Pennsylvania House Bill (HB) 1198, enacted in early July 2016, makes notable changes to Pennsylvania’s bank shares tax. The bank shares tax regime previously was overhauled by the legislature in 2013, P.L.270, No. 52 (Act 52).
Under the new provisions:
- The bank shares tax rate increases from 0.89 percent to 0.95 percent of taxable value of bank shares for tax years beginning on or after Jan. 1, 2017.
- The book value of total equity capital of certain foreign subsidiaries formed for the purpose of engaging in international or foreign banking pursuant to 12 U.S. Code Section 611 is excluded from the computation of share value. This exclusion is phased in over five years beginning in 2018.
- The $100,000 “bright-line” receipts test for determining nexus is eliminated. Any level of business activity in Pennsylvania by out-of-state banks presumably will be construed as doing business and subject the out-of-state bank to Pennsylvania taxation.
- For apportionment purposes, the definition of receipts is changed from amounts reported for federal income tax purposes to the total of all items of income reported on the income statement of the institution’s Reports of Condition (call report) at the end of the preceding calendar year. This change effectively creates a de facto unitary-combined bank shares tax return because receipts of the bank and all the bank’s subs (all entities included in the bank’s call report) are included in the receipts factor.
HB 1198 clarifies the goodwill and apportionment rules for bank shares tax enacted by Act 52. HB 1198 clearly provides that goodwill is deductible against the tax base and not just in the computation of the deduction for U.S. obligations. The apportionment rules for receipts from investment and trading assets and activities also are clarified. Guidance issued by the Department of Revenue in February 2015 effectively disallowed a Method 1 election, but effective for taxable years beginning after Dec. 31, 2016, taxpayers are permitted to make either a Method 1 or Method 2 election.