Amicus Curiae Brief — Barclays Bank PLC v. Franchise Tax Bd. of Cal.

7

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= 5 1993

LLERK

No. 92-1384

IN THE

SUPREME COURT OF THE UNITED STATES

October Term 1992

BaRcLays BANK PLC

Petitioner,

»

FRANCHISE TAX BOARD,

AN AGENCY OF THE STATE OF CALIFORNIA

Respondent.

ON PETITION FOR WRIT OF CERTIORARI

TO THE COURT APPEAL OF THE STATE OF

CALIFORNIA IN AND FOR THE THIRD

APPELLATE DISTRICT

BRIEF OF ORGANIZATION FOR

INTERNATIONAL INVESTMENT INC.

AND UNION OF INDUSTRIAL AND

EMPLOYERS’ CONFEDERATIONS OF

EUROPE AS AMICI CURIAE IN

SUPPORT OF CERTIORARI

JAMES MERLE CARTER

Counsel of Record

Harris, Carter & Mahota

Suite 704

1747 Pennsylvania Ave. NW

Washington, DC 20006

Tel: 202/223-4723

410/673-7201

TABLE OF CONTENTS

Page

TABLE OF AUTHORITIES ..................006. ii

INTEREST OF AMICI CURIAE .................. ]

of,

STATEMENT OF REASONS FOR TAKING THE CASE

A. THE DECISION BELOW IMPAIRS THE

FEDERAL GOVERNMENT'S ABILITY TO

CONDUCT FOREIGN RELATIONS......... dq

B. THE DECISION BELOW IS MATERIALLY IN

CONFLICT WITH PRIOR DECISIONS OF

THIS COURT REGARDING THE DORMANT

COMMERCE CLAUSE...............5.... 6

RE ie PS a i)

APPENDICES

I ORGANIZATION FOR INTERNATIONAL IN-

VESTMENT INC. CORPORATE MEMBERS. A-1

If UNICE MEMBERS........... . ae A-3

Ii LETTER OF 30 JUNE 1989, ON BEHALF OF

THE EUROPEAN COMMUNITY DELIV-

ERED TO THE SECRETARY OF STATE.... A-5

TABLE OF AUTHORITIES

Cases: Page

Capitol Industries — EMI, Inc. v Bennett, 681 F.2d

1107 (9th Cir.), cert. denied, 459 U.S. 1087 (1982) 9

Complete Auto Transit v Brady, 430 US. 274 (1977) 7

Container Corp. v Franchise Tax Board, 463 U.S. 159

(19GB)... cccccccccesecsenueun nnn 4,69

Franchise Tax Bd. v Alcan Aluminium, Ltd., 493 US.

331 (1GBB) .. wn ncceccceccce ups eeee eee 6

Itel Containers International Corp. v Huddleston,

US. , 113 S. Ct. 1095 (1993) ......... 7

Japan Line Ltd. v Los Angeles County, 441 U.S. 434

(2 ) BR 3,6,9

Kraft General Foods, Inc. v lowa Department of Rev-

enue, US. , 112 S. Ct. 2365-1992).... 7

Shell Petroleum, N.V. v Graves, 570 F.Supp 58 (N.D.

Cal.), aff'd 709 F.2d 593 (9th Cir.), cert. denied sub

nom. Shell Petroleum N.V. v Franchetti, 464 US.

1013 (CIGEB) .. oo ov ccccesee seen eee i)

State of Wyoming v State of Oklahoma, US.

, 133 B& Ce, FED CHR « oc cncesoueuueneee 7

Wardair Canada Inc. v Florida Dept. of Revenue,

477 US. 8 CRRBB) . . cc ccctccscsceuseeue passim

United tates Constitution:

Art. I, § 8, Cl. 3, Commerce Clause............. passim

United States Statutes:

FOREIGN InvesToRS Tax Act, P.L. 89-809, 80 Stat.

