Amended IL reg could reduce throwback of foreign sales

Background

Sales shipped from within Illinois to a state or foreign country in which the taxpayer is not subject to tax are thrown back to Illinois and included in the Illinois sales apportionment numerator, resulting in a higher apportionment of income to Illinois. When determining whether a foreign country has jurisdiction to subject the taxpayer to a net income tax, the foreign country is treated as though it were a U.S. state. For tax years ending before Dec. 31, 2022, Illinois does not treat a taxpayer as subject to tax in a foreign jurisdiction if the taxpayer could be exempt from income tax in the foreign country due to the provisions of a tax treaty between the foreign country and the United States.

Regulations amended

For tax years ending on or after Dec. 31, 2022, Illinois amended its regulations to recognize a foreign country’s jurisdiction to tax an Illinois taxpayer even if the foreign country is precluded from doing so because of a tax treaty. By allowing a taxpayer to be deemed subject to tax in a foreign country in which the taxpayer is excluded from taxation because of a treaty, sales shipped from Illinois to such foreign country no longer will be required to be thrown back to Illinois. This change aligns Illinois’ definition of “taxable in other states or foreign countries” with the Multistate Tax Commission’s model rule that is used by most states.

Looking ahead

The Illinois amendment became effective Aug. 24, 2022, and is a 2022 third-quarter change for financial accounting purposes under Accounting Standards Codification 740. Affected taxpayers could see the effects of these changes in both current and deferred income tax calculations.

Taxpayers with foreign sales to countries that have tax treaties with the United States and that previously were subject to Illinois throwback rules should discuss the potential effects of the amended regulation with their tax advisers.