Interest Payment Not Required to Be Added Back as Alabama’s Subject-To-Tax Exception Applied

The BR State + Local Tax Spotlight

On July 28, 2022, the Alabama Tax Tribunal held that a corporation is not required to add back interest paid to a related entity as the recipient was subject to tax on that income in Ireland. This was so even though the related entity made significant interest payments to other affiliates and ultimately paid tax to Ireland on only $10,000 of net income. Pfizer, Inc. v. Alabama Dep’t of Revenue, Docket No: BIT. 18-236-JP (Ala. Tax Trib. July 28, 2022). This ruling should help other taxpayers fighting the applicability of addback statutes.

The Facts: Pfizer paid $658 million in interest to Pfizer Transactions Ireland (“PTI”) and did not add back that payment in calculating its Alabama corporate income tax. Pfizer took the position that the payment was not required to be added back as the interest was “subject to tax” in Ireland and, therefore, one of the exceptions to the add back applied.

The Department of Revenue (“Department”) challenged the applicability of the exception because, while PTI did include the $658 million as income on its Irish tax return, it also deducted large amounts of interest payments to affiliates based in Luxembourg and, after deducting its administrative expenses, had a trading profit (to which the tax rate is applied) of $10,000.

Alabama’s add back statute generally requires the add back of interest and intangible expenses paid to an affiliate (called a “related member”). One of the exceptions to the add back is where the corresponding item of income was “subject to” a tax based on the related member’s net income by a foreign nation which has in force an income tax treaty with the United States. In 2008, the statute was clarified to provide: “That portion of an item of income which is attributed to a taxing jurisdiction having a tax on net income shall be considered subject to a tax even if no actual taxes are paid on such item of income in the taxing jurisdiction by reason of deductions or otherwise.” Ala. Code § 40-18-35(b).

The Decision: The Tax Tribunal held that the clear wording of the statutory exception applied and found that by including the interest income from Pfizer in PTI’s Irish tax returns, the company was subject to tax on that income. That PTI deducted an almost equal amount of interest that it paid to its Luxembourg affiliates did not change this fact. The Tribunal rejected the Department’s attempt to limit the 2008 clarifying statutory change. “The facts presented in this appeal fit squarely within the subject-to-tax exception to Alabama’s add-back statute, as amended.”

This article is one in a series of articles written for the August 2022 edition of The BR State + Local Tax Spotlight.

© 2022 Blank Rome LLP. All rights reserved. Please contact Blank Rome for permission to reprint. Notice: The purpose of this update is to identify select developments that may be of interest to readers. The information contained herein is abridged and summarized from various sources, the accuracy and completeness of which cannot be assured. This update should not be construed as legal advice or opinion, and is not a substitute for the advice of counsel.