Amicus Curiae Brief — Alcan Aluminum Corp. v. Franchise Tax Board

tsproma Court, US |

4 EILEO

No. 92-1751 MUN 2 1995

Orfice OE THe =

IN THE

Supreme Court of the Wuited States

OCTOBER TERM, 1992

ALCAN ALUMINUM CORPORATION,

Petitioner,

Ve

FRANCHISE TAX BOARD OF THE STATE OF CALIFORNIA,

Respondent.

On Petition for a Writ of Certiorari to the

Court of Appeal of the State of California

in and for the Second Appellate District

BRIEF OF THE GOVERNMENT OF CANADA

AS AMICUS CURIAE SUPPORTING PETITIONER

F. EUGENE WIRWAHN

Chestnut Oaks

Route One, Box 176B

Aldie, Virginia 22001

(703) 327-4871

Counsel for the Government of

Canada as Amicus Curiae

WILSON - Epes Printina Co., Inc. - 789-0096 - WASHINGTON. D.C. 20001

QUESTION PRESENTED

Whether the application of the corporate income ap-

portionment formula, known as worldwide combined re-

porting, to domestic corporations with foreign parents

violates the Foreign Commerce Clause of the United

States Constitution, Article 1, Section 8, Clause 3.

(i)

TABLE OF CONTENTS

Page

oc ss | SE i

py iy Ct lye) | See iv

INTEREST OF THE GOVERNMENT OF CANADA. 1

CESSES AEA a dee I 3

et EERE ERT ESS Rt OC 6

I. THE APPLICATION OF WORLDWIDE COM-

BINED REPORTING TO DOMESTIC SUB-

SIDIARIES OF FOREIGN CORPORATIONS

CREATES AN ENHANCED RISK OF MUL-

Sean ta AS i 6

Il. THE USE OF WWCR PREVENTS THE

UNITED STATES GOVERNMENT FROM

SPEAKING WITH ONE VOICE WHEN REG-

ULATING COMMERCIAL RELATIONS WITH

FOREIGN GOVERNMENTS Wn... 9

ENED RDI NOT OSE TE 13

(iii)

iv

TABLE OF AUTHORITIES

Cases: Page

Alcan Aluminum Corporation v. Franchise Tax

Board of the State of California, No. B065648

(Court of Appeal of the State of California,

Second Appellate District, Division Three), un-

published opinion (Nov. 11, 1992) .......000.000.0... 9

Container Corp. of America v. Franchise Tax Bd.,

RR oa 2,3, 7,8

Franchise Tax Board of California v. Alcan Alumi-

num, Ltd., 483 U.S. 381 (1990) —....00002 3

Constitution, Statutes and Treaties:

California Revenue and Taxation Code § 25110.... 5

Convention between Canada and the United States

of America with Respect to Taxes on Income and

Capital signed at Washington on September 26,

1980, 1984 C.T.S. 15, T.I.A.S. No. 11087 -........... 7

Exchange of letters between the Honourable Allan

J. MacEachen, Deputy Prime Minister and

Minister of Finance of Canada, and the Honour-

able G. William Miller, Secretary of the Treas-

ury of the United States, (September 26, 1980),

with reference to The Convention Between the

United States of America and Canada with

Respect to Taxes on Income and Capital (Sep-

tember 26, 1980), 1984 C.T.S. 15, p. 64, I Tax

ry. A et Ee | RENE Aen ea 3-4

Convention Between the United States and France

concerning Double Taxation, and Protocol

signed at Paris on April 27, 1982, 164 LTS 211,

TS 885, 49 Stat. 3145, Article IV .........0..0........ 7

Internal Revenue Code of 1986, as amended: 26

Tc aunen 10

Protocol to the Convention Between the United

States of America and the French Republic

with Respect to Taxes on Income and Property

of July 28, 1967, as amended by the Protocol of

October 12, 1970, signed on November 24, 1978,

2 Tax Treaties (CCH) { 8084 .......2......2... 4

ee rere ee

v

TABLE OF AUTHORITIES—Continued

United Kingdom Income and Corporation Tazes

Act, (U.K.), 1988, c. 1., sections 812-815 ..._.......