RGSS (CIGES) .. occ ccccccsccceseveeee 5

INTERNAL REVENUE Cope, 26 USC §§ 482, 861-865 5

ii

No. 92-1384

IN THE

SUPREME COURT OF THE UNITED STATES

October Term 1992

| BarcLays BANK PLC

Petitioner,

9

FRANCHISE TAX BoarD,

AN AGENCY OF THE STATE OF CALIFORNIA

Respondent

ON PETITION FOR WRIT OF CERTIORARI

TO THE COURT APPEAL OF THE STATE OF

CALIFORNIA IN AND FOR THE THIRD

APPELLATE DISTRICT

BRIEF OF ORGANIZATION FOR

INTERNATIONAL INVESTMENT INC.

AND UNION OF INDUSTRIAL AND

EMPLOYERS’ CONFEDERATIONS OF

EUROPE AS AMICI CURIAE IN

SUPPORT OF CERTIORARI

INTEREST OF AMICI CURIAE

The Organization for International Investment Inc.

(“OFII") is a non-profit corporation the members of

which are United States subsidiaries of foreign

l

2

shareholders.' The Union of Industrial and Employers

Confederations of Europe (“UNICE”) is recognized as the

official spokesman for European business and industry

vis-a-vis the Evropean Economic Community and other

European institutions.”

OFII members are domestic companies engaged in

manufacturing, distributing goods, and performing ser-

vices within the United States. OFII members export man-

ufactured and processed goods and import various

articles. OFII represents members inierests in matters of

federal and State taxation and seeks legislative and judi-

cial solutions to problems affecting economic interests of

its members. OFII members have a direct and vital interest

in the international aspects of the tax issues presented by

this case. Similarly to the petitioners, OFT] members bear

an increased and discriminatory tax burden under Califor-

nia law. OFII members are treated as unitary with their

foreign affiliated companies and are obliged to pay Califor-

nia taxes on foreign source income of companies that do

not do business anywhere in the United States. California's

scheme of worldwide taxation creates a substantial im-

pediment to international commerce — to investment in

the United States by foreign perso

The member federations of ® of UNICE are the official

representatives of all sectors of business and industry in

their respective nations. UNICE comprises thirty-three

member federations from twenty-two European nations

including all European Community and European Free

Trade Association nations. UNICE’s permanent secre-

tariat is in Brussels, Belgium. An important objective of

UNICE is to promote international commerce and invest-

ment by eliminating international double taxation. UNICE

views California's taxation of foreign source income of

companies that do not do business in the United States as a

direct impediment to the flow of capital and intellectual

1. A list of OFT] members in annexed as Appendix I. Neither the

petitioner nor any of its subsidiaries and affiliates are members of

OFII.

2. A list of UNICE organizations is annexed as Appendix II.

3

property between the United States and the nations

UNICE represents. UNICE is particularly concerned with

the chilling effect the extra-territorial reach of California's

unique tax method has on foreign direct investment in the

United States.

OFII and UNICE believe it is essential that the L'nited

States speak with “one voice” in international taxation

matters, as required by this Court's decision in Japan Line

Ltd. v County of Los Angeles.* Departure from Japan Line

principles poses a severe risk of burdensome and unfair

international multiple taxation. The inherent incom-

patibility between California's worldwide combined re-

porting method and the internationally accepted arm's

length standard inevitably leads to multiple taxation of

enterprises represented by the amici organizations.

SUMMARY STATEMENT

The Barclays Bank PLC Petition for a Writ of Cer-

tiorari seeks review of a decision of the Supreme Court of

California that directly confronts the power of the Federal

Executive in matters of foreign commerce and taxation of

international transactions. In all of its tax treaties and in

the Internal Revenue Code, the United States has pro-

moted and adhered to the internationally accepted stan-

dard of arm's length, separate entity accounting for

division of taxable income by multinational entities. Cal-

ifornia has expanded its unitary income apportionment

method of taxation to include foreign transactions and

foreign entities over which neither California nor the

United States has jurisdiction. These disparate methods

cannot be reconciled. California's disregard of interna-

tional and federal sourcing-of-income rules inevitably cre-

ates a substantial risk of multiple taxation; imposes severe

compliance burdens that interfere with the free flow of

commerce; and intrudes upon the prerogatives of the

federal government in foreign affairs and international

commerce. The United States cannot conduct a coherent

3. 441 US. 434 (1979).

