State tax authorities are increasingly focusing on and reviewing multinational taxpayers. For example, several states have enacted legislation to provide exceptions to their water’s-edge reporting rules to include in a water’s-edge return the income of non-US entities doing business or incorporated in so-called tax havens. The trend of expanding the unitary group to include entities doing business or incorporated in tax havens is similar to previous calls by states for mandatory worldwide reporting to subject an affiliated group’s global income to a state’s formulary apportionment. Those efforts are unnecessary because states already have income and apportionment adjustment tools that can be used to address any perceived tax avoidance.
They also risk casting a wide net over all taxpayers with foreign activity. Further, state lawmakers are not considering the potential unintended consequences of those efforts, which could result in an overall reduction of state revenue.