The deadline to make or renew a Montana Water’s Edge Election for calendar year corporations is March 31, 2014. See below for specifics on election periods and requirements.
Montana’s corporate income tax regime requires members of a unitary business to report on a worldwide combined basis, unless a water’s-edge election is made. Under Montana law, taxpayers who elect water’s-edge reporting may exclude certain foreign affiliates from the combined return, in exchange for paying a higher tax rate. A water’s-edge group pays the tax at a rate of 7% on all taxable income for the taxable period as opposed to the regular rate of 6.75%.
A water’s-edge election made by a taxpayer is effective only if every affiliated corporation subject to Montana taxes consents to the election. Consent by the common parent of an affiliated group constitutes consent by all members of the group. An “affiliated corporation” is defined as a United States parent corporation and any subsidiary if more than 50% of the voting stock of the subsidiary is owned directly or indirectly by the parent or by another subsidiary of the parent whose income and apportionment factors must be included in a return under a water’s-edge election. An affiliated corporation also includes any corporation that is unitary with the taxpayer and that is incorporated in a tax haven. The following are considered tax haven countries under current Montana law:
Andorra, Anguilla, Antigua and Barbuda, Aruba, the Bahamas, Bahrain, Barbados, Belize, Bermuda, British Virgin Islands, Cayman Islands, Cook Islands, Cyprus, Dominica, Gibraltar, Grenada, Guernsey-Sark-Alderney, Isle of Man, Jersey, Liberia, Liechtenstein, Luxembourg, Malta, Marshall Islands, Mauritius, Monaco, Montserrat, Nauru, Netherlands Antilles, Niue, Panama, Samoa, San Marino, Seychelles, St. Kitts and Nevis, St. Lucia, St. Vincent and the Grenadines, Turks and Caicos Islands, U.S. Virgin Islands, and Vanuatu.
Other affiliated corporations which may be included are DISCs and FSCs, export trade corporations, foreign corporations which derive gain or loss from real property interests in the U.S., and corporations incorporated outside the U.S. but which have 50% of their stock owned directly or indirectly by the taxpayer and more than 20% of their average payroll and property assignable to a location inside the U.S.
A taxpayer must file a Form WE – ELECT in order to make or renew a water’s-edge election. The filing of returns and paying of tax under the water’s-edge election method without the filing of a Form WE – ELECT will not be accepted as a valid election. Furthermore, the election must disclose the taxpayer’s identity and a complete listing of all domestic and foreign affiliates owned in excess of 50%. The taxpayer must also provide detailed explanations of affiliates excluded from the water’s edge group.
Currently, a corporate entity may make a water’s-edge election for a three-year period. Form WE – ELECT must be filed within the first 90 days of the first tax year for which the election is to become effective. Thus, if a calendar year taxpayer files an election by March 31, 2014, tax year 2014 will be the first year of the three year election. If the first tax period for which the election is to become effective is less than 90 days, the taxpayer will have until the end of the tax period to file the election. Retroactive elections are not permissible. The election is binding for the entire three-year period unless the taxpayer obtains permission from the Montana Department of Revenue to change its election.
Upon receipt of the Form WE- ELECT, the Department will either approve or deny the election request by marking the appropriate box on the face of the form. The form will be sent back with a letter from the Department either providing additional information regarding a valid water’s edge election or an explanation as to why the water’s edge election request was denied. If confirmation is not received within two weeks of submitting the request or by the deadline to make a valid election, the Department recommends taxpayers contact them as there may be a problem with the request.