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.
A financial institution that is a “small bank holding company” pursuant to Federal Reserve Board regulations is required to file the “Parent Company Only Financial Statement for Small Bank Holding Companies,” on a form called an “FR Y-9SP report.” The FR Y-9SP report is prepared according to the equity method of accounting, as prescribed by generally accepted accounting principles, and includes the equity for all investments in subsidiaries, associated companies, and those corporate joint ventures over which the bank holding company exercises significant influence. Although the report is labeled as “Parent Company Only,” the total equity capital that is being reported on it includes the equity in all of the entities over which it exercises significant influence. Therefore, it is the total equity capital from the FR Y-9SP that is reported on the Ohio financial institution annual tax return and only one Ohio annual return needs to be filed for the group.
Some bank organizations are not owned through a holding company structure and are not required to file an FR Y-9. These organizations are required to file a form called a “call report” rather than the FR Y-9. The total equity capital from the call report will be reported on the Ohio financial institution annual tax return. Only one Ohio annual return needs to be filed for the group of entities included in a call report.
Another important aspect of the Regulations deals with determining “total Ohio equity capital,” which is the measurement upon which the tax is calculated. In order to determine the total Ohio equity capital, the Regulations require that a single, gross receipts apportionment factor be applied to the total equity capital. An apportionment factor is a tax concept rather than a generally accepted accounting principle concept. The Regulations provide details regarding how a financial institution’s Ohio apportionment factor is determined. The gross receipts used for the apportionment must be reflective of all of the entities whose equity is included in the total equity capital being reported. We suspect additional guidance will be needed in this area.
Finally, the Regulations contain rules regarding how assets and lending activities are sourced or “sitused” to Ohio, and rules regarding electronic filing of quarterly estimated returns.