Amicus Curiae Brief — EMI Ltd. v. Bennett
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Oftice Supreme Court, Us.
No. 84-613 NQ¥ 2 (S84
1 ALEXANDCEH b- STEVAS,
IN THE | cueRK |
—
al
Supreme Court of the Cited States
OCTOBER TERM, 1984
EMI Limirep,
Petitioner.
Vs
WILLIAM BENNETT, AND ERNEST J.
DRONENBURG, JR., SUCCESSOR; KENNETH Cory;
RICHARD SILBERMAN, AND Mary ANN GRAVES, SUCCESSOR:
AND MARTIN HUFF AND GERALD H. GOLDBERG, SUCCESSOR,
Respondents.
Petition For A Writ Of Certiorari To The
United States Court Of Appeals For The Ninth Circuit
BRIEF OF THE UNITED KINGDOM
AS AMICUS CURTAE SUPPORTING
CERTIORARI
GEORGE W. BEATTY
(Counsel of Record)
WILLIAM L. GOLDMAN
JAMES A. RIEDY
1200 18th Street, N.W.
Washington, D.C. 20036
(202) 457-8500
Counsel for Amicus Curiae
PRESS OF RAM PRINTING. HYATTSVILLE. MD 20781 (301) 864-6662
i
TABLE OF CONTENTS
Page
INTEREST OF AMICUS CURIAR oo. cccccccccscccccccces 1
AIT OP ROTI oink co ccc hich ccdccancencss 3
I. This Case Differs From Prior Cases In Which For-
eign Parent Companies Have Asserted Standing To
Challenge Unitary State Income Taxes. ......... 5
II. The Potential Injuries To Petitioner In This Case
Give Petitioner Standing To Chailenge The Con-
stitutionality Of California’s Request For World-
wide Financial Data Of Corporations Doing No Busi-
Re eS i vk vans ceegcdawsitacecessces 7
III. The Federal Courts Should Exercise Jurisdiction In
Cases Such As This Involving Questions Of Interna-
tional Law And Considerations Of Comity Among
I ers eee ree ene pene 12
ete eee Oe ere gay ae ek 14
ee oe eee eee el. ae Ce la
ii
TABLE OF AUTHORITIES
CASES: Page
Alcan Aluminium v. ee of Rev. of State of Or.,
724 F.2d 1206 (7th Cir. 19B6) 2... ccccccccss 5, n.4; 6
Alcan Aluminum Ltd. v. Franchise Tax Bd. of Cal., 558
F. phe ge ah (S.D.N.Y. 1983), affd mem., 2nd Cir.,
ied, 464 U.S. —_, 79 L.Ed.2d 170 (1984) 5, 7
Cap je Industries-EMI, Inc. v. Bennett, 681 F.2d 1107
(9th Cir. 1982), cert. denied, 459 U. S, 1087 (1982) 7, 10
Container Corp. v. Franchise Tax Bd., 463 U.S. __, 77
L.Ed. od 2 545 GE shi aedks Ka eaeeeees 13, n.9; 14
Dyson v. Attorney-General, 1 K.B. 410 (1911) ....... 12
Flast v. Cohen, 392 U.S. 83 (1968) ............0. 000 12
In re Grand ag Proceedings, 691 F.2d 1384 (11th Cir.
1982), cert. denied sub nom. Bank of Nova Scotia v.
United States, 462 U.S. 1119 (1983) ............. 13
National Restaurant Ass’n v. Simon, 411 F.Supp. 993
CD. Gta BOWE ss icnvccangccaukanseeneeaa 11.
Nuclear Engineering Co. v. Scott, 660 F.2d 241 (7th Cir.
1981), cert. dented, 455 U.S. 993 (1982) .......... 10
Shell Petroleum, N.V. v. Graves, 709 F.2d 593 (9th Cir.
1983), cert. denied, 464 U.S. ___, 78 L.Ed.2d 717
CHE. ks vacenveveuennss0kes anne eee 5; 13, n.8
South Carolina v. Regan, 465 U.S. ___, 79 L.Ed.2d 372
CMBBED vaccccucncdsseeees ¢650000 eee aS ; a
United States v. First Nat. Bank of Chicago, 699 F.2d 341
(rem Car. BRR) .sccxskcnsccabeeeeeeueeeees 9, 13
United States v. SCRAP, 412 U.S. 669 (1973) ....... 12
United States v. Toyota Motor Corp., 569 F.Supp. 1158
(C.D. Cal. 1983), appeal pending i Le 3 ee 13
United States v. Vetco, Inc., 691 F.2d 1281 (9th Cir.
1981), cert. denied, 454 U.S. 1098 (1981) ......... 13
Warth v. Seldin, 422 U.S. 490
(RPG) ovceeeesecsuwecusanwretnee 4; 6, n.5; 9; 12
ili
Table of Authorities Continued
Page
STATUTES:
Internal Revenue Code, section 6038A ............. 8, n.7
PUBLICATIONS:
Bureau of Economic Analysis, United States Department
of Commerce, Foreign Direct Investment in the
United States in 1982, 63 Survey of Current Business
31 (Aug. 1983, No. 8) ......... 2. cece eee eee
N.Y. Times, Sept. 30, 1983, § A, at 3 ............---
ho Ww
IN THE
Supreme Court of the Anited States
OCTOBER TERM, 1984
No. 84-613
EMI LIMITED,
Petitioner,
V.
WILLIAM BENNETT, AND ERNEST J.
DRONENBURG, JR., SUCCESSOR; KENNETH Cory;
RICHARD SILBERMAN, AND MARY ANN GRAVES, SUCCESSOR;
AND MARTIN HUFF AND GERALD H. GOLDBERG, SUCCESSOR,
Respondents.
On Petition For A Writ Of Certiorari To The
United States Court Of Appeals For The Ninth Circuit
BRIEF OF THE UNITED KINGDOM
AS AMICUS CURIAE SUPPORTING
CERTIORARI’
INTEREST OF AMICUS CURIAE
Petitioner’s briefs in the proceedings below cover a
wide spectrum of issues relating to the constitutionality
of applying a unitary state income tax toa U.S. subsidiary
of a U.K. parent corporation. The British Government
! Petitioner and respondents have filed letters with the Clerk of
this Court consenting to the filing of this amicus curiae brief.
2
has repeatedly and forcefully objected to the imposition of
such taxes.*
This amicus brief is being filed for the more limited
purpose of urging the Court to resolve a question involv-
ing standing that also has major internaticnal ramifica-
tions. Simply put, the question is whether a British par-
ent corporation has standing in the U.S. Federal courts to
challenge the constitutionality of demands made by a
taxing State for the production of financial data relating
to the worldwide operations of the parent and its foreign.
subsidiaries, none of whom is doing business in the taxing
State or elsewhere in the United States.
* During Prime Minister Thatcher’s visit with President Reagan in
September, 1983, the Prime Minister said that “something will have
to be done” to limit the effects of the unitary tax, adding that Britain
considers the issue “serious.” N.Y. Times, Sept. 30, 1983, § A, at 3, ~
col. 1. Copies of the following documents, which express the United
Kingdom’s opposition to the unitary tax, are reproduced in Appendix
A, infra:
(a) Note Submitted to the Departmert of State by the Me: der
States of the European Community (including the United King-
dom), the European Commission and the Embassies of Austra-
lia, Canada, Japan and Switzerland for the Attention of the U.S.
Treasury Working Group on Worldwide Unitary Taxation (App.
la).
(b) Statement of the Government of the United Kingdom Before the
U.S. Treasury Working Group on Worldwide Unitary Taxation
(App. 3a).
(c) Letter Dated July 12, 1983 from the Chancellor of the Exchequer
to the Secretary of the Treasury (App. 19a).
(d) Note Submitted by the United Kingdom to the Department of
State dated May 18, 1982 (App. 21a).
(e) Note Submitted by the United Kingdom to the Department of
State dated October 30, 1981 (App. 23a).
(f) Note Submitted by the United Kingdon to the Department of
State dated March 25, 1980 (App. 26a).
3
As discussed below, the burden of such requests falls
squarely on the British parent corporation. Nonetheless,
the decision below leaves the parent corporation without
any forum in which to challenge the imposition of this
burden.
Businesses headquartered in the United Kingdom have
made direct investments in the United States of over $23
billion, which is more than the amount invested by any
other nation.* Because of the extensive U.K. investment
in the United States, the participation by U.K. corpora-
tions in business activities involving both the United
States and third countries, and the adverse impact that
the decision below will have on those activities, the Brit-
ish Government has a significant interest in the disposi-
tion of this petition for certiorari.
