Bloomberg Tax
May 2, 2023, 10:08 PM

Minnesota Targets Corporations Shifting Profits to Tax Havens

Michael J. Bologna
Michael J. Bologna

Multinational corporations paying income taxes in Minnesota would be required to add foreign subsidiaries’ profits to their state returns under a historic tax overhaul bill moving quickly through the state Legislature.

Lawmakers are expected to act on omnibus tax legislation that includes a bold plan to shift Minnesota to mandatory worldwide combined reporting for the calculation of corporate income taxes. The action would make Minnesota the only state to abandon so-called “water’s edge” rules, which permit businesses to exclude foreign affiliates’ income from the combined group when they file their state income tax returns.

Minnesota’s proposed law, which has broad support from the Democratic-Farmer-Labor Party-controlled Legislature, addresses a gap in state corporate income tax codes that has frustrated advocates of progressive tax policy for decades—billions of dollars in profits from US-based multinationals shifted to offshore tax havens. In 2019, the Institute on Taxation and Economic Policy estimated the states would immediately realize at least $17 billion annually by bringing worldwide combined reporting into their tax codes. A fiscal note attached to the House version of the bill estimates a $452 million bump in state revenue over the next two years.

“Minnesota lawmakers in both houses should be commended for recognizing the seriousness of the problem and supporting adoption of the best tool available for solving it,” said Michael Mazerov, a senior fellow at the Center on Budget and Policy Priorities. “I hope mandatory worldwide combined reporting is adopted there, and, if it is, that it inspires lawmakers in other states to take this same, long-overdue step.”

Even opponents of mandatory worldwide combined reporting—and there are a lot of them in the business community—concede Minnesota’s example could be a harbinger of things to come.

“This will be the biggest news of the year in the world of state and local taxes—hands down,” said David Brunori, senior director at the Washington national tax office of RSM US LLP and a critic of Minnesota’s proposal. “This has been in the water for a few years and if you can get a win in Minnesota, other states will be chomping at the bit to follow.”

Competing Tax Bills

The Minnesota Senate debated an omnibus tax bill (SF 1811) on Tuesday that was approved by the Taxes Committee on April 27. The House passed its own omnibus tax bill (HF 1938) on April 27. Both measures would require worldwide combined reporting for all unitary businesses with income subject to apportionment in Minnesota, effective beginning on Jan. 1, 2024.

Minnesota is home to a large number of corporations with global operations, including UnitedHealth Group Inc., Target Corp., Best Buy Co. Inc., 3M Co., U.S. Bancorp, and General Mills Inc.—all Fortune 500 multinationals.

The two bills contain other tax-cutting and revenue-raising provisions. The House version is offering a $550 one-time refundable tax credit for joint filers, a more generous working family tax credit, and a full income tax waiver on Social Security benefits for joint filers with adjusted gross income below $100,000. New revenue would arrive under the worldwide reporting provision and a new 10.85% tax bracket on residents earning more than $1 million. The Senate’s proposal contains similar language around tax credits and Social Security, but doesn’t include a millionaires tax.

Assuming the Senate bill passes, the competing provisions would trigger a conference committee process to harmonize the two revenue bills in the coming weeks. Lawmakers are working against a constitutionally specified adjournment deadline of May 22.

Supreme Court

Worldwide combined reporting isn’t a new concept and has twice been affirmed by the US Supreme Court, said Walter Hellerstein, a professor of tax law at the University of Georgia and an authority on state corporate tax issues.

In the 1970s and 1980s several states, including California, extended the combined reporting concept beyond the boundaries of the US. California’s tax code was subsequently challenged on constitutional grounds by businesses contending it created a risk of international multiple taxation and prevented the US from “speaking with one voice” in foreign commerce. The Supreme Court sided with California and halted the constitutional controversy in a decision published in 1983 and a second published in 1994.

“The constitutional authority for states to treat a business as unitary across the globe—not just within the United States—is established by these cases,” said Hellerstein. “The history is clear, they can do it. At this point, it’s a political question, it’s not a legal question.”

Despite California’s victories, the states were heavily criticized by foreign governments and the White House. Under former President Ronald Reagan, the Treasury Department proposed legislation constraining states from levying corporate income taxes on a worldwide unitary basis and imposing a water’s edge limit on combined reporting.

No federal law was ever enacted, but the states quickly abandoned the idea, Hellerstein said. No state currently applies worldwide combination without an elective or mandatory water’s edge limitation. Alaska is the only exception, requiring mandatory worldwide combined reporting, but only for oil and gas production companies.

‘A Warning Flag’

Minnesota’s proposal has come under heavy criticism from the Council on State Taxation, which represents the interests of hundreds of US-based multinationals. In a recent letter to lawmakers, the council said Minnesota would be sending “a warning flag to multinational businesses that the state is a hostile environment for business expansion and relocation.”

Republican lawmakers are echoing those views, warning Minnesota will miss out on investment opportunities and suffer “retaliatory moves” by foreign governments—something California had to confront before it finally abandoned mandatory worldwide combined reporting and adopted the water’s edge election.

“This is going to happen to Minnesota companies too,” Sen. Bill Weber, the Republican caucus’ ranking member on the Taxes Committee, said during a press briefing Tuesday. “They are going to be put at risk, the state is going to be put at risk by foreign retaliation. So here we are, one state is going to start a trade war.”

Jess Morgan, a senior manager in accounting giant EY’s National Tax Department, said the proposed program could prove challenging for Minnesota to administer and for businesses to comply with. She said unanswered questions include: how will foreign income be measured, how will the state treat income protected under international treaties, and will the program actually generate the revenue the state expects?

At the same time, Morgan said, worldwide combined reporting isn’t a completely foreign concept. Businesses across the country annually elect the filing option when filing their returns each year. New technologies and accounting protocols have also reduced burdens on businesses using the method.

“It’s the fullest expression of the unitary business theory,” Morgan said. “With the availability of data today, administrating it might not be as difficult as in the past,” she added.

To contact the reporter on this story: Michael J. Bologna in Chicago at

To contact the editors responsible for this story: Meg Shreve at; Kathy Larsen at

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