4

foreign economic policy — that is, it cannot speak with

“one voice” — in the face of a disparate and incompatible

income tax method applied internationally by individual

States.

The overriding issue in this case is whether the dor-

mant Commerce Clause requires that California's world-

wide combined reporting tax regime be restricted to

interstate commerce where its principles were developed.

That issue has not been decided by this Court in the

context of domestic corporations with foreign parents or

foreign corporations with either foreign parents or foreign

subsidiaries. This issue was specifically reserved for deci-

sion by this Court in Container Corp. of America v Fran-

chise Tax Bd.4 This case now presents the issue with

unusual clarity and, therefore, should be heard by this

Court.

In its strained reading of Wardair Canada Inc. v

Florida Dep't of Revenue,® the California Supreme Court

has advanced a novel analysis of the dormant Commerce

Clause that elevates Congressional inaction to Congres-

sional mandate. If the California judgment is allowed to

stand, any State may establish policy affecting foreign

commerce of the United States and even contravene

federal foreign policy with impunity unless and until inter-

dicted by an act of Congress. The California Supreme

Court's decision disregards this Court's precedents and

endeavors to supersede federal foreign policy. This Court

should grant the petition in this case to settle finally the

dormant Commerce Clause issue that has been open for

ten years since the decision in Container Corp.

STATEMENT OF REASONS

FOR TAKING THE CASE

A. THE DECISION BELOW IMPAIRS THE FEDERAL

GOVERNMENT’S ABILITY TO CONDUCT FOR-

EIGN RELATIONS.

4. 463 US. 159 (1983).

5. 477 US. 1 (1986).

5

The United States adopted the arm's length method

many years ago as its standard for allocating income

among commonly controlled corporations doing business

in more than one nation.® This method is reflected in the

Internal Revenue Code’ and is embodied in all bilateral tax

treaties to which the United States is a party.* The arm's

length standard, moreover, is accepted by foreign nations:

no foreign nation uses worldwide combined reporting.

No one questions that worldwide combined reporting

for tax purposes is incompatible with the arm's length

method. The question is whether the United States can

maintain and administer uniform standards to divide in-

come among nations if those standards are ignored by

individual States. The application of worldwide combined

reporting to international commerce by California “... im-

pair(s] the ability of the federal government to carry out its

tax and investment policy in the international area” and

“has seriously complicated [the United States’] economic

relations with many of our closest allies.”® Its use has been

a matter of extreme concern to the United States’ trading

partners and has already led to harm to the United States

as a nation.!°

The reason for the United States to observe and as-

sure compliance with the international standard is two-

fold: (1) to secure uniform and equitable treatment of

United States business abroad and, correspondingly, (2) to

6. E.g., ForeiGn Investor's Tax Act, Pub. L. No. 89-809, 80 Stat.

1539 (1966).

7. See LR.C. § 482 and the income sourcing rules of LR.C. Sub-

chapter N, §§ 861 — 65.

8. These numerous authorities are collected in the amicus brief

of the United States filed in the court below, reproduced in Petitioner's

appendix at H-10,n.5.

9. Letter to Governor Deukmijian of California, dated Jan. 30,

1986, from Secretary of State George P. Schultz, included in Appendix

A of the amicus curiae brief of the United States, reproduced in

Petitioner's Appendix at H-43.

10. Letter of 30 June 1989, on behalf of the European Community,

delivered to the Secretary of State by the Spanish Ambassador, an-

nexed as Appendix IV.