SUMMARY OF ARGUMENT
The standing argument being made in this case is dis-
tinctly different from the standing arguments raised in
other cases where foreign parent corporations have
attacked the constitutional validity of vitary state in-
come taxes.
Petitioner has alleged that California’s request for
worldwide financial data threatens to injure petitioner in
two ways. First, petitioner has alleged that delivery of
some of the requested information to California would
violate the British Official Secrets Act and would subject
petitioner’s executives to criminal penalties. Second,
petitioner has alleged that much of the requested in-
formation is not readily available. For purposes of this
proceeding, petitioner’s allegations must be accepted as
3’Bureau of Economic Analysis, United States Department of
Commerce, Foreign Direct Investment in the United States in 1982,
63 Survey of Current Business 31, 36 (Aug. 1983, No. 8).
4
true under this Court’s decision in Warth v. Seldin, 422
U.S. 490, 501 (1975).
The burden imposed on petitioner by a request for
information which is not readily available, and the threat
of criminal penalties if some of that information is pro-
duced, give petitioner an immediate and significant per-
sonal stake in this proceeding. By its very nature, the
rec ‘est for financial data relating to petitioner and its
non-U.S. subsidiaries can be satisfied only by petitioner.
Because the burden of complying with the request falls on
petitioner, not on its U.S. subsidiary, petitioner rather
than the U.S. subsidiary is the proper party to assert that
the request imposes a constitutionally impermissible bur-
den on foreign commerce.
It is no answer to say, as the court below did, that
petitioner can avoid the burden by declining to complv
with the request. As the court below acknowledged (Pet.
App. A-6), such action would result in a “threatened
increase” in the California tax otherwise payable by peti-
tioner’s U.S. subsidiary under California’s tmitary sys-
tem. This “threatened increase” in the tax properly pay-
able by the subsidiary under California law constitutes, in
substance, a threatened tax on petitioner to force com-
pliance. Thus, petitioner is threatened with harm
whether or not it complies. Moreover, the threatened
injury is not one that can be adequately avoided in sub-
sequent proceedings brought by the U.S. subsidiary to
test the constitutionality of the unitary tax as applied to
the subsidiary.
The conclusion that petitioner has standing to seek
relief from the injuries threatened here is reinforced by
considerations of international law and comity. The inter-
national friction that has already been generated by in-
formation requests of the type involved here will be ex-
acerbated if the United States shuts the doors of its
in tae ieee ieee em:
5
courts to the foreign parent companies adversely affected
by such requests. Because the foreign parents are the
real parties in interest, they should be afforded an oppor-
tunity to argue the merits of their own constitutional
assertions.
ARGUMENT
I. This Case Differs From Prior Cases In Which Foreign
Parent Companies Have Asserted Standing To Challenge
Unitary State Income Taxes.
The standing argument presented in this case is entire-
ly different from the standing arguments advanced
unsuccessfully in Shell Petroleum, N.V. v. Graves, 709
F.2d 593 (9th Cir. 1983), cert. denied, 464 U.S. —_, 78
L.Ed.2d 717 (1983), and Alcan Aluminum Lta. v. Fran-
chise Tax Bd. of Cal., 558 F.Supp. 624 (S.D.N.Y. 1983),
affd mem., 2d Cir., cert. denied, 464 U.S. , 79 L.Ed.
2d 170 (1984). In those cases, the foreign parent corpora-
tions based their standing arguments on allegations that
California was, in effect, subjecting the foreign parents’
separate income to multiple taxation. Standing was de-
nied on the ground that California was taxing only the
income of the U.S. subsidiary corporations, with the re-
sult that each parent corporation’s harm was only that ofa
shareholder whose investment in its corporation was
being diminished in valve.‘
‘4 {n addition, jurisdiction was denied in the Sheil case, supra, and
Alcan Aluminium v. Department of Rev. of State of Or., 724 F.2d
1294 (7th Cir. 1984) on the separate ground that the actions were not
ripe. The issue of ripeness is not present in this case since California
already has assessed a tax against petitioner’s U.S. subsidiary, Capi-
tol Industries-EMI, Inc. (“Capitol”).
Similarly, the fact that petitioner’s prior petitions for certiorari
have been denied should have no bearing here. Those petitions were
filed before the decision below by the court of appeals in an effort to
join this case with other cases involving unitary issues then pending
before this Court.
Ma
6
By contrast, petitioner’s standing argument here is
based on the uncontested fact that petitioner ztself will be
directly burdened as a consequence of California’s
request for detailed financial information covering peti-
tioner and its worldwide non-U.S. subsidiaries.* This
standing argument was not presented to the Court in the
other cases in which certiorari was denied. In particular,
the Shell and Alcan cases, supra, did not involve any
threatened violation of foreign law that might subject the
petitioners’ employees in those cases to criminal penal-
ties.
Moreover, to the extent that the standing argument
being made here was adverted to in the other cases, the
clear suggestion was that standing would be established if
the foreign parent made an adequate factual showing of
its harm. For example, in Alcan Aluminium v. Depart-
ment of Rev. of State of Or., supra, the court of appeals
distinguished Shell, stating (724 F.2d at 1299):
In Shell, however, the parent’s only alleged injury
was as a shareholder of its subsidiary. The parent
alleged no independent injury as a basis for Amy
Id. at 595. Thus, the subsidiary’s state remedy ful
protects the parent’s interests. The present case is
distinguishable. Appellant has alleged an indepen-
dent injury as a basis for standing. It claims an
unconstitutional burden on its foreign commerce. If
5 Petitioner’s complaint in the district court alleged in Count VI
that “Much of the information requested [by California] is not pub-
lished by or readily available to EMI.” For purposes of deciding the
standing issue, these allegations must be accepted as true. Warth v.
Seldin, supra, 422 U.S. at 501. Obviously, a request to furnish
information that is not readily available places a direct burden on
petitioner. Moreover, as discussed at p. 9, infra, compliance with
California’s request could subject petitioner’s employees to possible
criminal penalties in the U.K. Thus, the threatened harm to petition-
er is twofold.
7
appellant’s allegations as to its standing are accepted
as true, its interests and those of Alcancorp are not
identical. See also Capitol Industries-EMI, Inc. v.
Bennett, 681 F.2d at 1118-19 & n.30. Thus, Alcan-
corp’s state remedy does not protect oo. fully.
As soon as the tax 1s assessed against Alcancorp, tne
threat of injury to appellant will be immediate. Noth-
ing in the Tax Injunction Act requires appellant to
wait while Alcancorp pursues its own remedies
under Oregon law for its own injury.
See also Alcan Aluminum Ltd. v. Franchise Tax Bd. of
Cal., supra, 558 F.Supp. at 628 n.9.
The clear suggestion by the court of appeals that Alcan
would have standing once its case was ripe is in apparent
conflict with the decision below. This Court should con-
sider the standing issue presented here in order to re-
solve the conflict on an issue having obvious and impor- —
tant international implications.
II. The Potential Injuries To Petitioner In This Case Give
Petitioner Standing To Challenge The Constitutionality
Of California’s Request For Worldwide Financial Data of
Corporations Doing No Business In California.
1. The court of appeals erred in holding that petition-
er lacks standing. The ¢ ‘tical error was the court’s con-
clusion (Pet. App. A-6) that “. .. EMI’s only possible
injury is the diminution in value of its holdings in
Capitol.”
To the contrary, petitioner has alleged its own, person-
al harm that is separate and distinct from the tax liability
assessed by California against Capitol. Petitioner’s own
direct harm is twofold. First, the burden of generating
the worldwide financial data requested in this and other
similar cases is substantial in terms of time, effort and
cost. Generally the data do not exist as such, but must be
especially generated, and then converted into dollars at
8
differing current and historical exchange rates. Separate
sets of computations may have to be made for different
States that apply different accounting standards.’ EMI
has 63 non-U.S. subsidiaries that would be covered by
California’s request in this case. Other U.K. parents
affected by similar requests have well over 100 such
subsidiaries. Her Majesty’s Government believes that it
imposes an intolerable burden on foreign commerce to
require a United Kingdom parent company to obtain and
deliver to the California tax authorities detailed financial!
data, stated in U.S. dollar terms, for scores of worldwide
subsidiaries that do no business in California or else-
where in the United States and have no business contacts
with the U.S. subsidiary that does do business there.’