United Nations Model Double Taxation Conven-

tion Between Developed and Developing Coun-

tries, U.N. Doc. ST/WSA/102 (1980); Report

of the OECD Comm. on Fiscal Affairs, Model

Double Taxation Convention on Income and on

Capital (1977) ~.............

Miscellaneous:

Aide-Memoire from Government of Japan, August

Te: MID cintacitiidicesattiibipaidioes bit Mielianeactatinlith acl ie thitaeiactustbideiintheie

Aide-Memoire from Government of Japan, June 6,

Brief Amicus Curiae of the United States in Sup-

port of Plaintiff and Appellant Alean Aluminum

Corporation, Alcan Aluminum Corporation v.

Franchise Tax Board of the State of California,

Court of Appeal of the State of California, Sec-

ond Appellate District (April 1992)-............0...

Demarche No. 383/83 from Embassy of Australia,

yk ER NS Rs Tr ae a ee ee

Demarche from Belgium, President European

Communities, on behalf of the Member States

of the European Communities, June 29, 1982....

Demarche from Belgium, President European

Communities, supported by the Member States

of the European Communities, the European

Commission, and the Embassies of Australia,

Japan, Canada, and Switzerland, January 1,

SOE sccrcctisnnieiecihsiteientibiitaieeadiitiie haaceeiite, ee. |

Demarche from the gary of Germany, Novem-

a

Demarche from Greece, President European Com-

munities, on behalf of the Member States of the

European Communities, August 1, 1983...............

Page

12

vi

TABLE OF AUTHORITIES—Continued

Demarche from Greece, President European Com-

munities, on behalf of the Member States of the

European Communities, September 23, 1983...

Demarche from Ireland, President European Com-

munities, on behalf of the Member States of the

European Communities, December 20, 1984........

Demarche from Italy, President European Com-

munities, on behalf of the Member States of the

European Communities, March 138, 1980 ~...........

Demarche from the Member States of the European

Communities and the Commission of the Euro-

pean Communities, August 30, 1985 -.................

Demarche from the Commission of the European

Communities and the Embassy of Luxembourg,

I a aliarrsecihectceaetiiekctrnateticnnincwnene

Demarche EA-14533 from Embassy of the Nether-

Pe, a A, TT annonces...

Demarche from the United Kingdom, President

European Communities, on behalf of the Mem-

ber States of the European Communities, July

aR IRRPSEE eS RP Ne AS Bn a cee CE

Demarche No. 51 from the United Kingdom Em-

Se es ee he ei...

Demarche No. 83 from the United Kingdom Em-

Se es OE oe a.

Demarche No. 211 from the United Kingdom,

President European Communities, on behalf of

the Member States of the European Communi-

SE ee Gh Re inns se.

Demarche No. 461.20-LJ/hu from Embassy of

Switzerland, November 15, 1983 ~...........0000000.......

Diplomatic Note No. 692 from Canada to the

United States, December 22, 1981...

Diplomatic Note No. 245 from Canada to the

United States, May 10, 1982 ...W0..0.

Diplomatic Note No. 283 from Canada to the

United States, June 14, 1982...

Diplomatic Note No. 481 from Canada to the

United States, September 28, 1983 000.2...

Page

vii

TABLE OF AUTHORITIES—Continued

Diplomatic Note No. 338 from Canada to the

United States, June 17, 1986 ................200020......-----

Hearings on H.R. 5076 before the House Commit-

tee on Ways and Means, 96th Cong., 2d Sess.

(1980), (statement of Donald C. Lubick, Assist-

ant Secretary of the Treasury for Tax Policy) ..

Hearings on S. 1974 before the Senate Committee

on Finance Subcommittee on Taxation and Debt

Management, 99th Cong., 2d Sess. (September

29, 1986), (statement of J. Roger Mentz, Assist-

ant Secretary of the Treasury for Tax Policy) ....