6

protect as agreed by treaty foreign direct investment in the

United States. Neither objective is attainable if a major

commercial jurisdiction within the United States ignores

the international standard and subjects foreign direct in-

vestments to what amounts to economic harassment

through double taxation and imposition of excessive com-

pliance costs.

The lower courts that considered this case found on

the basis of substantial evidence that California's use of

worldwide combined reporting, as applied to foreign-

owned corporate groups, violated the Foreign Commerce

Clause because it “impair{[ed] federal uniformity in an area

where federal uniformity is essential” and “prevent(ed]

the Federal Government from speaking with one voice

when regulating commercial relations with foreign gov-

ernments.”!!

The precise legal issue presented by this case is

whether the United States foreign policy “voice” as ex-

pressed by the Executive Branch, combined with Congres-

sional assent in the form of enabling legislation and treaty

ratification, is sufficient to invoke the protection of the

Foreign Commerce Clause of the United States Constitu-

tion for the beneficiaries of that foreign policy.'

B. THE DECISION BELOW IS MATERIALLY IN

CONFLICT WITH PRIOR DECISIONS OF THIS

COURT REGARDING THE DORMANT COM-

MERCE CLAUSE.

The California Supreme Court has effectively de-

clined to consider the Foreign Commerce Clause issues

raised by this case. The California Court chose not to

follow the dormant Commerce Clause analysis developed

by this Court in Container Corp. and Japan Line, but,

11. Japan Line, 441 US. at 448, 451 (citation omitted).

12. This is frequently referred to as the “dormant” Commerce

Clause issue. Franchise Tax Bd. of Cal. v Alcan Aluminium Ltd., 493

US. 331, 334-35, specifically referred to Container Corp. and Japan

Line as the controlling authorities.

7

rather, chose to read Wardair as a blanket permit remov-

ing the State's tax method from scrutiny in the absence of

Congressional action expressly forbidding use of the

method. This clearly contravenes views recently ex-

pressed by this Court in striking down a State tax ex-

clusively levied on foreign dividends.!3

The distinction between a tax on a “discrete transac-

tion occurring within the State” and one on foreign com-

merce itself has been carefully restated by this Court in

Itel Containers Int'l Corp. v Huddleston.'4 The Itel opin-

ion’s reference to Wardair'® in this context lends no sup-

port to the California Supreme Court's convoluted

analysis. The /tel opinion, indeed, expressly reaffirmed the

principles of Complete Auto Transit, Inc. v Brady'® and

Japan Line, and endorsed the analytical process of Con-

tainer. In view of this recent expression of the appropriate

tests to be applied, the California Supreme Court's attempt

to postulate a new test for the Commerce Clause based on

an unwarranted distortion of Wardair is all the more

untenable. The opinion below ignores altogether this

Court's admonition that “Congress must manifest its un-

ambiguous intent before a federal statute will be read to

permit or approve ... [violations] of the Commerce Clause

... 17 There is, to be sure, nothing in Wardair that suggests

Congressional silence becomes an endorsement of State

action that violates Complete Auto Transit and Japan

Line principles. The court below created a departure from

those principles and simply cited the result in Wardair as

supportive of that departure. No other court has been able

13. See Kraft General Foods, Inc. v lowa Dep't of Revenue and

Finance, US. , 112 S. Ct. 2365 (1992). The dissent, more-

over, noted that the Case did not involve a foreign entity and that the

Executive Branch actually supported the State's power to levy the tax.

It may be surmised, therefore, that both the majority and the dissent

would have viewed the instant case more favorably to petitioners.

14. US. , 113 S. Ct. 1095, 1104 (1993).

15. Supra, n. 5.

16. 430 US. 274 (1977).

17. State of Wyoming v State of Oklahoma, US. , 112

S. Ct. 789, 802 (1992).

8

to discern such a departure in the Wardair opinion.'*

What the California Supreme court chose not to ac-

knowledge was that there was nothing in the facts of War-

dair that called for dormant Commerce Clause analysis.