‘The problem of trying to convert the books and records of a
worldwide business conducted by a U.K. parent corporation into
figures computed in U.S. dollars on the basis of U.S. tax and account-
ing principles is clearly set forth in the comments submitted by the
Confederation of British Industry to the U.S. Working Group on
Worldwide Unitary Taxation (Dec. 1983). Those comments are re-
produced in Appendix A, infra (App. 30a).
7 By contrast, Federal tax law requires that domestic subsidiaries
of foreign parents provide information only with respect to those
foreign affiliates that had a “transaction with” the reporting domestic
company; moreover, the information that must be furnished in those
cases is limited to readily available information regarding the foreign
affiliate and the transactions conducted with it. See Internal Reve-
nue Code, section 6038A. Thus, California is here seeking worldwide
financial data that goes far beyond the limited transactional data
that must be furnished to comply with Federal law. The British
Government believes that U.K. parent companies directly affected
by sweeping state requests of the type involved here have standing
to assert that the marked difference between the state and Federal
requirements confirms the conclusion that the state requirements
impose a constitutionally impermissible burden on foreign com-
merce.
9
In addition to being burdensome, California’s request
for information could expose petitioner’s employees to
possible criminal penalties in the U.K. Petitioner’s com-
plaint in this case alleges in Count VII that “Some of the
information sought is protected from disclosure by the
British Official Secrets Act and by similar legislation in
other countries, and were it to be divulged, to Defend-
ants’ staff or to others, EMI’s executives would become
liable to criminal proceedings in the United Kingdom and
other countries.”
Surely, the possibility that delivery of the documents
might lead to criminal sanctions against petitioner’s own
employees gives petitioner standing to assert in the
Federal courts that the demand for delivery made by
California is an unconstitutional restraint on foreign com-
merce. Petitioner’s threatened injury is “distinct and
palpable.” Warth v. Seldin, supra, 422 U.S. at 501.
There should be no question that standing to raise the
issue exists when one recognizes that, on its merits, the
issue is a serious one involving “a sensitive balancing of
the competing interests at stake.” United States v. First
Nat. Bank of Chicago, 699 F.2d 341, 345 (7th Cir. 1988).
2. Petitioner is the real party in interest in this
proceeding. California originally directed its demand for
information to petitioner and only belatedly redirected
the demand to Capitol. Even in cases where demands for
worldwide financial data are originally addressed to the
subsidiary doing business in the taxing State, the taxing
authorities must know that compliance will require par-
ent company action. There is no conceivable way that a
California subsidiary is going to be able to obtain data
from its foreign parent company or from other foreign
subsidiaries unless the common parent undertakes to
make such data available. Because the burden of comply-
ing falls on the foreign parent, not on the domestic sub-
10
sidiary, it is the parent and not the subsidiary who should
have standing to seek declaratory judgment relief.
3. It is no answer to say, as the court below did (Pet.
App. A-6), that petitioner itself will suffer no direct harm
if it chooses not to comply with California’s demand for
worldwide financial data. If that happens, California will
make arbitrary assumptions which will increase the tax
that would otherwise be payable by Capitol under Cali-
fornia’s unitary method. This “threatened increase,”
which the court below recognized (Pet. App. A-6), will in
form be assessed against Capitol. But the increment in
tax attributable to petitioner’s refusal to supply informa-
tion will in reality be a tax on petitioner to force its
compliance. Thus, the cases cited by the court below (Pet.
App. A-6), involving shareholders whose only interest
was a threatened diminution in the value of their stock,
are simply not in point. In each of those cases, the poten-
tial harm to the subsidiary arose solely as a consequence
of its own separate actions and did not reflect indirect
pressure being exerted to compel certain action by the
parent corporation.
The alternative harms to petitioner are obvious. Peti-
tioner is faced with “immediate business costs” if it com-
plies with California’s request or “immediate coercive
consequences” if it does not. Nuclear Engineering Co. v.
Scott, 660 F.2d 241, 252 (7th Cir. 1981), cert. denied, 455
U.S. 993 (1982).
4. It has already been established that “California
does not provide [petitioner] with an effective state reme-
dy for its claims.” Capitol Industries-EMI, Inc. v. Ben-
nett, 681 F.2d 1107, 1119 (9th Cir. 1982), cert. denied, 459
U.S. 1087 (1982). Thus, if the decision below is permitted
to stand, petitioner will be foreclosed from all judicial
review.
ise Pl eS ISN Tat MDC HAND Fert ULS> seine scs? be
11
The decided case closest in principle to the present one
is this Court’s recent decision in South Carolina v. Re-
gan, 465 U.S. —__, 79 L.Ed. 2d 372 (1984) in which the
Court held that jurisdiction was not barred by the Anti-
Injunction Act where the party aggrieved would not
otherwise have access to judicial review. The Court re-
jected the possibility that South Carolina’s interest in
that case could adequately be advanced in suits brought
by third-party taxpayers. The result should be the same
here.
It is highly doubtful whether Capitol will ever have
standing to advance petitioner’s separate constitutional
claims. See South Carolina v. Regan, supra, 79 L.Ed. 2d
at 383. But even if such standing does exist, petitioner’s
objection to California’s information request cannot ade-
quately be pursued in proceedings brought by Capitol
since that route will entail heightened risks to Capitol.
If Capitol attempts to litigate the constitutionality of
California’s request for information after petitioner has
refused to comply, Capitol will face a “threatened in-
crease” in tax (Pet. App. A-6) and possible penalties
(Petitioner's Complaint, Count VI) by reason of such
refusal. In this respect, the present case is analogous to
National Restaurant Ass’n v. Simon, 411 F.Supp. 993
(D. D.C. 1976) where the court held that the Anti-
Injunction Act did not prevent the plaintiff-employer
from seeking an injunction against enforcement of an
Internal Revenue Service ruling requiring employers to
report certain tips paid to their employees. The Govern-
ment argued that the court lacked jurisdiction to consider
injunctive relief because the plaintiff could test the valid-
ity of the reporting requirements by failing to report the
tips and contesting the $1 fine which the Government
could impose for each such failure. The court rejected the
Government’s argument on the ground that it put the
12
plaintiff in the “untenable position” of risking a fine
“merely to test the validity of a reporting and information
requirement.” (411 F.Supp. at 996). That is precisely the
position Capitol would be in if it attempted to test the
validity of California’s request for information in this
case.
Given the international implications of this case, ami-
cus wishes to point out that the court of appeal in England
came to a similar conclusion in Dyson v. Attorney-
General, 1 K.B. 410 (1911). In that case, the court held
that a taxpayer who was threatened with penalties if he
failed to comply with a request for tax information could
bring a declaratory judgment proceeding against the
Attorney General to test the validity of the request. In his
opinion, Farwell L. J. stated (1 K.B. at 421):
It is obviously a question of the greatest importance;
more than eight millions of Form IV. have been sent
out in England, and the questions asked entail much
trouble and in many cases considerable expense in
answering; it would be a blot on our system of law
and procedure if there is no way by which a decision
on the true limit of the power of inquisition vested in
the Commissioners can be obtained by any member
of the public aggrieved, without putting himself in
the invidious position of being sued for a penalty.
III. The Federal Courts Should Exercise Jurisdiction In
Cases Such As This Involving Questions Of Internation-
al Law And Considerations Of Comity Among Nations.
This Court has considered the question of standing in
numerous contexts. See, e.g., Warth v. Seldin, supra;
United States v. SCRAP, 412 U.S. 669 (1973); Flast v.
Cohen, 392 U.S. 83 (1968). “This inquiry involves both
constitutional limitations on federal-court jurisdiction
and prudential limitations on its exercise.” Warth v. Sel-
din, supra, 422 U.S. at 498. For the reasons previously
7 Vv o_o,
13
discussed, there should be no question that the threshold
constitutional requirement of justiciability has been satis-
fied in this case.* The British Government urges the
Court to grant certiorari to decide whether the court
below properly exercised the “prudential limitation” on
its jurisdiction.
It is well recognized that cases involving requests for
information from foreign parties present special issues of
international law and comity among nations. United
States v. Toyota Motor Corp., 569 F.Supp. 1158 (C.D.
Cal. 1983), appeal pending (9th Cir.); In re Grand Jury
Proceedings, 691 F.2d 1384 (11th Cir. 1982), cert. denied
sub nom. Bank of Nova Scotia v. United States, 462 U.S.
1119 (1983); United States v. Vetco, Inc., 691 F.2d 1281
(9th Cir. 1981), cert. denied, 454 U.S. 1098 (1981); United
States v. First Nat. Bank of Chicago, supra. Requests of
the type made in this case have had, and are continuing to
have, an adverse impact on commercial relations between
the United States and most of its major trading partners.’