House of Commons Official Report, Parliamentary

Debates, (Hansard), Column 528 of the Official

Record of 18 May, 1993, Vol. 224, No. 178........

Letter of his Excellency, Allan Gotlieb, Cana-

dian Ambassador to the United States, to the

Honourable Donald T. Regan, United States

Secretary of the Treasury, August 11, 1983........

Letter of the Honourable Marc Lalonde, Minister

of Finance of Canada, to the Honourable Donald

T. Regan, Secretary of the United States De-

partment of the Treasury, August 11, 1983........

Letter of his Excellency, Allan Gotlieb, Cana-

dian Ambassador to the United States, to the

Honourable Donald T. Regan, United States

Secretary of the Treasury, August 23, 19838 ......

Letter of the Right Honourable Pierre Elliott

Trudeau, Prime Minister of Canada to his Ex-

cellency, Ronald Reagan, President of the United

States, September 24, 1983 ......... on.

Letter of the Honourable George P. Shultz, United

States Secretary of State, to the Governor of

California, January $0, 1986 ...............................

Letter of his Excellency, Allan Gotlieb, Cana-

dian Ambassador to the United States, to the

United States Secretary of State, Secretary of

the Treasury, and Attorney General, Septem-

ge ag NN eR I REA et A RA

Page

4

12

5, 12

viii

TABLE OF AUTHORITIES—Continued

Letter of his Excellency, Julian Santamaria, Am-

bassador of Spain, on behalf of the Member

States of the European Communities, to the

Honourable James A. Baker III, United States

Secretary of State, June 30, 1989 0...

Memorandum to the United States Department of

the Treasury on the Issue of State Taxation by

Worldwide Combination and Formula Appor-

tionment “Unitary Taxation,” Federal Republic

of Germany, Federal Ministry of Finance p. 5,

nuns

Statistics Canada, Catalogue 67202, “Canada’s In-

ternational Investment Position,” 1992 ............

Statistics Canada, International Trade Division,

BR ae nia cE Re APR i re dh A

Page

11

In THE

Supreme Court of the United States

OCTOBER TERM, 1992

No. 92-1751

ALCAN ALUMINUM CORPORATION,

. Petitioner,

FRANCHISE TAX BOARD OF THE STATE OF CALIFORNIA,

Respondent.

On Petition for a Writ of Certiorari to the

Court of Appeal of the State of California

in and for the Second Appellate District

BRIEF OF THE GOVERNMENT OF CANADA

AS AMICUS CURIAE SUPPORTING PETITIONER

INTEREST OF THE GOVERNMENT OF CANADA

Petitioner, Alcan Aluminum Corporation (“Alcan”),

is a member of a multinational corporate group based in

Montreal, Quebec, Canada and a U.S. subsidiary of a

Canadian corporation, Alcan Aluminium Limited (“Lim-

ited”). The Alcan Petition makes it clear that Limited

and its non-U.S. subsidiaries have no permanent estab-

lishments in California, yet they are adversely affected by

Respondent Franchise Tax Board’s (““FTB’’) application

of worldwide combined reporting (““WWCR’’) to Alcan.

Other multinational corporate groups based in Canada

and elsewhere outside the United States, with which Cali-

fornia has no jurisdictional link whatsoever, are similarly

2

affected by FTB’s use of WWCR.” Thus, the taxation at

issue in this Petition is different from the domestic taxa-

tion this Court has previously considered.* The taxation

here is in reality of international rather than local con-

cern. Canada shares that concern.

In the interest of preserving commerce between Canada

and the United States,* eliminating the serious adverse

consequences of WWCR for Canadian corporations, and

ending the disruption to the international taxation frame-

work caused by WWCR, Canada hereby submits this brief

amicus curiae in support of Petitioner.*

1See, for example, amicus curiae brief of the Government of

the United Kingdom and amici curiae brief of the twelve Member

States of the European Communities: Belgium, Denmark, France,

Federal Republic of Germany, Greece, Ireland, Italy, Luxembourg,

the Netherlands, Portugal, Spain and the United Kingdom; and

the Governments of Australia, Austria, Canada, Finland, Japan,

Norway, Sweden and Switzerland, filed in this Court in support of

Petitioner in Barclays Bank PLC v. Franchise Tax Board, No.

