Did Louisiana follow the former federal extraterritorial-income exclusion and the related federal disallowance of deductions for corporations and individuals?

Plain-English summary

Louisiana followed the former federal extraterritorial-income exclusion for both corporations and individuals because state law contained no specific modification reversing it.

Deductions allocated to excluded ETI and disallowed federally were also disallowed for Louisiana purposes. The ruling left Louisiana's separate DISC and foreign sales corporation modifications intact.

Corporation income tax

Louisiana corporation taxable income started with federal gross income. The state had express addback rules for DISC and FSC benefits, but those narrow provisions did not extend to the newer ETI exclusion.

Accordingly, ETI properly excluded from federal gross income remained excluded in Louisiana, and the related federal deduction disallowance carried through.

Individual income tax

Louisiana tax table income started with federal adjusted gross income. Because La. R.S. 47:293 contained no ETI adjustment, qualifying income excluded federally remained excluded for Louisiana individuals as well.

Common questions

Q: Did Louisiana add federally excluded ETI back to corporate income?

A: No.

Q: Could a taxpayer claim Louisiana deductions that federal law allocated to excluded ETI and disallowed?

A: No.

Q: Did this ruling eliminate Louisiana's DISC or FSC adjustments?

A: No.

Citations and references

• IRC § 114 — former federal ETI exclusion
• Public Law 106-519 — FSC Repeal and Extraterritorial Income Exclusion Act of 2000
• La. R.S. 47:287.734 — Louisiana DISC and FSC modifications
• La. R.S. 47:293 — individual additions and subtractions from federal adjusted gross income
• LAC 61:III.101.C — Revenue Ruling authority and reliance statement

Source

• Landing page: Louisiana Department of Revenue Policies
• Original PDF: LA Revenue Ruling 02-010

Original ruling text

Revenue Ruling
No. 02-010
August 26, 2002
Corporation Income Tax and Individual Income Tax
Conformity With the Federal Extraterritorial Income Provisions

Issue: Is the federal exclusion for extraterritorial income recognized for Louisiana corporation and
individual income tax purposes?
Discussion: Federal income tax incentives that promote export trade have existed since the early
1970s. These incentives were created to encourage U.S. exports and discourage U.S. corporations
from moving their foreign sales operations to low tax countries.
The first such incentive was the domestic foreign sales corporation (DISC). Under the DISC
provisions, a company was allowed to follow a more favorable income tax regime that allowed a
certain portion of the DISC's income to be nontaxable or tax deferred. The DISC structure allowed a
fixed percentage of the DISC's income to be treated as if earned by the parent corporation and thus
was taxable, but the remaining income was treated as offshore income and therefore free from tax
unless distributed to its U.S. parent as a dividend. The DISC was determined to be a violation of
international trade principles under the General Agreement on Tariffs and Trade.
Congress then created the foreign sales corporation (FSC) as a replacement for the DISC. A FSC is
a foreign corporation with a U.S. parent set up to handle the export activities of the parent. The FSC
must have a genuine foreign presence and its income must be attributable to substantial commercial
activity outside the U.S. Only the foreign trade income of a FSC is subject to the favorable FSC
taxing rules. A FSC generally is not subject to federal income tax on its exempt foreign trade
income, which is generally 15/23rds, or about sixty-five percent of its total foreign trade income.
However, the FSC does pay federal income tax on its non-exempt foreign income. The exempt
foreign trade income of a FSC is treated as foreign-source income that is not effectively connected
with the conduct of a trade or business within the United States. In addition, the U.S. parent
corporation of a FSC generally is not subject to U.S. income tax on dividends distributed from the
FSC out of certain earnings because the parent is allowed a dividend received deduction for the
dividends it receives from the FSC equal to 100% of the dividend income.
In November 2000, the United States Congress enacted Public Law 106-519, the FSC Repeal and
Extraterritorial Income Exclusion Act of 2000 (the Act), in response to the World Trade
Organization Appellate Body ruling that the FSC regime constitutes an illegal export subsidy. The
Act disallowed the creation of new foreign sales corporations and created an exclusion for
extraterritorial income. Extraterritorial income (ETI) is the gross income of the taxpayer that is
attributable to foreign trading gross receipts. Under Section 114 of the Internal Revenue Code,
extraterritorial income is not included in the federal gross income of corporate or individual
taxpayers to the extent that it is qualifying foreign trade income. The ETI provisions also disallow
any deduction that is allocated to ETI that is excluded from federal gross income. Unlike the DISC
and FSC provisions, the ETI provisions do not require the formation of a special entity to which
sales are made. Also unlike the FSC provisions, the ETI provisions apply to corporations and
individuals in the same manner.

Revenue Ruling No. 02-010
Page 2 of 2

For Louisiana corporation income tax purposes, the starting point for determining Louisiana taxable
income is federal gross income. Federal items of income and deduction are included in determining
Louisiana income unless there is a specific modification. There are specific modifications that
address the DISC and the FSC in La. Rev. Stat. Ann. § 47:287.734. Both the DISC and the FSC
were regarded as federal tax incentives that need not be recognized for Louisiana corporation
income tax purposes. The DISC and FSC are taxed for Louisiana purposes as if they were any other
corporation. In addition, the parent corporation of the DISC or FSC must modify its federal gross
income to add back any income not included in its gross income because of the existence of the
DISC or FSC. No similar statutory modification has been enacted with respect to the exclusion of
extraterritorial income and related deductions, and the DISC and FSC provisions are very specific
and cannot be extended to apply to extraterritorial income.
Unlike the DISC and the FSC, the extraterritorial income exclusion and disallowance of related
deductions is also applicable to individual taxpayers. The starting point for determining Louisiana
tax table income is federal adjusted gross income. Any additions or subtractions from federal
adjusted gross income used in determining Louisiana tax table income are specifically set forth in
La. Rev. Stat. Ann. § 47:293. Because there are no modifications to adjusted gross income for
extraterritorial income and related deductions in R.S. 47:293, the exclusion is followed for
Louisiana individual income tax purposes.
Conclusion:
For corporate income taxpayers, extraterritorial income will be excluded from gross income for
Louisiana income tax purposes to the extent it is properly excluded from federal gross income. For
individual taxpayers, extraterritorial income will be excluded from Louisiana tax table income to
the extent it is properly excluded from federal adjusted gross income. For both corporate and
individual income taxpayers, deductions allocated to ETI that are disallowed for federal purposes
are also disallowed for Louisiana income tax purposes. This revenue ruling does not alter the
application of the FSC and DISC modifications.
Cynthia Bridges
Secretary
By:

Leonore F. Heavey
Attorney
Policy Services Division

A Revenue Ruling is written to provide guidance to the public and to Department of Revenue employees. It is issued
under Section 61:III.101(C) of the Louisiana Administrative Code to apply principles of law to a specific set of facts. A
Revenue Ruling does not have the force and effect of law and is not binding on the public. It is a statement of the
department's position and is binding on the department until superseded or modified by a subsequent change in statute,
regulation, declaratory ruling, or court decision.