Foreign parent corporations as well as foreign govern-
ments (including amicus) believe it is inherently unfair to
close the courts of the United States to foreign parents
who are seeking to challenge the validity of such requests
under the Federal Constitution. Under these circum-
stances, in a case involving serious questions of foreign
relations where the denial of jurisdiction will create “in-
ternational friction” (United States v. Vetco, Inc., supra,
691 F.2d at 1388), the Federal courts should exercise
their discretion in favor of finding jurisdiction.
8In Shell Petroleum, N.V. v. Graves, supra, the court of appeals
acknowledged (709 F.2d at 595) that the decision denying standing
“was based on prudential rather than Constitutional grounds.”
®See n.2, supra and Container Corp. v. Franchise Tax Bd., 463
U.S. ——, 77 L.Ed.2d 545, 577 n.4 (1983) (Powell, J., dissenting).
14
CONCLUSION
This case affords the Court an opportunity to consider
the constitutionality of unitary taxation in the foreign
parent context, a question left unanswered in Container
Corp. v. Franchise Tax Bd., 463 U.S. _, 77 L.Ed. 2d
545 (1983). The British Government is anxious to have
that issue resolved. But even if the Court chooses not to
answer all of the important issues in this case at this time,
amicus strongly urges that the Court at least grant cer-
tiorari in order to consider the important, separate ques-
tion of standing.
Respectfully submitted,
GEORGE W. BEATTY
(Counsel of Record)
WILLIAM L. GOLDMAN
JAMES A. RIEDY
1200 18th Street, N.W.
Washington, D.C. 20036
(202) 457-8500
Counsel for Amicus Curiae
November 20, 1984
APPENDIX
la
APPENDIX A
NOTE SUBMITTED TO THE DEPARTMENT OF STATE BY
THE MEMBER STATES OF THE EUROPEAN
COMMUNITY (INCLUDING THE UNITED KINGDOM), THE
EUROPEAN COMMISSION AND THE EMBASSIES OF
AUSTRALIA, CANADA, JAPAN AND SWITZERLAND FOR
THE ATTENTION OF THE U.S. TREASURY WORKING
GROUP ON WORLDWIDE UNITARY TAXATION
The Embassies of the Member States of the European
Community, the European Commission and the Embas-
sies of Australia, Canada, Japan and Switzerland present
their complements to the Department of State. A copy of
this Note is also being delivered to the Department of the
Treasury for the attention of the Working Group on
Worldwide Unitary Taxation.
Our countries constitute the United States’ main trad-
ing partners, accounting for more than half of US trade.
We also account for approximately $76 billion of direct
investment in the United States (84% of the total) and US
direct investment in our countries amounts to $154 billion
(69% of total US direct investment abroad). Our govern-
ments are all deeply concerned about the use of the world-
wide unitary basis of taxation in some individual States of
the United States of America and have submitted our
views to the Working Group set up by the President and
chaired by the Secretary of the Treasury, Donald T.
Regan.
At this time, when the Task Force is nearing the
completion of its work, we reiterate our concern that the
Working Group itself and the US Administration in form-
ulating proposals for action on its recommendations
should give full weight to the combined views of the
United States’ main trading partners so that an
internationally-agreed solution to this growing problem
2a
may be implemented quickly thereafter. The achieve-
ment of this objective would represent the removal of a
serious obstacle to the further development of our trade
and investment relationships.
The below-mentioned diplomatic representatives take
this opportunity to renew to the Department of State the
assurances of their highest consideration.
I append my signature in support of the Joint Note on
Unitary Taxation submitted by the Embassy of Belgium.
/s/Ambassador, E and P
British Embassy
Date: 25 January 1984
3a
STATEMENT OF THE GOVERNMENT OF THE UNITED
KINGDOM BEFORE THE UNITED STATES TREASURY
: WORKING GROUP ON WORLDWIDE UNITARY TAXATION
SUMMARY OF PRINCIPAL POINTS
A. Her Majesty’s Government is opposed to the applica-
tion of the unitary method of state taxation on a
worldwide reporting basis.
B. The worldwide unitary method of state taxation is
contrary to well established international principles
and practice of taxation, and imposes unreasonable
tax and administrative burdens on multinational
corporate groups doing business throughout the
world.
ge OA IN SNR MO TD 0d
C. Unitary taxation is already damaging cormmercial
and economic relations between the US and the UK
and other countries. If it continues, the damage to
international trading relations will become more se-
rious. If unitary taxation spreads, the scale of the
worldwide damage will be further increased.
- ROAD 2 rnd N Ir ne Chinas Ala eal” Nubll OWE dear UREN OF ba A nak
D. In particular for UK companies unitary tax imposes
significant additional burdens on both the companies
and their shareholders. First it produces anomalous
tax liabilities, which may be considerably larger than
those calculated on the internationally-accepted
arm’s length basis. Second the requirements of the
method involve additional compliance costs. In addi-
tion the uncertainty generated by the unitary
method has disruptive effects on UK corporations’
business activities and industrial investment.
E. As long as the worldwide unitary method persists, it
will be impossible to achieve the essentia? economic
objectives of providing a consistent and coherent tax
framework for international trade and investment.
4a
Moreover, the damage to international trade and
investment would be greatly increased if foreign
Governments responded by imposing retaliatory
measures or introducing unitary systems of their
own.
I. INTRODUCTION
. Almost two years ago, the United States Govern-
ment advised the Supreme Court in its brief in the
Chicago Bridge & Iron Co case, that “the imposition
of [a state tax] on the apportioned combined world-
wide business income of a unitary group of related
corporations impairs federal uniformity in an area
where such uniformity is essential”. That explicit
pronouncement of United States policy is equally
appropriate for today. Indeed, since that brief was
filed, the threat to international business relations
posed by the worldwide unitary method of state
taxation has assumed even greater magnitude. At
present 11 states employ the worldwide combined
reporting system, namely Florida, California, Mas-
sachusetts, Oregon, Alaska, Idaho, Colorado, Mon-
tana, New Mexico, North Dakota and Utah. Approx-
imately 70 per cent of the direct foreign investment
in the United States comes from Western Europe.
Hence, the burden of the unitary worldwide com-
bined reporting system falls particularly heavily on
European based corporations.
. It is therefore hardly surprising that the unitary tax
issue has been the subject of repeated diplomatic
protests from other governments since 1979. On Au-
gust 1, 1983, the 10 governments of the European
Community delivered a diplomatic note to the
United States Government renewing their objec-
tions to the international application of the unitary
5a
tax. Similar objections were expressed by the
Japanese Government on August 11, the Nether-
lands Government on August 17, and the Canadian
Government on August 23. Eariier protests against
unitary taxation by these governments have been
well publicised.
. The United Kingdom has an interest even stronger
than that of other Governments since United King-
dom direct investment in the United States is great-
er than that of any other country. By 1982 the
cumulative total of United Kingdom investment in
the United States was $23.334 billion which ac-
counted for 23% of the foreign direct investment in
the United States. Any measure which inhibits in-
vestment by British business in the United States is
clearly to the detriment of both countries. Her
Majesty’s Government believes that unitary taxa-
tion already has a damaging effect on the business
relations between the two countries and that the
damage will become very serious if the issue is not
speedily resolved.
. The unitary method of taxation is wholly contrary to
the agreed international method of attributing the
profits of multi-national enterprises between the
countries in which they operate. This is the arms-
length method which seeks to ensure that profits of
such enterprises are allocated in such a manner that
each country is able to claim tax on the profits—and
no more and no less than the profits—actually earned
in that country. If all countries use the same arms-
length basis in determining the profits, then double
taxation should be avoided through the international
net-work of double taxation agreements.
6a
5. Unitary taxation is incompatible with this in-
ternationally agreed method. It uses a formula to
determine what sum shall be charged and, as prac-
tised in the States, it may include profits brought
into charge elsewhere on the arms-length basis. If
unitary taxation were practised worldwide and
every national state could use an identical formula
for determining its share of the profits of a multina-
tional enterprise then agreement might be reached
internationally on such a basis which would eliminate
double taxation. It is, however, the case that over
the last 40 years or more the international communi-
ty has devised and refined the arms-length method
for international use. It is in this context of world-
wide agreement about the method of attributing
profits to multinational companies that the use of a
different method by some states of the United States
causes a distortion which makes it internationally
unacceptable.