92-1884 (April 22, 1993).

2 Container Corp. of America v. Franchise Tax Bd. 468 U.S.

159 (1983).

3 Canada and the United States have the largest bilateral trade

and economic relationship in the world. In 1992, two-way trade

was almost $184 (U.S.) billion. Canada accounted for approxi-

mately 21% of all U.S. exports, and more than 77% of Canada’s

exports went to the U.S. In that year, imports by Canada from

California exceeded $5 (U.S.) billion, and Canadian exports to

California were almost $5 (U.S.) billion. Statistics Canada, Inter-

national Trade Division, 1993.

At the end of 1992, total United States investment in Canada

amounted to $198.8 (U.S.) billion, representing about 47% of

all foreign investment in Canada. Of this total, U.S. direct

investment in Canada was approximately $68.7 (U.S.) billion,

representing about 64% of all foreign direct investment in Canada.

Canadian direct investment in the United States at the end of

1992 was more than $45.5 (U.S.) billion. Statistics Canada, Cata-

logue 67202, “Canada’s International Investment Position,” 1992.

* Petitioner and Respondent have consented to the filing of this

brief amicus curiae in letters filed with the Clerk of this Court.

3

STATEMENT

Since 1983, when this Court reserved determination

of the issue presented,° Alcan and Limited have been

seeking relief in both Federal and state courts in the

United States. From 1984 until 1990, Limited was in-

volved in litigation with FTB over its use of WWCR in

United States Federal Courts: the District Court for the

Northern District of Illinois; the Court of Appeals for

the Seventh Circuit; and this Supreme Court of the

United States, which held that while Limited had stand-

ing as the sole stockholder of Alcan to challenge WWCR

on foreign commerce clause grounds, the Tax Injunction

Act barred the action.® In accordance with this Court’s

decision, Alcan resumed the litigation in California: in

the Los Angeles County Superior Court; the Second Ap-

pellate District, Division Three of the Court of Appeal

of the State of California; and the California Supreme

Court, which denied its Petition for review in December

1992.

