Worldwide combined reporting is on the agenda in Maryland. Earlier in March, the Maryland House Appropriations Committee amended the budget bill (S.B. 362) to, among other things, include a worldwide combined reporting provision that would require all corporations that form unitary business groups to pay taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities.
on worldwide taxable incomeTaxable income is the amount of income subject to tax, after deductions and exemptions. For both individuals and corporations, taxable income differs from—and is less than—gross income.
. Since the Senate refused to concur with the House’s amendments, the conference committee will decide the fate of the amendments in the coming days.
What Are the Proposed Amendments?
The amended bill (section 10-402.1) explains the rules for calculating worldwide combined income. Maryland modified income is defined as the corporation’s combined profits and losses from all foreign branches multiplied by the Maryland apportionmentApportionment is the determination of the percentage of a business’ profits subject to a given jurisdiction’s corporate income or other business taxes. U.S. states apportion business profits based on some combination of the percentage of company property, payroll, and sales located within their borders.
factor (calculated, in the simplest case, as the ratio of a corporation’s Maryland sales to its total global sales).
As mentioned in our prior analyses of proposed worldwide combined reporting in Minnesota and New Hampshire, the policy could lead to less taxable income in the state. For instance, if a corporation sells a significant portion of its goods in Germany but its profitability in Germany is lower than in Maryland, then its Maryland modified income would be lower than the apportionable income under the current system.
Lawmakers considering worldwide combined reporting sometimes mistakenly assume all corporations engage in profit-shifting (i.e., moving their profits to low-tax jurisdictions) or that reported corporate profitability in the U.S. is lower than in most foreign countries. In fact, most business activity abroad constitutes simply doing business in other countries, not shifting profits.
To calculate the apportionable income under worldwide combined reporting, corporations must combine their profit and loss statements from all branches and subsidiaries, foreign and domestic. According to the amended bill, these statements shall be 1) prepared for each foreign branch in the local currency, 2) adjusted to conform to GAAP, and 3) translated into the currency in which the parent company maintains its records. Income apportioned to the state is to be expressed in U.S. dollars.
These provisions can result in complicated currency exchange calculations, which can ultimately affect the tax baseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates.
. Consider a corporation with a parent company in Brazil, a foreign branch in Turkey, and business operations in Maryland. Exchange rates between the Turkish lira, Brazilian real, and U.S. dollar fluctuate significantly even within a given year (e.g., 1 dollar was equal to 19 liras in January 2023 and 29 liras in December 2023). How should these “translations” be made? Should the average exchange rate in a given year be used in these calculations? Or should each transaction be “translated” upon receipt of cash? These are non-trivial accounting questions to which the bill does not provide any answers. Similarly, not all countries conform to GAAP accounting, and the necessary adjustments can prove complex and time-consuming.
The new provisions of the amended bill also give broad authority to the comptroller of Maryland. For instance, the comptroller will be responsible for determining whether “the reported income or loss of a taxpayer . . . represents [tax] avoidance or evasion.” It may also require the inclusion of several extra factors (in addition to the single sales factor currently used in Maryland) that “will fairly represent the taxpayer’s business in the state.” Essentially, this means that when the comptroller believes that a corporation’s reported income is not an adequate gauge of its state-taxable activity (even when based on perfectly legal choices), it can take certain measures to manually increase this income and, consequently, the corporation’s Maryland tax liability. This could result in arbitrariness and unpredictability in the tax collection process and create a competitive disadvantage for corporations doing business in Maryland. Of course, if apportionable income overstated a company’s in-state activity, the bill makes no provision for a downward adjustment of a company’s liability.
If adopted, these proposed amendments will take effect in January 2028.
The Inherent Unpredictability of Worldwide Combined Reporting
Much of state revenue officials’ optimism regarding worldwide combined reporting comes from a report by the Institute on Taxation and Economic Policy (ITEP). The report, which made inaccurate assumptions about apportionment rules and global profit shiftingProfit shifting is when multinational companies reduce their tax burden by moving the location of their profits from high-tax countries to low-tax jurisdictions and tax havens.
, estimated corporate income taxA corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax.
gains from adopting worldwide combined reporting in Minnesota would be $418 million, about a third of total state corporate franchise tax collections. The Tax Foundation, COST, and other organizations have exposed the report’s faulty assumptions.
Two fundamental errors in the report were that it ignored the potentially uneven allocation of profits shifted to foreign jurisdictions across the states (by assuming that the share of shifted profits is equivalent to the share of a given state in nationwide GDP) and, far more importantly, that it failed to account for apportionment rules. Under worldwide combined reporting, all global sales need to be accounted for while calculating the state’s share of a corporation’s total sales. As a result, the report significantly overstated potential revenue gains from implementing worldwide combined reporting by only allocating estimated profit-shifting activity. Functionally, the estimates assume that all foreign earnings are tax avoidance, as if corporations never actually market their goods and services abroad.
Apart from the fact that the revenue-raising potential of this measure is likely much lower than ITEP’s estimate, adopting worldwide combined reporting may make corporate income tax collections even less predictable and more volatile. During economic shocks, profitability tends to fall everywhere, but it may decrease more significantly in foreign countries with less-developed financial markets and limited resources to ensure macroeconomic stabilization. As a result, corporate income tax revenues may decline more considerably under worldwide combined reporting than under the current system of corporate apportionment.
In the report on S.B. 360 and S.B. 362, the Maryland House Appropriations Committee estimated that the combined reporting provision would generate $65.3 million in FY 2028 and $224.6 million in FY 2029. However, it is unclear from the report how the committee arrived at these estimates. In the absence of legitimate ways to estimate potential revenue changes, analysts have sometimes relied on scaling the inaccurate ITEP figures used in Minnesota. But even assuming these revenue estimates are accurate, the implementation of worldwide combined reporting would increase corporate income tax collections by only about 13-15 percent and total general fund revenues by less than 1 percent.
Conclusion
Worldwide combined reporting at the state level has serious flaws and is not sound tax policy. It adds complexity to the state corporate income tax system and increases transaction costs for in-state corporations. Its revenue effects are ambiguous and may even turn out to be negative, especially when the average profitability of foreign subsidiaries is lower than that of domestic corporations.
Furthermore, it does not appear that income taxes paid to foreign governments would be accounted for and appropriately credited by Maryland or any other U.S. state that considers implementing worldwide combined reporting. Several states, including Minnesota, New Hampshire, and Vermont, have considered worldwide combined reporting but abandoned the idea, and for good reason. By violating the principles of simplicity, neutrality, and stability, and failing to raise significant revenue, worldwide combined reporting at the state level is doomed to fail.
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