. It is for these reasons that Her Majesty’s Govern-
ment has consistently urged that action be taken to
prevent the application of unitary taxation to United
Kingdom businesses. It sought to do so when
negotiating the current United Kingdom/United
States Double Taxation Agreement: but when in
1979, the United States Senate ratified the Treaty it
attached a reservation against this provision in Arti-
cle 9 (4). That Article in its original form would have
prevented the United States Government and the
individual states from applying the unitary method
to United Kingdom corporate groups which have
subsidiary companies in the United States. In its
final form, the Article applied only for purposes of
the United States Federal tax, which does not em-
yet we.
7a
ploy the unitary method. At the time the United
Kingdom, with the approval of Parliament, ratified
the amended Treaty and accepted the Senate reser-
vation against Article 9 (4), Her Majesty’s Govern-
ment was given to understand that the Government
of the United States would use its best endeavours to
eliminate the application of the unitary method of
taxation on a worldwide basis. Nevertheless, since
then more states have adopted the worldwide unita-
ry approach.
. Attempts have been made concurrently to secure a
solution through the United States courts without
success. Last June the United States Supreme Court
ruled in Container Corporation v. Franchise Tax
Board, that the California worldwide unitary tax
method did not violate the Foreign Commerce
Clause of the United States Constitution as applied
to a United States parent corporation and its foreign
subsidiaries. In so holding, the Court specifically
reserved the question of the constitutionality of com-
bined apportionment with respect to state taxation
of domestic corporations with foreign parents or for-
eign corporations with either foreign parents or for-
eign subsidiaries.
. In Her Majesty’s Government view, the Court’s de-
cision in Container Corporation was an unfortunate
setback that derived, in large measure, from the
confusion caused by the failure of the United States
Government to reaffirm the position taken in its
original brief in the Chicago Bridge case, to which we
have referred. In considering whether the California
tax impaired federal uniformity and the conduct of
United States foreign relations, the Court observed
that the federal government’s failure to file an ami-
10.
8a
cus brief in the Container case suggested that “the
foreign policy of the United States is not seriously
threatened by California’s decision to apply the
unitary business concept and formula apportion-
ment. .. .” Hence, Her Majesty’s Government be-
lieves that the outcome of the Court’s sharply di-
vided (5-3) decision could well have been different
had the federal government clearly restated what all
parties originally understood to be its position.
Moreover, the likelihood of an early resolution of the
applicability of the unitary method to the foreign
parent corporation case reservzd by the Supreme
Court is very much in doubt. Attempts are being
made to have the matter heard but two courts of
appeal have dismissed suits by foreign corporations
against the California Franchise Tax Board on the
ground that those foreign entities lack “standing” to
contest the tax assessments that are nominally ad-
dressed to their domestic subsidiaries. On the other
hand, as domestic corporations, the subsidiaries can-
not invoke the treaty provisions that are at the heart
of the claim that the unitary method impairs the
conduct of foreign relations. Hence, these court rul-
ings render rights conferred by treaties unenforce-
able by the very entities those provisions were
negotiated to protect-companies of one treaty party
engaged in this way in the territory of the other
treaty party.
The denial of standing to raise claims under the
United States Constitution will leave foreign parent
companies which in fact bear the economic burden of
double taxation caused by the unitary method unable
to challenge the lawfulness of that burden. This may
not be “taxation without representation” as it is
Danas eat | HWA ie ALLA ARON NN IR NOL ms ot N PM Ke OA ale Or wit
11.
12.
13.
9a
usually understood. But it does amount to taxation
without the right to be heard, in that a levy whose
constitutionality is at issue cannot be challenged by a
party directly affected by it. Reciprocally narrow
rulings by foreign courts would weaken the ability of
the United States companies to obtain judicial
protection for their investments abroad.
In sum, the failure of both the treaty making process
and federal litigation to resolve the validity of the
worldwide unitary method makes it imperative that
a comprehensive solution be reached as soon as prac-
ticable. It is Her Majesty’s Government’s view that
this method is incompatible with the internationally
accepted regime for taxing the profits of multination-
al enterprises.
II. CRITERIA FOR JUDGING A TAX SYSTEM
Any tax system should be judged on whether it is
capable of being administered equitably, produces
certainty and efficiency, and whether it is capable of
simple operation. The effects of applying unitary tax
on a worldwide basis are both inequitable and uncer-
tain. Moreover it is far from simple for the com-
panies concerned, since it requires a restatement in
US terms of the income and formula factors for each
component part of a group operating worldwide.
These effects in turn constitute an element of tax
induced inefficiency in the world economy, which
will inevitably distort trade patterns and inhibit bus-
iness decisions.
Application to differing economic circumstances
These adverse effects can be traced to particular
aspects of applying the unitary basis to the condi-
14.
10a
tions and circumstances which exist today. First,
when applied on a worldwide basis, the unitary sys-
tem is of necessity operating in economic conditions
which are far from homogeneous. The system works
by combining the income of several related corpora-
tions engaged in a “unitary” business. Income is then
allocated to the taxing state by multiplying the total
income of the enterprise by a percentage comprised
of the average of the ratios of instate property,
payroll and sales to total property, payroll and sales.
The precise formula varies from one State to
another.
The theory underlying this “unitary” approach is
that a dollar of payroll or property spent or a dollar of
sales made in one tax jurisdiction produces roughly
the same amount of taxable income as a dollar so
spent or sales made in another tax jurisdiction. This
theory manifestly falls down when applied to two (or
more) countries whose economic circumstances are
very different. For example, in a developing country
property and payroll costs may be very low, relative
to those in the Unitec States. On the other hand
profits will probably be higher to reflect the risks of
expropriation, currency exchange limitations, or
other factors. Applying the unitary basis to a group
operating both in the USA and a developing country
will thus result in a reallocation of group’s income
from the developing country to the USA. Quite apart
from the implications for the group itself (which are
discussed in more detail below), it must be open to
question whether this represents an equitable divi-
sion of world resources.
15.
16.
lla
Incompatibility with arm’s length basis
Second, because international trade relations oper-
ate on an entirely different (ie arm’s length) basis,
the worldwide application of the unitary system pro-
duces results which are at best anomalous and at
worst give rise to serious inequities. In sharp con-
trast to the unitary method (see above), the arm’s
length method requires the income of each corpora-
tion to be computed on a separate accounting basis
under the assumption that each member of a corpo-
rate group must deal with the other members as if
they were wholly separate entities owned by unre-
lated interests. This method has now been recom-
mended by both the OECD and UN model treaty and
enshrined in a worldwide network of bilateral
treaties to prevent double taxation, including those
treaties to which the USA is a party. In addition,
following the lead given by the US Federal Author-
ities in 1928, virtually all developed countries have
now adopted the arm’s length standard for prevent-
ing tax avoidance through artificially fixed inter-
company prices.
The unitary method and the arm’s length method are
not compatible. Applying the unitary formula to
groups which also operate in countries which work on
the arm’s length basis leads to cases of double taxa-
tion. It has been argued that the unitary basis does
not in fact tax the foreign source income of foreign
corporations related to the “unitary” company. In-
stead that income is merely taken into account in
order to determine the net income attributable to
activity within the “unitary” state. But the arith-
metical results of applying a unitary formula belie
17.
18.
12a
this argument. The “unitary” state is in effect requir-
ing a consolidated income tax return and subjecting
to tax the income earned by foreign members of the
unitary group without giving any relief for overseas
tax. In other words it has extended its jurisdiction to
bring into its tax net income over which other states
will have exercised their priority taxing rights under
the normal arm’s length arrangements.
The element of double counting this involves can and
does lead to multinational groups being taxed on
more than 100 per cent of their income. This may
represent an additional financial cost for the group
itself, which is inequitable. Or it could lead to a
diminution of the revenues flowing to any exchequer
which seeks to avoid double taxation by giving credit
for the “unitary” tax paid—a result which at best can
be described as anomalous. These inequities and ano-
malies are particularly acute in the—not uncommon
case—where the US company of a unitary group
operates at a loss. Even though it had made no profit
by any normal commercial standards, the US com-
pany would be liable for tax in respect of a proportion
of the worldwide profits of its foreign affiliates. In
other words there would be an element of direct
subsidy from the worldwide group (or foreign reve-
nue as the case may be) to the unitary state.