Canada and the other main trading partners of the

United States, including the United Kingdom and the

Member States of the European Communities, filed amici

curiae briefs supporting Limited and Alcan. Other coun-

tries and their corporations have been involved in similar

searches for a judicial resolution.’ Canada and other

members of the international community have continued

to register by diplomatic channels their objection to FTB’s

intrusion into the international tax framework.* The con-

5 Container Corp., supra at 189, n. 26 and 195, n. 32.

8 Franchise Tax Board of California v. Alcan Aluminium, Ltd.,

483 U.S. 331 (1990).

7 For example, Barclays Bank PLC v. Franchise Tax Board, No.

92-1884 (1993); Shell Petroleum, N.V. v. Graves, 709 F.2d 593

(CA9), cert. denied, 464 U.S. 1012 (1983); EMI Ltd. v. Bennett,

738 F.2d 994 (CAQ9), cert. denied, 469 U.S. 1073 (1984).

8 September 26, 1980 Exchange of Letters between the Honourable

Allan J. MacEachen, Deputy Prime Minister and Minister of Fi-

4

nance of Canada, and the Honourable G. William Miller, Secretary

of the Treasury of the United States (September 26, 1980), with

reference to The Convention Between the United States of America

and Canada with Respect to Taxes on Income and Capital, 1984

C.T.S. 15; p. 64, I Tax Treaties (CCH) 1317MB; Diplomatic

Note No. 692 from Canada to the United States, December 22,

1981; Diplomatic Note No. 245 from Canada to the United States,

May 10, 1982; Diplomatic Note No. 283 from Canada to the United

States, June 14, 1982; Letter of his Excellency, Allan Gotlieb,

Canadian Ambassador to the United States, to the Honcurable

Donald T. Regan, United States Secretary of the Treasury, Aug-

ust 11, 1983; Letter of the Honourable Marc Lalonde, Minister of

Finance of Canada, to the Honourable Donald T. Regan, Secretary

of the Treasury of the United States, August 11, 1983; Letter of

his Excellency, Allan Gotlieb, Canadian Ambassador to the

United States, to the Honourable Donald T. Regan, United States

Secretary of the Treasury, August 23, 1983; Letter of the Right

Honourable Pierre Elliott Trudeau, Prime Minister of Canada, to

his Excellency, Ronald Reagan, President of the United States,

September 24, 1983; Diplomatic Note No. 481 from Canada to the

United States, September 28, 1983; Diplomatic Note No. 338 from

Canada to the United States, June 17, 1985; Letter of his Excel-

lency, Allan Gotlieb, Canadian Ambassador to the United

States, to the United States Secretary of State, Secretary of the

Treasury, and Attorney General, September 30, 1987.

Protocol to the Convention Between the United States of Amer-

ica and the French Republic with Respect to Taxes on Income

and Property of July 28, 1967, as amended by the Protocol of

October 12, 1970, signed on November 24, 1978, 2 Tax Treaties

(CCH) {| 8034; Demarche from Italy, President European Com-

munities, on behalf of the Member States of the European Com-

munities, March 18, 1980; Demarche No. 51 from the United

Kingdom Embassy, March 25, 1980; Demarche No. 211 from the

United Kingdom, President European Communities, on behalf of

the Member States of the European Communities, October 30,

1981; Demarche No. 83 from the United Kingdom Embassy, May

18, 1982; Demarche from Belgium, President European Communi-

ties, on behalf of the Member States of the European Communi-

ties, June 29, 1982; Demarche from Greece, President European

Communities, on behalf of the Member States of the European

Communities, August 1, 1983; Aide-Memoire from Government

of Japan, August 11, 1983; Demarche from Greece, President

European Communities, on behalf of the Member States of the

European Communities, September 23, 1988; Demarche No. 383/83

5

troversy has been partially responsible for stalling some

bilateral tax treaty negotiations with the United States.°

The “water’s edge election” statute California enacted

in 1986 and that became effective in 1988*° has not

eliminated the problems caused by FTB’s continued reli-

ance upon WWCR. Though corporations can now “elect”

whether FTB can apply WWCR to them, they must pay

a substantial fee for the “privilege” and contract with

the FTB to be bound by that election for a rolling ten

year period. Under this contract, corporations must also

agree to accept burdensome information requirements to

be imposed solely at the discretion of FTB. The con-

tract also provides for a penalty—the reimposition of

WWCR without any refund of the election fee—which

from Embassy of Australia, November 7, 1983; Demarche No.

461.20-LJ/hu from Embassy of Switzerland, November 15, 1983;

Demarche from the Republic of Germany, November 28, 1983;

Demarche EA-14533 from Embassy of the Netherlands, Decem-

ber 21, 1983; Demarche from Belgium, President European Com-

munities, supported by the Member States of the European Com-

munities, the European Commission, and the Embassies of Aus-

tralia, Japan, Canada, and Switzerland, January 1, 1984; Demarche

from Embassy of Belgium, January 25, 1984; Aide-Memoire from

Government of Japan, June 6, 1984; Demarche from Ireland,

President European Communities, on behalf of the Member States

of the European Communities, December 20, 1984; Demarche from

the Commission of the European Communities and the Embassy

of Luxembourg, August 8, 1985; Demarche from the Member States

of the European Communities and the Commission of the European

Communities, August 30, 1985; Letter of his Excellency, Julian

Santamaria, Ambassador of Spain, on behalf of the Member States

of the European Communities, to the Honourable James A. Baker

III, United States Secretary of State, June 30, 1989; Demarche

from the United Kingdom, President European Communities, on

behalf of the Member States of the European Communities, July

22, 1992.

® January 30, 1986 letter of United States Secretary of State

George P. Shultz to the Governor of California. (Relevant text

of letter set out in Footnote 26, infra.)

10 California Revenue and Taxation Code § 25110.

6

can be imposed by the FTB without any provision for

judicial review.