Congress had expressly permitted the States to levy sales

taxes on fuel purchased within their borders. The question in

Wardair was whether certain international conventions

and resolutions modified this clear policy in the case of

international flights. This Court found that no such policy

could be discerned and, hence, declined to engage in a

Japan Line style of Commerce Clause analysis. From this

rather clear doctrine, the California Supreme Court has

posited a wholly new principle: Congressional inaction on

a specific issue must be deemed Congressional endorse-

ment of the State’s action irrespective of Executive foreign

policy. This new principle purportedly would apply here

regardless of the obvious conflict with the Internal

Revenue Code and the principles found in tax treaties to

which the United States is a party. It would also apply

regardless of the adverse effect the State’s policy may have

on the foreign commerce of the United States. This “princi-

ple,” which effectively stands dormant Commerce Clause

analysis on its head, can only be characterized as a perver-

sion of Wardair, not an application of it.

This case now comes before this Court after eight and

one-half years of litigation on these Foreign Commerce

Clause issues in the California court system.!* It may be

anticipated that the respondent, Franchise Tax Board, will

urge this Court not to address the important foreign com-

merce issues posed by California's application of world-

wide combined reporting in this case and similar cases.

The respondent will argue that there is no conflicting

federal foreign policy or interference with international

18. This includes the two lower California courts that considered

this issue and were unimpressed by the respondent's arguments con-

cerning Wardair. See Petitioner's Appendix at A-31, 32 and B-13, 14.

“19. Five of those years were spent in the appellate process. The

petitioners herein filed their complaint in Superior Court on 30

November 1984. The trial court filed its decision on 20 August 1987.

commerce of the United States to be addressed. But the

Foreign Commerce Clause issue presented by this case is

too important to be delayed any longer.2° Worldwide com-

bined reporting continues to interfere with United States

foreign policy, to offend the United States’ trading part-

ners, and to undercut important federal economic pol-

icies. The decision of the California Supreme Court is so

patently inconsistent with this Court’s prior decisions that

it should not be allowed to continue to cast a shadow over

the foreign relations and foreign commerce of the United

States.

CONCLUSION

For the reasons stated, amici curiae, Organization

For International Investment and Union of Industrial and

Employers’ Confederations of Europe, urge this Court to

grant the Petition for a Writ of Certiorari.

Respectfully submitted,

By: James Merle Carter

(Counsel of Record)

Harris, Carter & Mahota

Suite 704

1747 Pennsylvania Ave., NW

Washington, DC 20006

(202) 223-4723

(419) 673-7201

20. The respondent, Franchise Tax Board, has managed to avoid

a decision on the merits of the foreign commerce issue for more than

ten years in both State and federal courts. See, e.g., Capitol Indus. —

EMI, Inc. v Bennett, 681 F.2d 1107 (9th Cir.), cert. denied, 459 U.S. 1087

(1982); Shell Petroleum, N.V. v Graves, 570 F. Supp. 58 (N.D. Cal.),

aff'd, 709 F.2d 593 (9th Cir.), cert. denied sub nom. Shell Petroleum

N.V. v Franchetti, 464 U.S. 1012 (1983); Alcan Aluminium Supra,

n.12. This is the first case in which a foreign parent corporation has

been able to claim standing in California courts as a “taxpayer.” The

California Supreme Court previously has declined to hear cases invol-

ving State and local taxation of foreign commerce. Both Japan Line

and Container Corp. were appeals from lower California courts.

APPENDICES

APPENDIX I

ORGANIZATION FOR INTERNATIONAL

INVESTMENT INC.

CORPORATE MEMBERS

AKZO AMERICA, INC.

ALCAN ALUMINUM CORPORATION

ALCATEL USA CORPORATION

ASEA BROWN BOVERI, INC.

BASF CORPORATION

BATUS INC.

BET INC.

BP AMERICA CORPORATION

BTR, INC.

BUMBLE BEE SEAFOODS, INC.

BUNGE CORPORATION

CENTRAL SOYA COMPANY, INC.

CIBA-GEIGY CORPORATION

ELF AQUITAINE, INC.