Unitary basis is not uniform
Third the unitary basis is not—and cannot be—
uniform in its application. The very concepts it uses
are incapable of precise definition, at least on any-
thing other than a very local basis. It is notable that,
even amongst the various states within the USA,
there are significant variations first in the criteria
19.
l3a
used for determining whether or not a particular
corporation is “unitary”, and second in the formula to
be applied to unitary corporations. Even within an
individual state it is by no means unknown for a
business which has been deemed “unitary” one year
to be classed as non-unitary the following year, and
for the basis of calculating its tax liability to vary
from one year to the next. As a result no business can
be sure whether or not it will be adjudged to be
“unitary” and if so, how its tax bill will be calculated.
In other words the unitary basis breeds uncertainty.
The problem this creates for business is heightened
by the lack of any procedure analogous to that embo-
died in “arm’s length” tax treaties for resolving dis-
putes about the application of the rules to individual
cases.
Unitary basis imposes high compliance costs
The fourth aspect of the unitary basis which con-
tributes towards its damaging effects is the com-
pliance costs it involves. It is for the companies them-
selves to tell the Working Group what complying
with the unitary system means in practice. The UK
Government would merely note that the full require-
ments of the system necessitate, at a minimum, the
translation into US dollars of accounts maintained by
related companies in a multitude of different curren-
cies and the preparation of extra sets of accounts to
meet the specific, and varying, requirements of the
unitary states. And we understand that the details
requested often reflect confidential data, trade sec-
rets, or other information that cannot be made avail-
able for reasons totally unrelated to tax considera-
tions.
l4a
20. Of more direct concern to the UK Government is the
21.
extent to which the unitary states’ demands for fi-
nancial information may involve investigation of the
records of UK companies which are outside the USA.
More often than net, the substantial majority of the
records required describe business transactions that
are entirely unrelated to activities within the United
States. This is objectionable in principle, as well as
producing excessive compliance burdens in practice.
Comparison of unitary method with arm’s length
method
By contrast, the arm’s length method, though not
perfect, avoids these four very real problems which
inevitably arise when the unitary basis is applied
worldwide. First by focussing on the amount of profit
that would have been made within an individual
country by independent parties dealing at arm’s
length, it recognises that companies operating in
different economic circumstances will incur different
costs and run very different risks. Second, there is of
course no question of the basis being incompatible
with internationally-accepted methods—the arm’s
length basis is the international accepted method.
Equally, the ‘international’ nature of the arm’s
length method helps to avoid the third problem—the
lack of any uniform rules. Because it has been for so
long the guiding principle of international tax, there
has been time to smooth out the ‘rough edges’ of the
arms-length method. The countries of the world have
evolved a series of internationally accepted stand-
ards which are capable of exact definition under
clearly applied procedures. So the various problems
identified earlier—of double taxation: of companies
being liable to tax on more than 100 per cent of their
5a
income: of companies being liable to tax in respect of
profits when, on normal commercial principles, they
are making a loss—simply do not arise or where they
do, they can be satisfactorily resolved.
22. The fourth problem, that of high compliance costs for
companies, equally does not arise to anywhere near
the same extent under the arm’s length method. The
information required in order to operate this method
is, more often than not, information which companies
have already had to prepare for other purposes. The
use of accounts drawn up to comply with company
law requirements is a good example of this.
23. Generally, therefore, when measured against the
criteria for judging a tax basis the arm’s length basis
is on each count preferable to the worldwide unitary
method. It is at once more equitable, more certain,
simpler and more conducive to efficiency. Nor does
there seem any good reason why it should not serve
as an effective policing mechanism to protect the
revenue of individual states. There is an extensive
body of Treasury Regulations under Section 482 of
the Internal Revenue Code of 1954 providing defini-
tive guidelines governing the fiscai relationships of
commonly-controlled corporations. Moreover we un-
derstand that, under long-standing accords, in-
formation gathered by the United States Treasury
from Federal tax audits is continually made available
to the individual States. Against this backgiound,
the majority of States have felt able to operate an
arm’s length system, and to apply this rule to sub-
sidiaries of multinational group resident within their
jurisdictions.
24.
25.
26.
27.
l6a
Wider consequences of the unitary system
Any set of rules which fails to measure up to the
criteria of a good tax system must be expected to
have adverse consequences which go well beyond the
immediate im»act of that set of rules itself. This is
certainly the case with the current application, by
several US States, of the unitary system on a world-
wide basis.
First there is now evidence that it is inhibiting trade
relations and distorting investment patterns. In the
light of the inequities, anomalies and uncertainties
generated by the tax rules, foreign corporations are
re-appraising the benefits and burdens of conducting
business within a unitary state. The recent decision
by the London Chamber of Commerce to cancel its
mission to Florida on account of Florida’s adoption of
the worldwide unitary basis is a good example of this.
Furthermore, the spread of unitary taxation
amongst the various States can only serve to under-
mine the verv strong position that the United States
has adopted in OECD and elsewhere for the
liberalisation of international investment flows. The
position was restated only a few weeks ago by Presi-
dent Reagan himself in his 9 September Statement
on US policy towards international investment. The
continued imposition of unitary taxation is in-
compatible with this stance.
These adverse consequences for worldwide trade
and investment would be even worse if other coun-
tries respond to the States’ application of unitary tax
by taking retaliatory measures or introducing unita-
ry systems of their own. In particular the States’
operation of the worldwide unitary basis, and the US
17a
Federal Government’s failure to prohibit this sys-
tem, may well serve as an example which other coun-
tries will soon choose to follow. In particular some
developing countries may feel that the system has its
attractions for them. If such countries adopt unitary
tax, they would be unlikely to follow the three factor
formula used, for example, in California. The very
different economic conditions which prevail in the
developing world would naturally incline them to
develop or emphasise factors which allocate a great-
er proportion of income to the developing country.
They might for example focus simply on sales.
. The effects of other countries taking retaliatory
measures, or unitary tax spreading outside the
United States, will be keenly felt by the United
Kingdom. This is because the UK invests on a sub-
stantial scale in foreign countries in both the de-
veloped and developing world. But if the UK is a
substantial investor in foreign countries, the United
States is a much larger one. So the adverse impact on
the United States must be expected to be much
greater. As things stand at present the economic
burden this imposes will, in large part, fall on the
United States Federal Government. Because the
United State’s Internal Revenue Code allows a cred-
it against United States taxes for taxes paid to a
foreign country (subject to certain limitations), any
increase in foreign taxes could be offset dollar for
dollar by a reduction in United States taxes.
29.
30.
18a
III. CONCLUSION
In this paper the UK Government has analysed the
worldwide unitary system by reference to the
universally-accepted criteria of a good tax system—
equity, certainty, simplicity and the promotion of
economic efficiency. It has demonstrated that, when
applied in the present international context, the
worldwide unitary method inevitably produces re-
sults which are inequitable and uncertain. The
method involves additional compliance costs for com-
panies. Furthermore it is in the United Kingdom
Government’s view objectionable in principle that
the method can require the disclosure of the records
of companies outside the USA, particuiarly as these
will often apply to transactions entirely unrelated to
activities within the United States.
If the worldwide unitary system is allowed to persist
it will hamper rather than promote economic efficien-
cy distorting investment patterns and inhibiting
trade throughout the world. It makes it impossible to
achieve the essential objective of providing a con-
sistent and coherent international tax framework for
trade and investment. This framework is particular-
ly crucial at the present juncture in the development
of the world economy, when businesses are seeking
profits throughout the world without regard to na-
tional boundaries. The narrow economic standpoint
of the unitary system is incompatible with the
harmonious relationship that is the goal of our
governments, to the benefit of the American and
British people alike.
19a
LETTER DATED JULY 12, 1983 FROM THE CHANCELLOR
OF THE EXCHEQUER TO THE SECRETARY OF THE
TREASURY
Dear Mr. Regan,
I am writing to you on the subject of unitary taxation
following the recent decision of the United States Su-
preme Court in the case of Container Corporation of
America v. The California Franchise Tax Board, uphold-
ing the right of a state to use the worldwide combined
unitary method of taxation. This method carries a high
risk of double taxation, and imposes on international com-
panies a heavy administrative burden. As you know this
is a subject on which my predecessor and other colleagues
have expressed strong views to you on a number of occa-
sions. It is an issue of considerabie concern to Parliament
and the British business community.
After the filing of an amicus curiae brief in the Chicago
Bridge and Iron case by the United States Solicitor
General, we advised British companies to await the Su-
preme Court’s decision before making further
representations. We were therefore naturally disap-
pointed with the ruling in the Container case. When these
issues do arise it seems to us important that an amicus
curiae brief is filed, and I wonder whether the lack of such
a brief might have been a factor in this case. I appreciate
that the latest decision does not apply to United States
corporations with foreign parents, which is the issue of
most concern to us. However the consequence seems to
be that there is little prospect of this particular issue
being tested in the Supreme Court in the near future.
