Bloomberg Law, Tax Law Invites States to Pursue Bigger Share of Foreign Profits:

President Donald Trump’s tax and spending law opens the door for states to follow the federal government’s lead and tax a larger portion of international corporate income, vexing some business groups that argue states will exceed their taxing authorities on business income earned abroad.

The groups are particularly concerned about state adoption of a provision of the new tax law that restructures the global intangible low-taxed income regime, GILTI, created under the president’s 2017 tax reforms. GILTI was created to discourage multinationals from shifting intangible income, such as earnings from patents and licensing fees, to low-tax jurisdictions.

The law, signed July 4, replaces GILTI with a net controlled foreign corporation tested income regime, NCTI, broadening the base of foreign-source income subject to federal taxes and offering foreign tax credits to offset some of the impact. The credits reflect taxes paid by multinationals to foreign jurisdictions.

States are now starting to examine how or whether to adopt this change as part of their own tax codes and how it would affect their revenue streams. Business interests fear that parallel state-level changes could leave multinationals at a competitive disadvantage.

Many states have traditionally declined to tax business income earned outside the US, beyond “the water’s edge"—a response to perceived constitutional limits. Still, 21 states and the District of Columbia have included some portion of GILTI in their tax calculations, according to the Institute on Taxation and Economic Policy. From that group, 15 and DC will automatically transition to NCTI because they embrace rolling conformity, meaning they adopt all changes to the federal code as they are made. They could, though, proactively decide to decouple from NCTI.

The states that aren’t automatically switching will need to make a decision on whether to make the move.

These calculations get complicated at the state level, where few offer foreign tax credits like the federal government to blunt the impact of GILTI—now NCTI. Thus, states could conform to the broader base of taxable income under NCTI without the offsets.

“This is all quite new, so we are still studying the implications,” said Illinois Department of Revenue Director David Harris. Illinois waived taxes on GILTI for seven years, but a state law enacted in June just before the federal law was finalized taxes 50% of this income beginning in 2026.

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