The Ohio Department of Taxation recently released draft administrative regulations (the “Regulations”) designed to implement the new Ohio financial institutions tax. The new tax takes effect Jan. 1, 2014 and replaces the corporation franchise tax and dealers in intangible tax, which financial institutions have historically paid in Ohio.
The Regulations state that the tax has been designed based upon two fundamental concepts:
- The tax return will be reported on a consolidated basis at the highest level of ownership rather than on a separate entity basis.
- The equity of the consolidated reporting group will be based upon generally accepted accounting principles reported to the appropriate federal regulatory agency rather than on a federal income tax basis.
The most significant aspects of the Regulations deal with how financial institutions will file tax returns to pay the tax. Bank organizations that are owned through a holding company structure will report the equity of the holding company and all of the entities over which the bank holding company exercises significant influence on a form called an “FR Y-9.” A financial institution that is required to file the FR Y-9C pursuant to Federal Reserve Board regulations will instead report the total equity capital from its FR Y-9C on its Ohio financial institution annual tax return.…
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On December 11, 2012, the Ohio General Assembly approved a measure (H.B. 510) that will reform how banks and other financial institutions are taxed by the State of Ohio. Governor John Kasich is expected to sign the bill into law today. If enacted, the changes will take effect for tax years starting in 2014.
This bill expands reforms instituted in 2005 when the State of Ohio overhauled its business tax regime by phasing out the corporation franchise tax and the personal property tax for most corporations and implemented the commercial activity tax in their place. Financial institutional taxation did not substantially change at that time. Until now, financial institutions were subject to one of two alternative taxes, the corporation franchise tax and the intangibles tax. The new law will replace these two taxes with a single financial institutions tax.
The new tax would broaden the tax base by reducing deductions and exemptions, but generally apply lower tax rates. The tax base would be closely tied to equity capital reported for financial regulatory purposes and allocated to Ohio using a single factor based on Ohio gross receipts.
Different tax rates would apply to different tiers of capital. The bill would cause the first $200 million of Ohio capital to be taxed at 0.8%, capital between $200 million and $1.3 billion would be taxed at 0.4%, and capital above $1.3 billion would be taxed at 0.25%. An annual minimum tax of $1,000 would apply.
Dealers in intangibles not subject to the new financial institutions tax would no longer pay …
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Legislation to significantly change the way Ohio taxes financial institutions is tied up in the Ohio legislature – for the time being, anyway. Although the Ohio House of Representatives passed H.B. 510 to overhaul Ohio taxation of financial institutions in the spring, the Ohio Senate stalled work on the legislation before its summer recess.
Stated reasons for the delay are that the Senate has more pressing legislation to deal with (the financial institutions reform bill would not take effect until 2014) and because of some concern that the estimates of the amount of revenue that would be raised from the new tax structure are too optimistic. However, Senate leadership has expressed commitment to passing the legislation later in the year.
The governor and others are touting the bill as shifting the relative tax burden from smaller banks to larger banks while lowering rates overall.
The bill is designed to do four things: (1) close “loopholes” that some think are being used by larger, multi-state institutions, (2) replace two alternative taxes (the corporate franchise tax and the intangibles tax) with a single tax, (3) reduce tax rates, and (4) change the “apportionment” formulas that financial institutions use to apportion what is taxable capital inside Ohio versus their entire capital.
The new law would tax all of a bank’s Ohio-sourced capital without deductions, although different tax rates would apply to different tiers of capital. As passed by the Ohio House, the bill could cause the first $200 million of Ohio capital to be taxed …
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