of Part 4 of, and Chapter 9 (commencing with Section 2025.010) of Title 4 of Part 4 of, the Code of Civil Procedure. The consent relates to issues of jurisdiction and service and does not waive any defenses a taxpayer may otherwise have. The consent shall remain in effect so long as the water's-edge election is in effect and shall be limited to providing that information necessary to review or to adjust income or deductions in a manner authorized under Sections 482, 861, Subpart F of Part III of Subchapter N, or similar provisions of the Internal Revenue Code, together with the regulations adopted pursuant to those provisions, and for the conduct of an investigation with respect to any unitary business in which the taxpayer may be involved. (B) Agrees that for purposes of this article, dividends received by any corporation whose income and apportionment factors are taken into account pursuant to subdivision (a) from either of the following are functionally related dividends and shall be presumed to be business income: (i) A corporation of which more than 50 percent of the voting stock is owned, directly or indirectly, by members of the unitary group and which is engaged in the same general line of business. (ii) Any corporation that is either a significant source of supply for the unitary business or a significant purchaser of the output of the unitary business, or that sells a significant part of its output or obtains a significant part of its raw materials or input from the unitary business. "Significant," as used in this subparagraph, means an amount of 15 percent or more of either input or output. All other dividends shall be classified as business or nonbusiness income without regard to this subparagraph. (3) The definitions and locations of property, payroll, and sales shall be determined under the laws and regulations that set forth the apportionment formulas used by the individual states to assign net income subject to taxes on or measured by net income in that state. If a state does not impose a tax on or measured by net income or does not have laws or regulations with respect to the assignment of property, payroll, and sales, the laws and regulations provided in Article 2 (commencing with Section 25120) shall apply. Sales shall be considered to be made to a state only if the corporation making the sale may otherwise be subject to a tax on or measured by net income under the Constitution or laws of the United States, and shall not include sales made to a corporation whose income and apportionment factors are taken into account pursuant to subdivision (a) in determining the amount of income of the taxpayer derived from or attributable to sources within this state. (4) "The United States" means the 50 states of the United States and the District of Columbia. (c) All references in this part to income determined pursuant to Section 25101 shall also mean income determined pursuant to this section. (d) (1) This section shall apply only to a taxable year of a taxpayer that determines its income derived from or attributable to sources within this state pursuant to a water's-edge election made prior to January 1, 2006, where that election may not be terminated for that taxable year without the consent of the Franchise Tax Board pursuant to paragraph (9) of subdivision (c) of Section 25113. (2) This section shall be repealed on January 1, 2014.  SEC. 4.   SEC. 5.  Section 25110 of the Revenue and Taxation Code, as added by Section 2 of Chapter 22 of the Statutes of 2006, is amended to read: 25110. (a) Notwithstanding Section 25101, a qualified taxpayer, as defined in paragraph (2) of subdivision (b), that is subject to the tax imposed under this part, may elect to determine its income derived from or attributable to sources within this state pursuant to a water's-edge election in accordance with the provisions of this part, as modified by this article. A taxpayer, that makes a water' s-edge election on or after January 1, 2006, shall take into account that portion of its own income and apportionment factors and the income and apportionment factors of its affiliated entities to the extent provided below: (1) The entire income and apportionment factors of any of the following corporations: (A) Domestic international sales corporations, as described in Sections 991 to 994, inclusive, of the Internal Revenue Code and foreign sales corporations as described in Sections 921 to 927, inclusive, of the Internal Revenue Code. (B) Any corporation (other than a bank), regardless of the place where it is incorporated if the average of its property, payroll, and sales factors within the United States is 20 percent or more. (C) Corporations that are incorporated in the United States, excluding corporations making an election pursuant to Sections 931 to 936, inclusive, of the Internal Revenue Code. (D) Export trade corporations, as described in Sections 970 to 972, inclusive, of the Internal Revenue Code. (2) With respect to a corporation that is not described in subparagraphs (A), (B), (C), and (D) of paragraph (1) the income and apportionment factors of that corporation to the extent of its income derived from or attributable to sources within the United States and its factors assignable to a location within the United States in accordance with paragraph (3) of subdivision (b). Income of that corporation derived from or attributable to sources within the United States as determined by federal income tax laws shall be limited to, and determined from, the books of account maintained by the corporation with respect to its activities conducted within the United States. (3) The income and apportionment factors of the corporations described in this subdivision shall be taken into account only to the extent that they would have been taken into account had no election under this section been made. (b) For purposes of this article and Section 24411, all of the following definitions apply: (1) An "affiliated corporation" means a corporation that is a member of a commonly controlled group as defined in Section 25105. (2) A "qualified taxpayer" means a corporation that does both of the following: (A) Files with the state tax return, on which the water's-edge election is made, a consent to the taking of depositions, at the time and place most reasonably convenient to all parties, from key domestic corporate individuals and to the acceptance of subpoenas duces tecum requiring reasonable production of documents to the Franchise Tax Board, as provided in Section 19504, by the State Board of Equalization, as provided in Section 5005 of Title 18 of the California Code of Regulations, or by the courts of this state, as provided in Chapter 2 (commencing with Section 1985) of Title 3 of Part 4 of, and Chapter 9 (commencing with Section 2025.010) of Title 4 of Part 4 of, the Code of Civil Procedure. The consent relates to issues of jurisdiction and service and does not waive any defenses that a taxpayer may otherwise have. The consent shall remain in effect as long as the water's-edge election is in effect, and shall be limited to providing that information