How did South Carolina Revenue Ruling 92-13 treat corporate dividends received from foreign subsidiaries after the U.S. Supreme Court's Kraft decision?

Plain-English summary

South Carolina Revenue Ruling 92-13 concluded that foreign dividends had to receive the same corporate-income-tax treatment as domestic dividends.

The Tax Commission adopted that approach after the U.S. Supreme Court held in Kraft General Foods, Inc. v. Iowa Department of Revenue and Finance that taxing dividends from foreign subsidiaries while exempting domestic-subsidiary dividends violated the Foreign Commerce Clause.

Historical deduction percentages

For foreign dividends included in federal taxable income, the ruling allowed the corporation to reduce that income for South Carolina purposes by:

• 70% for dividends from a foreign corporation owned less than 20%;
• 80% for dividends from a foreign corporation owned 20% or more; and
• 100% when the foreign corporation met the 80% voting-and-value test in I.R.C. Section 1504(a)(2) and would otherwise qualify for the 100% deduction in I.R.C. Section 243(a)(3) if it were domestic.

Why the commission changed the treatment

Section 12-7-415 began with federal corporate gross and taxable income, subject to South Carolina modifications. Through federal conformity, the state had adopted I.R.C. Section 243's 70%-to-100% deductions for dividends from domestic corporations.

South Carolina had not specifically adopted I.R.C. Section 78's foreign-dividend gross-up or the foreign tax credit provisions in Sections 901 through 908.

The ruling also cited historical state provisions excluding income protected by a United States treaty and allocating dividends, less related expenses, to the state of the corporation's principal place of business.

Because the existing scheme favored domestic corporate dividends, Kraft required equal treatment for foreign dividends. The Commission used the same ownership-based percentages to administer the tax constitutionally.

What this means for you

Corporations reviewing historical returns

The foreign-dividend percentage depended on ownership level and, for the 100% reduction, the voting-and-value test plus hypothetical eligibility under the domestic-dividend rule.

Multinational tax teams

The ruling did not adopt the federal foreign-dividend gross-up or foreign tax credit regime. It addressed equal treatment through a South Carolina taxable-income reduction.

Current filers

This is a 1992 response to then-current statutes and Kraft. Verify current conformity and dividend rules before using the percentages today.

Common questions

Q: What percentage applied below 20% ownership?
A: Seventy percent.

Q: What percentage applied at 20% or more ownership?
A: Eighty percent, unless the 100% requirements were met.

Q: When could the reduction reach 100%?
A: When the foreign corporation met the 80% voting-and-value test and would qualify for the domestic 100% dividends-received deduction.

Q: Why were foreign dividends matched to domestic dividends?
A: The ruling said discriminatory treatment would violate the Foreign Commerce Clause under Kraft.

Q: Did South Carolina adopt the federal foreign tax credit provisions?
A: The ruling said it had not specifically adopted I.R.C. Sections 901 through 908 or the Section 78 gross-up.

Citations and references

• S.C. Code Ann. §§ 12-7-415 and 12-7-430(g) — historical federal conformity and treaty-income exclusion
• S.C. Code Ann. § 12-7-1120(2) — historical dividend allocation
• I.R.C. § 243 — domestic dividends-received deduction
• I.R.C. § 1504(a)(2) — 80% voting-and-value test
• I.R.C. § 78 and §§ 901-908 — foreign dividend gross-up and foreign tax credits
• Kraft General Foods, Inc. v. Iowa Department of Revenue and Finance, Docket No. 90-1918 (U.S. 1992)

Source

• Landing page: https://dor.sc.gov/advisory-opinion-search
• Original PDF: https://dor.sc.gov/sites/dor/files/policies/RR92-13.pdf

Original ruling text

SC REVENUE RULING #92-13

SUBJECT:

Foreign Dividend Income

TAX ANALYST:

Deana West

EFFECTIVE DATE:

All periods open under statute.

REFERENCE:

S.C. Code Ann. Section 12-7-415 (Supp. 1991)

AUTHORITY:

S.C. Code Ann. Section 12-4-320 (Supp. 1991)
SC Revenue Procedure #87-3

SCOPE:

A Revenue Ruling is the Commission's official interpretation of
how tax law is to be applied to a specific set of facts. A
Revenue Ruling is public information and remains a permanent
document until superseded by a Regulation or is rescinded by a
subsequent Revenue Ruling.

Question:
How are foreign dividends taxed in South Carolina?
Discussion:
Code Section 12-7-415 provides that the "South Carolina gross income and taxable income of a
corporation...is the corporation's gross and taxable income as determined under the Internal
Revenue Code with the modifications specified in [Code Section] 12-7-430".
In conforming to the Internal Revenue Code, South Carolina adopted I.R.C. Section 243,
excluding certain domestic dividends from taxable income. In general, this section allows a
corporation a 70% to 100% deduction for dividends received from a domestic corporation
depending upon its percentage of stock ownership. South Carolina did not specifically adopt the
federal dividend gross-up provision in I.R.C. Section 78 or the foreign tax credit provisions of
I.R.C. Sections 901 - 908.

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Guidance concerning the taxation of foreign income and dividends can be found in Code
Sections 12-7-430(g) and 12-7-1120(2). Code Section 12-7-430(g) provides that "South
Carolina gross income does not include gross income excluded from federal income tax by
reason of any treaty of the United States. Code Section 12-7-1120(2) provides that "dividends
received from corporate stocks owned, less all related expenses, shall be allocated to the state in
which the principal place of business of a corporation is located...".
This year the United State Supreme Court issued an opinion concerning a corporate taxpayer's
challenge to Iowa's system of taxing dividends received from a foreign subsidiary, but not taxing
dividends from a domestic subsidiary. The Iowa statute that was challenged is very similar to
South Carolina's statute. In June, 1992, the Court ruled in Kraft General Foods, Inc. v. Iowa
Department of Revenue and Finance (Docket No. 90-1918) that Iowa's statute of taxing
dividends received from foreign subsidiaries while exempting dividends from domestic
subsidiaries was in violation of the Foreign Commerce Clause.
Conclusion:
In order to administer South Carolina's corporate income tax in a constitutional manner, South
Carolina will tax foreign dividends in the same manner as domestic dividends. Currently, for
South Carolina purposes the federal taxable income of a corporation may be reduced for foreign
dividends that are included in federal taxable income as follows:

1. 70% for dividends received from less than a 20% owned foreign corporation;
2. 80% for dividends received from a 20% or more owned foreign corporation; and
3. 100% for dividends received from a foreign corporation that meets the 80% voting and
   value test of I.R.C. Section 1504(a)(2) and would otherwise qualify for a 100% deduction
   under I.R.C. 243(a)(3) if the foreign corporation were a domestic corporation.
   SOUTH CAROLINA TAX COMMISSION

s/A. Crawford Clarkson Jr.
A. Crawford Clarkson, Jr., Chairman

s/T. R. McConnell
T. R. McConnell, Commissioner

s/James M. Waddell, Jr.
James M. Waddell, Jr., Commissioner
Columbia, South Carolina
, 1992
December 3

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