By BRIDGET BUSH
Capital News Service
LANSING– If you’re a bank in Michigan, the state takes a slice of your foreign revenue that other states and even the federal government leave untouched.
That could change with legislation sponsored by Sen. Darwin Booher, R-Evart, that would revise definitions and tax liability for financial institutions operating outside the U.S. Booher and other experts say they expect the House to pass it by year’s end.
But Michigan’s Department of Treasury opposes the measure that could cost the state $13 million in revenue each year.
Booher’s bill came out of discussion with the banking industry. In addition to the foreign taxation issue, it addresses how capital numbers used to calculate the institutions’ tax base are figured and the period that the tax base is determined.
The proposal seeks to change how banks’ capital numbers are determined, said John Llewellyn, vice president of government relations for the Michigan Bankers Association. That’s a key number used to calculate taxes for banks and is also reported to the federal government and audited by the Securities and Exchange Commission, he said. Since it is reported to the federal government, the capital number is a standard in the industry.
It measures the capital amount invested in the business.
In 2012, the state stopped using the federal number and adopted its own capital calculation, Llewellyn said. The banks want to return to the federal number for clarity and consistency.
Booher said that state officials agree with the need to make that change. And they also agree with the legislation’s intent to return to taxing assets on an annual basis rather than on a five-year average.
That attempt to smooth out market volatility became complicated with mergers and acquisitions, Llewellyn said. States didn’t know how to measure it and banks didn’t know how to report it.
But there is disagreement on taxing bank operations in other countries.
“While the U.S. government says corporations don’t need to pay taxes on worldwide operations, Michigan has taken a position that banks should,” Llewellyn said.
That’s out of touch with the rest of the country’s tax approach, he said.
Michigan banks care because of “their foreign revenue coming in from Canada, for example, or what is considered ‘beyond the water’s edge,’ is subject to corporate taxes,” Booher said. “Other entities aren’t held to the same standard.”
In fact, Michigan is the only state that taxes the overseas activity of financial institutions. In researching other states’ policies, the Michigan Bankers Association found that “Pennsylvania is the only other state with this language– we actually discovered it for them,” Llewellyn said. “The difference is Pennsylvania doesn’t enforce it.”
Treasury is opposed to relieving banks of this foreign tax burden because the state could lose $13 million in taxes that it collects, Llewellyn said. If the state were to accept this amendment to the Income Tax Act, they’d like a new source of tax revenue– a strategy known as tax shifting, he said.
Llewellyn said the bankers group has recommended that the foreign tax piece be taken out of the bill.
“As the old saying goes, two out of three is better than none,” Llewellyn said.
By BRIDGET BUSH