United States Assistant Secretary of the Treasury for

Tax Policy J. Roger Mentz explained in testimony before

the United States Senate Committee on Finance that the

Federal Government had: “a number of serious policy

concerns with the California legislation” including:

In our view, a foreign corporation’s ability to avoid

being taxed by a state on its foreign income should

not be conditioned on payment of a substantial elec-

tion fee.”

ARGUMENT

I. THE APPLICATION OF WORLDWIDE COMBINED

REPORTING TO DOMESTIC SUBSIDIARIES OF

FOREIGN CORPORATIONS CREATES AN EN-

HANCED RISK OF MULTIPLE TAXATION.

The internationally accepted norm for allocating in-

come for tax purposes is arm’s length separate accounting

(“AL/SA”’). Under AL/SA, the income of each mem-

ber of a corporate group is computed by separate ac-

counting on the basis that each member of the group

must deal with the other as if it was a wholly sep-

arate entity owned by unrelated interests. This method

follows model conventions for the avoidance of double

taxation developed by the Organization for Economic

Cooperation and Development (“OECD”)” and the

United Nations, both of which expressly rejected formula

11 Hearings on S. 1974 before the Senate Committee on Finance

Subcommittee on Taxation and Debt Management, 99th Cong., 2d

Sess. (September 29, 1986), (statement of J. Roger Mentz, As-

sistant Secretary of the Treasury for Tax Policy).

12 The members of the OECD are: Australia, Austria, Belgium,

Canada, Denmark, Finland, France, Germany, Greece, Iceland,

Ireland, Italy, Japan, Luxembourg, the Netherlands, New Zealand,

Norway, Portugal, Spain, Sweden, Switzerland, Turkey, United

Kingdom and United States of America.

oo.

7

apportionment in favor of arm’s length allocation."

Furthermore, Canada notes with satisfaction that the

United States Supreme Court has recognized there is a

“serious divergence in the taxing schemes adopted by

California and the foreign taxing authorities” and that the

method preferred by the United States Government and

adopted by “foreign taxing authorities is consistent with

accepted international practice.” ™*

The principles of AL/SA have been adopted by the na-

tions of the world in their double taxation treaties.> As

a result, a considerable degree of harmonization between

18 United Nations Model Double Taxation Convention Between

Developed and Developing Countries, arts. 5(8), 7(2), 9(1), U.N.

Doc. ST/WSA/102 (1980) ; Report of the OECD Comm. on Fiscal

Affairs, Model Double Taxation Convention on Income and on

Capital, arts. 5(7), 7(2), 9(1) (1977).

14 Container Corp., supra at 187.

15 The use of arm’s length separate accounting and the require-

ment of a permanent establishment are contained in all of the 58

bilateral income tax treaties to which Canada is currently a party,

including the Convention between Canada and the United States

of America with Respect to Taxes on Income and Capital signed

at Washington on September 26, 1980, 1984 C.T.S. 15, T.I.A.S. No.

11087.

The requirement of the use of AL/SA has been contained in

every tax treaty to which the United States has been a party since

the first such treaty, which was signed with France April 27,

1932. 164 LTS 211, TS 885, 49 Stat. 3145, Article IV.

All of the U.S. treaties for the prevention of double taxation

contain an absolute prohibition on U.S. taxation of the profits of

a foreign corporation that does not have a permanent establish-

ment in the U.S. Article VII of the United States-Canada Income

Tax Convention exemplifies this prohibition:

The business profits of a resident of a Contracting State shall

be taxable only in that state unless the resident carries on

business in the other Contracting State through a permanent

establishment situated therein. If the resident carries on, or

has carried on, business as aforesaid, the business profits of

the resident may be taxed in the other State but only on so

much of them as is attributable to that permanent establish-

ment.

8

their bilateral tax conventions has been achieved, to the

benefit of taxpayers and national governments. This

framework of understanding and cooperation on taxa-

tion matters has contributed to the significant growth of

trade and investment since World War II.

