Einde inhoudsopgave
Treaty Application for Companies in a Group (FM nr. 178) 2022/5.3.5.3
5.3.5.3 The Californian system
L.C. van Hulten, datum 06-07-2022
- Datum
06-07-2022
- Auteur
L.C. van Hulten
- JCDI
JCDI:ADS659444:1
- Vakgebied(en)
Omzetbelasting / Plaats van levering en dienst
Voetnoten
Voetnoten
R.K. Wiederstein, ‘California and Unitary Taxation: The Continuing Saga’, International Company and Commercial Law Review 1992, vol. 3, no. 135, par. 1.
R. Krever & P. Mellor, ‘Chapter 1: History and Theory of Formulary Apportionment’, par. 1.04, in R. Krever, The Allocation of Multinational Business Income: Reassessing the Formulary Apportionment Option, Alphen aan den Rijn: Kluwer Law International 2020.
B.F. Miller, ‘Worldwide Unitary Combination: The California Practice’, p. 139, in C.E. McLure, Jr. (ed.), The State Corporation Income Tax: Issues in Worldwide Unitary Combination, Stanford, CA: Hoover Institution Press 1984.
R.K. Wiederstein, ‘California and Unitary Taxation: The Continuing Saga’, International Company and Commercial Law Review 1992, vol. 3, no. 135, par. 3.
R.K. Wiederstein, ‘California and Unitary Taxation: The Continuing Saga’, International Company and Commercial Law Review 1992, vol. 3, no. 135, par. 2.
R. Tannenwald, ‘The Pros and Cons of Worldwide Unitary Taxation’, New England Economic Review 1984, vol. 17, no. July/August.
Container Corp. v. Franchise Tax Board of California, 463 United States 159 (1983) and Barclays Bank plc v. Franchise Tax Board of California, 512 United States 298 (1994). In the latter case it concerned a group of multinational corporations with a foreign parent company. See also R.S. Avi-Yonah, ‘Between Formulary Apportionment and the OECD Guidelines: A Proposal for Reconciliation’, World Tax Journal 2010, vol. 2, no. 1, par. 1.
Barclays Bank plc v. Franchise Tax Board of California, 512 United States 298 at 312 (1994).
Barclays Bank plc v. Franchise Tax Board of California, 512 United States 298 at 303 (1994), citing Container Corp. v. Franchise Tax Board of California, 463 United States 159 (1983).
J.M. Weiner, ‘Chapter 4: The Dream Is Alive: EU Tax Policy with a Common Consolidated Corporate Tax Base and Formulary Apportionment’, par. 4.03, in R. Krever, The Allocation of Multinational Business Income: Reassessing the Formulary Apportionment Option, Alphen aan den Rijn: Kluwer Law International 2020.
C.E. McLure, Jr. & J.M. Weiner, ‘Deciding whether the European Union should adopt formula apportionment of company income’, par. 1.3.2, in S. Cnossen, (ed.), Taxing Capital Income in the European Union, Oxford: Oxford University Press 2000.
The federal government, businesses in the United States as well as foreign trading partners (J.J. Jurinski, ‘California's Water's-Edge Legislation: The Closing Chapter in the Unitary Tax Debate?’, Journal of State Taxation 1987, vol. 6, no. 1).
W. Hellerstein, ‘Chapter 5: The Application of Formulary Apportionment to Related Entities: Lessons from the US Experience’, par. 5.04, in R. Krever, The Allocation of Multinational Business Income: Reassessing the Formulary Apportionment Option, Alphen aan den Rijn: Kluwer Law International 2020.
R.K. Wiederstein, ‘California and Unitary Taxation: The Continuing Saga’, International Company and Commercial Law Review 1992, vol. 3, no. 135, par. 4.
The Californian formulary apportionment system allowed to include all foreign subsidiaries in its tax return, if the foreign subsidiaries formed part of the unitary business.1 This worldwide unitary data was subsequently used to calculate the Californian income tax liability.2 The option to include foreign subsidiary income was used if this lowered the in-state allocation of income.3
Lobbying parties argued that the formulary apportionment system as applied by California was inconsistent with the arm’s length principle and was therefore unconstitutional. On top of that, opponents of the worldwide systems argued that it harmed foreign relations.4 Foreign trade partners were of the opinion that the approach taken led to states reaching beyond their jurisdictions for revenues.5 This could expose multilateral companies to double taxation, as by applying the apportionment method it could tax income in part, which is already taxed in full in foreign countries through separate taxation. Additionally, it would increase their administrative burden.6
The United States Supreme Court rejected the argument that the system was inconsistent with the arm’s length principle and thus unconstitutional, both for a United States-based and for a foreign-based multinational.7 The Court declared that formulary apportionment of the income of a multijurisdictional unitary enterprise, if fairly done, only taxes the income generated within a state.8 Additionally, the Court stated that the geographical or transactional accounting methods are not able to capture ‘the many subtle and largely unquantifiable transfers of value that take place among the components of a single enterprise.’9
The first decision of the Court concerned a United States-based multinational company. This was not seen as a major issue for European entities as the influence on these countries seemed limited. However, the second decision concerned a foreign-based multinational, which changed the perception of various countries. Following this decision, they made their opposition to the United States’ tax system clear.10 The eventual shift to a non-mandatory worldwide combination11 system followed from lobbying efforts by numerous parties.12 California did not change its system because it was unconstitutional or because it believed another tax policy was better.13 The system was changed solely due to external pressure. Currently, a multinational company may make a water’s edge election in California, meaning that income of non-US unitary business entities is not included in the consolidation.14