1. (a) The act of August 4, 1991 (P. L. 97, No. 22), effective for tax years beginning on or after January 1, 1991, amended the Corporate Net Income (CNI) Tax by repealing the total exclusion of all corporate dividends from taxable income and instead following the dividend exclusion provided under the IRC. In addition, the foreign dividend gross-up was specifically allowed as a deduction, while no foreign tax credit was provided.
2. (b) In Kraft General Foods, Inc. v. Iowa Department of Revenue, 112 S.Ct. 2365 (1992), decided June 18, 1992, the United States Supreme Court struck down an Iowa statute imposed on a corporation’s net income, substantially similar in all material respects to the amended Pennsylvania CNI Tax, on the ground that it facially discriminated against foreign commerce in violation of the Foreign Commerce Clause. The Department has concluded that the Kraft decision is equally applicable to the CNI Tax to the extent that adoption of the Federal tax base results in a facial discrimination against foreign commerce by not allowing any deduction for certain foreign dividends.

3. (c) To administer the CNI Tax in a constitutional manner, an additional deduction from the CNI Tax base for foreign dividends is required. See—for example—Commonwealth v. Curtis Publishing Co., 363 Pa. 299, 69 A.2d 410 (1949). Until the General Assembly amends the affected provision of the CNI statute, the Department finds that by allowing a deduction for foreign dividends in the following manner, discrimination is remedied and the original intent of the General Assembly to tax at least a portion of Federally-taxable dividends is achieved.

   1. (1) The Department will allow foreign dividends reported on lines 13 and 14 of the Federal return Schedule C an additional deduction equal to one of the following:

      1. (i) Seventy percent, if the dividends are from a less than 20%-owned foreign corporation.
      2. (ii) Eighty percent, if the dividends are from a 20%-or-more-owned foreign corporation.
      3. (iii) One hundred percent, if the dividends are from a foreign corporation that meets the ‘‘80% voting and value test’’ of section 1504(a)(2) of the IRC (26 U.S.C.A. § 1504(a)(2)) and would otherwise qualify for a 100% deduction under section 243(a)(3) of the IRC (26 U.S.C.A. § 243(a)(3)) if the foreign corporation were a domestic corporation.
   2. (2) The treatment of foreign dividends set forth in paragraph (1) follows the Federal exemption of domestic dividends.
4. (d) A schedule, in the following form, shall be used to compute the additional deductions for foreign dividends and the total dividend deduction to be claimed on original and amended CNI returns for 1991 and thereafter.

PA DIVIDEND DEDUCTION SCHEDULE 1. Federal Schedule C, line 20, Total deductions$ 2. Federal Schedule C, Line 15, Foreign dividend gross-up (section 78)$ 3. Dividends from less-than-20%-owned foreign corporations listed on lines 13 and 14 of Federal Schedule C--------x 70%$ 4. Dividends from 20%-or-more-owned foreign corporations listed on lines 13 and 14 of Federal Schedule C--------x 80%$ 5. Dividends listed on lines 13 and 14 of Federal Schedule C from foreign corporations that meet the ‘‘80-percent voting and value test’’ of section 1504(a)(2) of the IRC and would otherwise qualify for a 100% deduction under section 243(a)(3) of the IRC if they were a domestic corporation. Do not list any amounts included in item 4.$ Total PA dividend deduction—Add lines 1, 2, 3, 4, 5 (Enter on RCT-101, page 3, section C, line 2a)$