I understand that at your meeting on 7 July with the
British Ambassador you said that you would probably
consider legislative action as a result of the decision. In
20a
the circumstances I would welcome this. Following the
reservation of the United States Senate on Article 9(4) of
the Double Taxation Convention, there were as you
know, some misgivings here, when the Convention came
before Parliament for ratification in 1980. Nonetheless
ratification was approved in the expectation that action
by the Administration to eliminate the practice was in
hand. .
I should be interested to know how you see this devel-
oping, and to learn of your proposed timetable. You will of
course be aware that this is a matter where there is
strong pressure in Parliament. We are keen for the mat-
ter to be resolved as soon as possible before possible harm
is done to the good relations between our two countries. I
hope we shall have an opportunity to let you have our
views on any legislation you may be preparing. Geoffrey
Howe, who of course also has a close interest in this
subject, will see you in Washington this week and looks
forward to having further discussions on this with you.
Yours sincerely,
Nigel Lawson
2la
NOTE SUBMITTED BY THE UNITED KINGDOM TO THE
DEPARTMENT OF STATE DATED MAY 18, 1982
Note No. 83
Her Britannic Majesty’s Embassy present their
compliments to the Department of State and have the
honour to refer to their Note of 25 March 1980 to the
Department on the exchange of Instruments of Ratifica-
tion of the Convention between the Government of the
United Kingdom of Great Britain and Northern Ireland
and the Government of the United States of America for
the avoidance of double taxation and the prevention of
fiscal evasion with respect to taxes on income and capital
gains.
Her Majesty’s Government remains firmly convinced
that the unitary basis of taxation with combined report-
ing, particularly as applied in the international field, is
entirely unsatisfactory. As was pointed out in that Note
this system of taxation makes no attempt to examine the
profits made by the locally based subsidiary company. It
may look to the total profit of the worldwide operations of
the group and claim a proportion of that total by reference
to arbitrarily defined criteria. It can lead to a demand for
tax by reference to group profits from unconnected activi-
ties in other parts of the world where they are already
taxed, even though the local subsidiary is incurring sub-
stantial losses. In addition the compliance costs are
unacceptably high.
Her Majesty’s Government wishes to draw the atten-
tion of the State Department to the case of Shell Pet-
roleum N.V. v. Graves et al. listed for hearing before the
United States District Court, Northern District of Cali-
fornia on 1 June 1982, a case which amply illustrates these
and other arbitrary and damaging features resulting from
2a
the international application of the unitary basis of taxa-
tion with worldwide combined reporting.
Unless common rules accepted by all OECD member
States for determining the allocation of profits between
different taxing jurisdictions are followed internationally
it will be impossible to preserve the essential objective of
providing a consistent and coherent international tax
framework for business and investment. Her Majesty’s
Government therefore urges as a matter of high priority
that the Government of the United States should use its
best endeavours to eliminate the international application
of the unitary basis of taxation.
The British Embassy avail themselves of this oppor-
tunity to renew to the Department of State the assur-
ances of their highest consideration.
18 May 1982
BRITISH EMBASSY
WASHINGTON
23a
NOTE SUBMITTED BY THE UNITED KINGDOM TO THE
DEPARTMENT OF STATE DATED OCTOBER 30, 1981
Note No. 211
Her Britannic Majesty’s Embassy present their
compliments to the Department of State and, on behalf of
the Ten EEC Governments, of which the British Govern-
ment has now the Presidency, have the honour to forward
the attached Note on the problems of the unitary method
of taxation.
The British Embassy avail themselves of this oppor-
tunity to renew to the Department of State the assur-
ances of their highest consideration.
30 October 1981
BRITISH EMBASSY
WASHINGTON
Attached: Note.
UNITARY TAXATION
1. Our Governments are concerned about the applica-
tion to US subsidiaries of foreign companies of the
unitary basis of taxation as applied in California and
in varying degrees by certain other States.
2. The unitary basis makes no attempt to examine the
profits generated by the subsidiary. It looks to the
total profits of the worldwide operations of the
group of which the subsidiary is a part, and claims a
portion of those profits on the basis of the assump-
tion that certain specified factors, such as the fixed
asset values, turnover and payroll, affect the profits
of the subsidiary in the same way and to the same
24a
extent as the profits of the group as a whole,
irrespective of where the corporations of the group
operate. This means that, whenever the group as a
whole makes a profit the subsidiary will be taxed on
a portion of this profit, even if the subsidiary is
actually making a loss, or in the reverse situation,
that the subsidiary may not be taxed if the group as
a whole has made a loss, although the subsidiary is
actually in a profit making position.
This method is incompatible with the principles ac-
cepted by all OECD member states and recom-
mended to all states as a basis for the taxation of
subsidiaries or permanent establishments of foreign
enterprises. These principles require that a sub-
sidiary should be taxed only on the profits it actually
has made, provided that these are based on dealing
at “arm’s length” between the subsidiary and re-
lated enterprises, i.e. that the transactions between
the subsidiary and related corporations are on the
same or on a comparable basis as transactions be-
tween wholly independent parties. This is intended
to arrive at a fair measure of profit and rule out
artificial pricing between members of the group for
the sole purpose of minimizing tax liability.
Unless the same basic rules for calculating taxable
profits are followed generally by the main trading
nations it will be impossible to achieve the essential
objective of providing a consistent and coherent
international tax framework for trade and invest-
ment.
The unitary tax basis can give rise to obviously
inequitable tax liabilities, and to a form of double
taxation which often cannot be relieved, or can be
10.
25a
relieved only if countries, which follow generally
accepted practices, bear an unfair burden of relief.
Unitary taxation, because it requires worldwide
reporting of the group’s activities in the state where
the subsidiary operates, imposes very heavy com-
pliance costs, in addition to the costs of compliance
and reporting for non-US corporations in their
“home countries.”
The Federal Government uses the arms-length
basis for its taxation of subsidiaries of foreign
corporations.
The problem was addressed in the US/UK Double
Taxation Treaty. Article 9(4) of the Treaty, which
was supported by the Administration, would have
disallowed the imposition of unitary taxes on sub-
sidiaries of UK companies. When the Senate voted
on the Treaty in 1978 the majority approved the
Treaty with Article 9(4) in its original form, al-
though the necessary two-thirds majority was not
achieved. Subsequently, the Senate approved the
Treaty with the necessary two-thirds majority, but
subject to the reservation that Article 9(4) was not
to apply for the purpose of state taxation. Article
9(4) remained in the Treaty, but only for the purpose
of national taxation.
There are currently two relevant bills in Congress,
S655 and HR 1983.
In view of the strong arguments against unitary
taxation and the recent extension [of] its application
in New York State, our Governments urge you to
support this legislation in so far as it relates to the
unitary tax issues raised above, with a view to early
enactment.
26a
NOTE SUBMITTED BY THE UNITED KINGDOM TO THE
DEPARTMENT OF STATE DATED MARCH 25, 1980
Note No. 51
Her Britannic Majesty’s Embassy present their compli-
ments to the Department of State and have the honour to
refer to the discussions between representatives of the
two Governments about the convention between the
Government of the United Kingdom of Great Britain and
Northern Ireland and the Government of the United
States of America for the avoidance of double taxation
and the prevention of fiscal evasion with respect to taxes
on income and capital gains, signed at London on 31
December 1975, as amended by protocols signed at Lon-
don on 26 August 1976, 31 March 1977 and 15 March 1979
(hereinafter referred to as “the Convention”). It is a
matter of regret to her Majesty’s Government that diffi-
culties over one aspect of the Convention, although it is an
important one, should have tended to obscure the
achievement of the two Governments in reaching a fair
and balanced agreement.
2. Among double taxation treaties, that between the
British and United States Governments has a pre-
eminent position. The economic and financial links be-
tween the two nations are so strong and the areas covered
so diverse that, apart from its intrinsic importance to the
United Kingdom and the United States of America, the
Convention attracts wide interest internationally and is a
source of authority in its field.
3. Her Majesty’s Government is therefore gravely con-
cerned that as a result of the amendment resulting from
the United States Senate reservation on Article 9(4) the
Convention does not comprehensively restrict the appli-
cation cf the unitary basis of taxation. That Article in its
27a
original form would have prevented the United States
Government and the individual States of the United
States of America from applying this basis to United
Kingdom corporate groups which have subsidiary com-
panies in the United States. In its final form the Article
applies only for the purposes of United States federal tax,
where the unitary basis is not employed, and does not
cover individual States of the Union. This is not only a
set-back for British corporate investment in the United
States. It may also be interpreted as awarding some
approval for the unitary basis of taxation and could have
wider repercussions.
