HAR § 18-235-38.5-02 — Exclusion of income, property, payroll, and sales of foreign affiliates

(a) As used in this section: “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 taxpayer are owned or controlled directly or indirectly by the same interests. “Subject to the federal income tax” when referring to a person means that the United States has jurisdiction to subject the person to the tax imposed by chapter 1 (with respect to income tax) of the federal Internal Revenue Code of 1986, as amended. (b) The income of a taxpayer shall not be computed with reference to the income or other attributes (such as property, payroll, or sales) of a foreign affiliate. (1) No taxpayer shall file, and the director shall not require a taxpayer to file, a combined report with a foreign affiliate. (2) A taxpayer’s business income subject to apportionment shall not include the business income, deductions, or losses of a foreign affiliate; 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. (3) For any taxpayer using the apportionment formula set forth in section 235-29, HRS, the numerator and the denominator of the taxpayer’s property, payroll, and sales factors shall not include the property, payroll, or sales of a foreign affiliate. (4) For any taxpayer using an apportionment formula other than that set forth in section 235-29, HRS, attributes of a foreign affiliate shall not be included in the taxpayer’s apportionment computation. (c) If the taxpayer and a foreign affiliate are engaged in a unitary business, the income of the taxpayer shall be segregated by allocation and separate accounting. The segregation shall be subject to adjustment under section 482 (with respect to allocation of income and deductions among taxpayers), IRC, and section 18-235-38-04. (d) This section shall apply notwithstanding anything to the contrary in this subchapter.