03/12/99 ANNOUNCEMENT 99-05

March 12, 1999

DEPARTMENT OF TAXATION ANNOUNCEMENT NO. 99-5

RE: Relating to the Inclusion of Dividends, Interest, Royalties, and Gains Received from a
Foreign Corporation in Business Income Subject to Apportionment

This announcement is in response to recent inquiries from multistate taxpayers regarding the application of the Hawaii net income tax to dividends, interest, royalties, and gains received from a foreign corporation. This announcement confirms that a multistate taxpayer must include dividends, interest, royalties, and gains received from a foreign corporation in its business income that is subject to apportionment.

On November 25, 1994, the Department promulgated rules relating to the allocation and apportionment of business income for multistate taxpayers. See Hawaii Administrative Rules (HAR) sections 18-235-21-01 to 18-235-38.5-02. Under section 18-235-38.5-02(b)(2), HAR, a multistate taxpayer is required to include dividends, interest, royalties, and gains received from a foreign corporation in arriving at business income subject to apportionment. Section 18-235-38.5-02(b)(2), HAR, provides that:

A taxpayer's business income subject to apportionment shall not include the business income, deductions, or losses of a foreign affiliate;¹ provided that transactions between a taxpayer and a foreign affiliate, such as a dividend paid to a taxpayer by a foreign affiliate, shall be recognized and shall not be eliminated.

Accordingly, the Department has been requiring multistate taxpayers to include dividends, interest, royalties, and gains received from a foreign corporation in arriving at business income subject to apportionment for all taxable years beginning after December 31, 1994. We note that any applicable exclusion, such as the dividends received deduction provided under section 235-7(c), Hawaii Revised Statutes, is applicable to the preapportionment base. ²

If you have any questions regarding this Announcement, please call Iris Kitamura, Administrative Rules Specialist, at 808-587-1570. Forms and other tax information may be downloaded from the Department's website at http://www.state.hi.us./tax/tax.html. On Oahu, forms may be ordered by calling the Department's Forms Request Line at 808-587-7572. Persons who are not calling from Oahu may call 1-800-222-7572 to receive forms by mail or 808-678-0522 from a fax machine to receive forms by fax.

/s/
RAY K. KAMIKAWA
Director of Taxation

1 "Foreign affiliate" of a taxpayer means a person, other than the taxpayer, if no part of the business income of the person is subject to the federal income tax under the federal Internal Revenue Code of 1986, as amended, whether or not the person and the taxpyer are owned or controlled directly or indirectly by the same interests. HAR section 18-235-38.5-02(a).

2 For recent changes in the Department's administratiion of section 235-7(c), HRS, please reference Department of Taxation Announcement 98-5.