necessary to review or adjust income or deductions in a manner authorized by Section 482, 861, Subpart F of Part III of Subchapter N, or similar provisions, of the Internal Revenue Code, together with the regulations adopted pursuant to those provisions, and for the conduct of an investigation with respect to any unitary business in which the taxpayer may be involved. (B) Agrees that, for purposes of this article, dividends received by any corporation whose income and apportionment factors are taken into account pursuant to subdivision (a) from either of the following are functionally related dividends and shall be presumed to be business income: (i) A corporation of which more than 50 percent of the voting stock is owned, directly or indirectly, by members of the unitary group and which is engaged in the same general line of business. (ii) Any corporation that is either a significant source of supply for the unitary business or a significant purchaser of the output of the unitary business, or that sells a significant part of its output or obtains a significant part of its raw materials or input from the unitary business. "Significant," as used in this subparagraph, means an amount of 15 percent or more of either input or output. All other dividends shall be classified as business or nonbusiness income without regard to this subparagraph. (3) The definitions and locations of property, payroll, and sales shall be determined under the laws and regulations that set forth the apportionment formulas used by the individual states to assign net income subject to taxes on, or measured by, net income in that state. If a state does not impose a tax on, or measured by, net income or does not have laws or regulations with respect to the assignment of property, payroll, and sales, the laws and regulations provided in Article 2 (commencing with Section 25120) shall apply. Sales shall be considered to be made to a state only if the corporation making the sale may otherwise be subject to a tax on, or measured by, net income under the Constitution or laws of the United States, and shall not include sales made to a corporation whose income and apportionment factors are taken into account pursuant to subdivision (a) in determining the amount of income of the taxpayer derived from or attributable to sources within this state. (4) "The United States" means the 50 states of the United States and the District of Columbia. (c) All references in this part to income determined pursuant to Section 25101 shall also mean income determined pursuant to this section.  SEC. 5.   SEC. 6.  Section 25117 is added to the Revenue and Taxation Code, to read: 25117. (a) Except as otherwise provided, income taken into account by all affiliated entities whose income and apportionment factors are determined pursuant to Section 25110 shall include income described in Subpart F of the Internal Revenue Code (commencing with Section 951). The income that is taken into account shall for all purposes be treated as a dividend actually paid, and be subject to any provision or limitation related to the treatment of dividends, including, but not limited to, Sections 24344, 24410, 24411, and 25106. The amount taken into account shall be treated as business or nonbusiness income as defined in Section 25120, as the case may be. (b) In the application of Subpart F of the Internal Revenue Code: (1) Exclusions from gross income under Section 959 of the Internal Revenue Code, relating to previously taxed income, shall apply, including amounts related to income previously taxed under federal law in years prior to the water's-edge election. (2) Federal adjustments to stock basis made pursuant to Section 961 of the Internal Revenue Code, relating to adjustments to basis of stock in controlled foreign corporations and of other property, including adjustments made prior to the water's-edge election, shall apply. (3) The provisions of and any reference to Section 1248 of the Internal Revenue Code, relating to gain from certain sales or exchanges of stock in certain foreign corporations, shall not apply. (4) Section 960 of the Internal Revenue Code, relating to special rules for foreign tax credit, shall not apply. (5) Section 965 of the Internal Revenue Code, relating to temporary dividends received deduction, shall not apply. (6) For purposes of this section, a federal election to exclude from Subpart F income the income described in Section 954(b)(4) of the Internal Revenue Code shall apply, including amounts related to income previously taxed under federal law in years prior to the water' s-edge election. No election under this subparagraph shall be allowed for state purposes unless a valid election was made for federal purposes. (c) In the event that a water's-edge election is terminated, for taxable years thereafter, the following rules apply: (1) Subpart F of the Internal Revenue Code shall not apply, except as provided in this subdivision. (2) Section 959 of the Internal Revenue Code, relating to exclusion from gross income of previously taxed earnings and profits, shall apply, but only to the extent attributable to income that has been taken into account pursuant to subdivision (a) during the period of the water's-edge election. (3) Stock basis shall be determined as if this section did not apply, except that stock basis shall be: (A) Increased by income taken into account pursuant to subdivision (a) during the period of the water's-edge election. (B) Reduced by both the following: (i) That portion of amounts excluded from income under paragraph (2) of subdivision (b) that are attributable to income taken into account pursuant to subdivision (a) during the period of the water' s-edge election. (ii) Amounts described by paragraph (2) of subdivision (c) excluded from income after termination of the water's-edge election. (d) (1) Except as provided in paragraph (2), this section shall apply to taxable years beginning on or after January 1, 2010. (2) In the event that two or more taxpayers subject to the same election under Section 25110 have different taxable years, this section shall apply as of the first day of the first taxable year of those respective taxpayers that begins on or after January 1, 2010.  (e) If a distribution with respect to earnings and profits from a given year is eligible for treatment as previously taxed income and would, without regard to the application of this section, be eligible for deduction, exclusion, or elimination under another section under this part, if paid as a dividend, in no event shall the combined effect of those sections and the rules relating to previously taxed income result in a deduction, exclusion, or elimination greater than the amount of the earnings and profits that apply to the distribution.   (f) Subdivision (f) of Section 24425 shall not apply to amounts excluded from gross income pursuant to this section or to amounts deducted pursuant to paragraph (2) of subdivision (a) of Section 24411.   (e)   (g)  The Franchise Tax Board may prescribe regulations as may be necessary and appropriate to carry out the purposes of this section.