4. Her Majesty’s Government is convinced that the
unitary basis of taxation with combined reporting, partic-
ularly as applied in the international field, is entirely
unsatisfactory. The Organisation for Economic Co-
operation and Development has explored, encouraged
and developed the “arm’s-length” principle for regulating
the taxation of multinational enterprises operating
through subsidiary companies or branches. This principle
requires that the subsidiary or branch should be taxed
only by reference to the profits which its own activities
generate. Where these activities involve transactions
with related enterprises and these transactions are not on
the basis which would be made between wholly indepen-
dent enterprises, the profits are to be adjusted for tax
purposes by reference to the independent enterprise test
ie the “arm’s-length” basis. This is intended to achieve a
fair measure of the profit by cancelling the effect of any
artificial pricing between related enterprises. The
“arm’s-length” approach has been internationally ac-
cepted and is a vital feature of double taxation conven-
tions throughout the world.
5. The unitary basis with combined reporting is a quite
28a
different approach. It makes no attempt to examine the
profits made by the locally based subsidiary company. It
may look to the total profit of the world-wide operations
of the group and claim a proportion of that total by refer-
ence to arbitrarily defined criteria. The problems associ-
ated with this technique are many and have been well
rehearsed. The tax consequences are unpredictable and
arbitrary. The widely varying commercial and economic
climates in different countries produce inequitable re-
sults. Under this system it can lead to a demand for tax by
{countries} in other parts of the world where they are
already taxed, even although the local subsidiary is in-
curring substantial losses. On the unitary basis there is
likely to be unrelieved and unrelievable double taxation.
In addition the compliance costs are unacceptably high.
6. Apart from these inherent problems associated with
the unitary tax basis, its incompatibility with the in-
ternationally accepted “arm’s-length” basis would gener-
ate conflicts between the international investing and
trading nations and disruption of international business if
the precedent implicit in the Convention were to be fol-
lowed by other countries. Unless common rules for
determining the allocation of profits between different
taxing jurisdictions are followed internationally it will be
impossible to preserve the essential objective of provid-
ing a consistent and coherent international tax
framework for business and investment, for which the
United States and the United Kingdom have striven
together with their fellow members of the Organisation
for Economic Co-operation and Development. It is the
view of Her Majesty’s Government that the unitary basis,
which is not a practical international alternative to the
“arm’s-length” basis, could undo the important and pa-
tient international work that has been achieved in
29a
regulating international tax practices, and that every
effort is required to discourage the use of the extension of
that basis. It is to this end that the British and United
States Governments have expressly prohibited its use for
the purpose of the respective national tax systems under
Article 9(4); and the issue will be an important aspect of
the proposed annual review of the Convention.
7. Her Majesty’s Government has recognised, in ratify-
ing this Convention with the approval of the United King-
dom Parliament, and in its acceptance of the United
States Senate reservation against Article 9(4) of the Con-
vention, the difficult issues raised within the United
States in seeking to limit State taxing powers through the
double taxation conventions of the United States. It has
also recognised the importance of the Convention in its
many other aspects for the two Governments and for the
business and investment communities on each side. It
must be emphasized however that the acceptance of the
Senate reservation in no way implies approval of the
unitary basis and it is the urgent request of Her Majesty’s
Government for the reasons given in this Note that the
Government of the United States should use its best
endeavours to eliminate the international application of
the unitary basis of taxation.
s. The British Embassy avail themselves of this oppor-
tunity to renew to the Department of State the assur-
ances of their highest consideration.
British Embassy
WASHINGTON 25 March 1980
30a
SUBMISSION DATED DECEMBER 23, 1983 FROM THE
CONFEDERATION OF BRITISH INDUSTRY TO THE
UNITED STATES WORKING GROUP ON WORLDWIDE
10
UNITARY TAXATION
* * *
THE COMPLIANCE BURDEN
No Uniform Rules
10.1
The unitary States require foreign data to be con-
verted or adjusted to the unitary State basis. Un-
fortunately the unitary States at present have no
common rules as to how such conversion shall be
done since there is no uniformity of underlying tax
rules and presumably never will be so long as fiscs
seek to maintain their individuality.
Disproportionate Burden on Foreign Groups
10.2 Foreign audited accounts may have to be con-
10.3
verted into a US or local State acceptable form.
Not only is this time consuming and expensive but
from a businessman’s point of view it beco.. 2s an
exercise verging on the ridiculous if different sets
of figures have to be produced to meet the whims of
each local fisc.
For example, assume that UK corporation X trans-
acts business in 20 different countries through
separate subsidiaries. Clearly, these 21 corpora-
tions, including the UK parent, would not keep
their books, or determine income, payroll, plant
costs, and sales in United States dollars. In addi-
tion, each corporation would maintain, in local lan-
guage, books and records which are consistent
with the accounting standards required by its
country of residence.
10.4
10.5
3la
If X now establishes a subsidiary in a unitary
jurisdiction it must be prepared to (1) translate 21
languages and (2) translate 21 currencies into
United States dollars at scores of different ex-
change rates, all of which are subject to sharp
fluctuations, devaluations, and other changes, and
(3) determine what method of accounting is accept-
able in the unitary jurisdiction and restate 21 sets
of accounts to be consistent with that method of
accounting. These adjustments could run the
gamut from differences in depreciation methods to
changes in tax years. Assume that the subsidiary
transacts business in two different unitary
jurisdictions which utilise different accounting
standards. Corporation X must now prepare 42
separate sets of accounts from 21 countries. This is
a situation where the cost of compliance would
frequently exceed the tax at stake.
This is not a merely theoretical objection. The
problem has already been acknowledged to exist,
as an extract from the British Tax Review 1983,
pages 206 and 207 makes clear:
“A frank statement of one of the problems en-
countered in unitary taxation of foreign-based
groups is contained ina memorandum dated May
31, 1979, from Dennis G Amundson, Deputy
Director of the Department of Economic and
Business Development of the State of California
to Richard T Silberman:
“they (the staff of the Franchise Tax Board)
readily acknowledged that the Board has not
been able to develop an equitable method of
converting foreign-based earnings into Amer-
32a
ican dollars. This problem is greatly com-
pounded when the foreign firm conducts oper-
ations in several countries. The distortive ef-
fect of foreign currency translation is very
dramatically pointed out by Lever Brothers, a
subsidiary of Unilever, N.V., a Dutch
corporation, which shares a common Board of
Directors with Unilever Ltd, a British
corporation. In the 1976 tax year, Lever
Brothers’ tax obligation to the State of Califor-
nia... depends entirely on the method used
te convert Dutch guilders and British pounds
to American dollars and the exchange rate at
the time the calculations are made. In this
case, the guilder, which is very strong in rela-
tion to both the pound and the dollar, produces
a substantially different picture of Lever
Brothers’ profitability than calculations based
on the weaker pound. The staff of the Fran-
chise Tax Board concedes that they have no
existing method to deal with this problem on a
uniform basis, and thus is forced to negotiate
tax assessment on a case by case basis. . . .””
10.6 We note with concern that even for one item, the
translation of foreign currency, there is no common
rule.
Foreign Information May not Exist or may be Secret
10.7 The situation would be difficult enough if the books
and records could be produced. However, the rele-
vant financial information may not exist at all or
may reflect confidential data, trade secrets, or
other information that cannot be made available for
reasons totally unrelated to tax considerations.
33a
There is no guarantee that such information will
continue to be available if foreign fiscs perceive
that they, and taxpayers domesticated in their
jurisdiction, are being penalized by imposition of
worldwide combined reporting in the USA. A com-
pany may very well be compelled to agree to any
tax audit adjustment, regardless of its merit,
either because the cost of contesting the adjust-
ment is prohibitively high, or because the relevant
financial information cannot readily be made avail-
able. Moreover, the cases demonstrate that the
unitary state may seek to exact additional penal-
ties for failure to provide the requested books and
records.
Potential Cost of Compliance—Multiple Jurisdictions
10.8 It is already burdensome enough that information
has to be kept locally according to local rules and
converted as best possible for headquarters pur-
poses. To extend this whole conversion process not
just upwards towards the ultimate parent com-
pany but in all other directions also, assuming the
fiscs involved in local operations jumped on the
unitary bandwagon, seems patently absurd from a
realistic commercial angle.
* * *
This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.