Objections And Challenges Article

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Objections and Challenges

The continued existence of the unitary tax in its present form is uncertain. Political considerations shape our tax laws and the unitary tax is certain to be altered.

Author: Stephen Sears

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Objections to California’s unitary tax scheme are widespread. Corporations, particularly multinational, prefer not to be taxed on the unitary bases. The alternative to the unitary method is method similar to that used by the Federal government in taxing multinational corporations. Only income from business within California would be subject to tax.

Transactions between related entities would have to be valued fairly to reflect the proper income.

A major objection is that the unitary method results in taxation of the same income by more than one country. This was the case in Shell Petroleum N.V. v. Franchise Tax Board State of California, No C 814302 MHP (N.D. Cal).

The California subsidiary involved was Scallop Nuclear Inc. one-hundred percent owned by Shell Petroleum, a Dutch company. During the period from 1973 to 1976, Shell claimed Scallop lost $390 million dollars. However, the Franchise Tax Board asserted that under the unitary method the income of over 900 companies within the Shell group should be apportioned. This resulted in income to Scallop of $46 million dollars.

Shell was very angry by this result. It contended that the Treaty of Friendship, Commerce and Navigation between the Netherlands and the United States precludes such taxation.

Other attacks on the unitary method are on constitutional grounds. Companies claim the method violates the commerce clause of the United States Constitution. On June 27, 1983, the Supreme Court (5 to 3) in Container Corporation of America v. Franchise Tax Board, 103 S. Ct. 2933, that California’s method is constitutional and valid.

Protests have not only come from companies but also from foreign countries. Formal letters of protest have been delivered to the United States Government by: Belgium, France, Canada, Italy, the United Kingdom and the governments of the European Economic Community. Japan has made it an issue at trade talks.
In the 1970’s, business interests in England were successful in having restrictions on the unitary tax included in a proposed United States/United Kingdom Income Tax Treaty. However, California and other states, after intense lobbying, succeeded in having that provision deleted.

A victory in the battle to repeal the unitary tax was won in June 1984 by Sony Corporation. They announced plans to build $15-20 million dollar plant in Indiana in exchange for the state politician’s pledge to repeal the state’s unitary tax. Governor Robert Orr announced a bipartisan legislative pact to fully abolish the global unitary tax. The plant is expected to create between 200-250 new jobs. Supporters of the unitary tax downplay the significance of the Indiana Decision. A spokesman for the Multistate Tax Commission said that only about 80 of the sates 30,000 businesses would be affected.

The influence of multinational and foreign corporations is just starting to be seen. The director of a Japanese business federation estimated that Japanese investment in the United States should double in the next five to ten years from the current level of $10 billion dollars. However, he noted the unitary tax as being a major obstacle. In response, Florida and Oregon promised to abolish their use of unitary taxation.

A total of 24 states use some form of unitary taxation California has become the most aggressive and Sony Corporation has considered cutting off all further investment in California unless the state concedes on the issue of unitary tax.

The British Parliament is asking Prime Minister Thatcher to retaliate by giving her the authority to revoke a tax preference for United States firms who are headquartered in a unitary state. The measure is designed to apply pressure on the United States companies to lobby their home states. British legislators have noted that the retaliatory measure will be dropped if the states, particularly California, take action to repeal their unitary tax laws.

About Author

Stephen Sears is a Certified Public Accountant (CPA) and an investment advisor with a Masters degree in Taxation. He has a Bachelor's degree in Business Administration. Mr. Sears has been the featured speaker at hundreds of seminars and has been intereviewed countless times on television and radio.

Article Source: http://www.1888articles.com/author-stephen-sears-41754.html

Objections and Challenges