FINA OIL & CHEMICAL CO.

FIREMAN’S FUND INSURANCE COMPANY

GLAXO INC.

GRAND METROPOLITAN INCORPORATED

GUINNESS AMERICA, INC.

HANSON INDUSTRIES

HITACHI, LTD.

HOECHST CELANESE CORPORATION

HOFFMANN-LA ROCHE, INC.

ICI AMERICAS INC.

INSTORIA, INC.

KLOCKNER NAMASCO CORPORATION

LVMH MOET HENNESSY LOUIS VUITTON

MATSUSHITA ELECTRIC CORPORATION OF AMERICA

MINORCO (USA) INC.

NESTLE USA, INC.

NORTH AMERICAN PHILIPS CORPORATION

PEARSON INC.

PECHINEY CORPORATION

PILKINGTON HOLDINGS, INC.

RANK AMERICA, INC.

REED PUBLISHING (USA) INC.

RHONE-POULENC

A-l

A-2

ROLEX WATCH, U.SA., INC.

ROLLS-ROYCE INC.

RTZ AMERICA

SANDOZ CORPORATION

SCHINDLER ELEVATOR CORPORATION

S.G. WARBURG & CO. INC.

SIEMENS CORPORATION

SKF USA, INC.

SMITHKLINE BEECHAM

SONY CORPORATION OF AMERICA

SOUTHLAND CORPORATION

TETRA LAVAL

THORN EMI NORTH AMERICA HOLDING, INC.

TOYOTA MOTOR SALES, US.A., INC.

UNILEVER UNITED STATES, INC.

A-3

APPENDIX II

UNICE MEMBERS

Federation des Entreprises de Belgique (Belgium)

Danish Employers’ Confederation (Denmark)

Federation of Danish Industries (Denmark)

Conseil National du Patronat Francais (France)

Bundesvereinigung der Deutschen Arbeitgeberverbande

— BDA (Germany)

Bundesverband der Deutschen Industrie — EDI (Ger-

many)

Federation of Greek Industries (Greece)

Confederazione of Irish Industry — CII (Ireland)

Federation of Irish Employers — FIE (Ireland)

Confederation Generale dell’ Industria Italiana — CON-

FINDUSTRIA (Italy)

Federation des Industriels Luxembourgeois (Luxem-

bourg)

Verbond van Nederlandse Ondernemingen — VNO

(Netherlands)

Nederlands Christelijk Werkgeversverbond — NCW

(Netherlands)

Confederacion Espanola de Organizaciones Empresa-

riales — CEOE (Spain)

Associacao Industrial Portuguesa — AIP (Portugal)

Confederacao da Industria Portuguesa — CIP (Portugal)

Confederation of British Industry — CBI (United King-

dom)

Vereinigung Osterreichischer Industrieler — VOI (Austria)

Confederation of Finnish Industries (Finland)

Finnish Employers’ Confederation (Finland)

Federation of Icelandic Industries (Iceland)

Confederation of Icelandic Employers (Iceland)

Confederation of Norwegian Business and Industry

(Norway)

Swedish Employers’ Confederation (Sweden)

Federation of Swedish Industries (Sweden)

A4

“Vorort” de l'Union Suisse du Commerce et de I'Industrie

(Switzerland)

Union Centrale des Associations Patrocales Suisses

(Switzerland)

Turkish Industrialists’ and Businessmen’s Association —

TUSIAD (Turkey)

Turkish Confederation of Employer Associations — TISK

(Turkey)

Employers & Industrialists Federation Cyprus (Cyprus)

Malta Federation of Industry — MFOI (Malta)

Associazione Nazionale dell’ Industria Sammarinese (San

Marino)

A-5

APPENDIX Ill

Letter From the European Community To The United

States Government.

