DOR has issued a “Working Draft Regulation Amendment” that revises certain provisions of the
current combined reporting regulation (adopted in May 2009). The affected sections describe how to
calculate the separate income of a member of a combined group that is to be included in the combined
group’s taxable income in any case in which that member was not incorporated in the United States and
not treated as a U.S. corporation under the federal Internal Revenue Code (i.e. “non-U.S.
corporations”).

Currently, the MA combined reporting regulation does not distinguish between the income of a non-
U.S. corporation that is to be included in a water’s edge combined report and the income of such
corporation to be included in a worldwide combined report (except in the case of the provision that
limits one category of water’s edge inclusion to certain specified income from intangibles or services
where such income exceeds 20% of income). As a result, the current regulation does not itself reflect
any limitation on the scope of the income that non-U.S. corporations in a water’s edge filing are to
include in the combined group’s taxable income. DOR has determined that the regulation should make
clear that in the context of a water’s edge report, non-U.S. corporations are only to take into account
items of income that are within the scope of federal gross income of such corporations under the Code
(with any Massachusetts adjustments thereto).

The working draft also includes some related changes, including a revision to an apportionment
provision of the regulation to make clear that when a non-U.S. corporation includes only those items of
income that are included in federal gross income, it must limit its apportionment factors to the factors
that relate to such federal gross income.

Practitioners also should remember that there are many foreign corporations that are not subject to
federal income tax, but are subject to state taxation. This disparity results from bilateral tax treaties and
their so-called “permanent establishment” provisions that could result in a foreign corporation having
nexus for state income tax purposes but not federal income tax purposes. When making elections of
reporting methods, this disparity should be considered.