EL EMBAJADOR de ESPAN

WASHINGTON

June 30th, 1989

The Honorable

James A. Baker, III

Secretary of State

U.S. Department of State

Washington, D.C. 2520

Dear Sir:

The Member States of the European Community have

noted that the United States Supreme Court is shortly to

hear an appeal against the judgement of the Seventh Cir-

cuit Court of Appeals in Imperial Chemical Industries pic

[sic] and Alcan Aluminium Limited v. California Franchise

Tax Board.

The EC Member States consider this to be an appro-

priate opportunity to restate their opposition to the use of

worldwide unitary tax by the State of California. They

would urge the United States Government to confirm that,

like the previous Administration they, too, are opposed to

the use of worldwide unitary tax.

The views of the EC Member States on worldwide

unitary tax are well known.* They consider that the im-

position of this tax is inconsistent with the internationally

accepted principles underlying the Tax Treaties and

Treaties that individual Member States have

entered into with the United States. Specifically, the use of

the tax by the State of California:

*Demarche of the EC Member States submitted to the US. De-

partment of State; 19 March, 1980, 30 October, 1981; 29 June 1982. |

August, 1983; 23 September, 1983; 20 December, 1984, 8 August, 1985,

3 August, 1985. |

A-6

i) contradicts the “arm's length” principal of

allocating income of multi-national corporations

between different national jurisdictions;

ii) may give rise to substantial double taxation;

iii) imposes a severe compliance burden by

insisting on the restatement of accounts of dif-

ferent, but affiliated, corporations throughout the

world even when they are not doing any business

in California — accounts which were originally

prepared to meet the specifications of the coun-

tries in which these corporations are resident;

iv) has perverse effects on the worldwide

strategy of multi-national corporations (since, for

example, a cost saving investment made in any

country outside the U.S., can increase the tax lia-

bility in California, even if the California subsidi-

ary is loss-making);

v) discriminates against companies doing

business in California via subsidiaries, rather than

through non-affiliated companies.

The EC Member States are strongly opposed to

the attempt by California or any other State to impose

taxation in income of foreign corporations arising out-

side the U.S.; to interfere with worldwide investment

strategies, and to insist on burdensome compliance

requirements on companies located outside the U.S.

EC Member States are aware that California has

amended its legislation to allow multi-national com-

panies to elect, on payment of a fee, to be taxed on a

“water's edge’’, rather than worldwide unitary basis.

However, since they are opposed to the use of world-

wide unitary tax in principle, Member § ates cannot

accept that it is right to insist on a fee as the price for

electing to avoid worldwide unitary tax. Moreover, the

process of making such an election involves substan-

tial and unreasonable burdensome compliance costs.

A-7

The EC Member States, of course, support the case

submitted by Imperial Chemical Industries and by Alcan

Aluminum in the District Court and the Seventh Circuit

Court of Appeal. They also very much endorse the

amicus brief submitted by the U.S. in the District Court

in ICI and Alcan v. California FTB. The EC Member

States are aware that the issue currently before the

Supreme Court is the question of the standing of the

foreign parent companies to challenge the tax in the

Federal courts, rather than the constitutionality of the

tax itself. However, they believe the two issues to be

inextricably interlinked. The EC Member States con-

sider that worldwide unitary tax imposes an admin-

istrative and economic burden on foreign parent

corporations and breaches the arm's length standard.

Since the US. in its double taxation convention adheres

to the internationally accepted arm’s length principle,

application of worldwide unitary tax by separate states

of the U.S. prevents the U.S. from speaking with one

voice when regulating commercial relations with for-

eign governments, and in the opinion of EC Member

States is unconstitutional. The administrative and eco-

nomic burden is imposed directly on foreign corporate

parents and it is this constitutionally significant burden

which creates standing for those foreign parents.

The Member States note and appreciate the U.S.

Government's opposition to worldwide unitary tax.

Given the importance of the present case before the

Supreme Court, the Member States would urge the U.S.

Government to reaffirm their commitment to the posi-

tion taken by the previous Administration.

Sincerely,

/s/ Julian Santamaria

Julian Santamaria

Ambassador of Spain