Applying WWCR, FTB considers separate foreign and

domestic corporations part of a multicorporate group as

one, and subjects all their worldwide income to tax as

| one “unitary” corporation, regardless of whether it is

taxable under the Internal Revenue Code or applicable

treaty, or has been attributed to and taxed in foreign

jurisdictions. The group’s combined income is appor-

tioned between California and the rest of the world on

the basis of an arbitrary formula composed of the ratio

of payroll, sales, and property of the group in California

compared to the world.

Canada notes that the United States Supreme Court

has acknowledged the double taxation that results from

the serious divergence between WWCR and the interna-

tional norm.’”® It is difficult to imagine a more “serious

divergence” from the international taxation framework

than WWCR. To Canada’s knowledge, of all the coun-

tries in the world and their political subdivisions, only

California and North Dakota apply WWCR to foreign

based multicorporate groups.’’ Double taxation occurs

because WWCR employs entirely different principles for

deciding where income is earned. The double taxation

produced can only be resolved if WWCR is required to

give way to AL/SA.*

16 Container Corp., supra at 187.

17 Montana applies WWCR only to domestic based multicorpo-

rate groups.

18 Any multiple taxation or undertaxation that occurs from any

differences in the allocation of income and expenses among tax

jurisdictions employing AL/SA, being those of inconsistent appli-

cations of the same principle, can be eliminated and resolved

through international negotiation and double taxation conventions.

9

Double taxation is also the consequence of the severe

distortions that ensue when diverse economic conditions

throughout the world are incorporated into the WWCR

formula.” WWCR assumes that a dollar spent on payroll

or property, or a dollar of sales made in one tax jurisdic-

tion produces roughly the same amount of taxable income

as a dollar so spent, or sale made, in another tax juris-

diction. Common sense and realities of the marketplace

defeat that assumption.

It would be equally challenging to present a more

extreme example of double taxation than the Petitioner

describes.” When FTB, through the use of WWCR,

combined the loss of Alcan with the income of Limited

and its non-U.S. subsidiaries, the FTB levied assessments

totalling $1,720,615.94 (U.S.).% Clearly income not

earned in California by Alcan was subjected to Cali-

fornia’s taxation. Obviously, that income was earned

outside of California’s taxing jurisdiction, and just as

plainly, subject to taxation where it was actually earned.

II. THE USE OF WWCR PREVENTS THE UNITED

STATES GOVERNMENT FROM SPEAKING WITH

ONE VOICE WHEN REGULATING COMMERCIAL

RELATIONS WITH FOREIGN GOVERNMENTS.

The use of WWCR contradicts the policy of the

United States Government. The amicus curiae brief of

19 State Taxation of Foreign Source Income: Hearings on H.R.

5076 before the House Committee on Ways and Means, 96th Cong.,

2d Sess. 7 (1980), (statement of Donald C. Lubick, Assistant

Secretary of the Treasury for Tax Policy).

20 Petition for Writ of Certiorari, 19-22.

21 Alean Aluminum Corporation v, Franchise Tax Board of the

State of California, No. B065648 (Court of Appeal of the State

of California, Second Appellate District, Division Three), un-

published opinion p. 2 (Nov. 11, 1992). Petition for Writ of

Certiorari, A2.

10

the United States filed below succinctly states the United

States Government’s position:

It is the position of the United States that Cali-

fornia’s worldwide unitary income allocation method

of taxation may not constitutionally be applied to

the taxpayer (plaintiff-appellant) without impairing

the ability of the United States to speak with one

voice in conducting and controlling foreign relations

and international commerce.”

As discussed above, the use of AL/SA has been required

by every tax treaty to which the United States has been

a party since the first such treaty signed with France on

April 27, 1932. The United States Senate has ratified

all of those treaties and the United States Congress in-

cluded that requirement in Internal Revenue Code

§ 482," the predecessor to which was first enacted in

the Revenue Act of 1928.

The disruption to the United States’ ability to speak

with one voice, which results from it and the rest of the

world having one international corporate taxation sys-

tem and California having another incompatible one, is

evident:

A failure to bring this development to a halt and

to eliminate the international incidence of unitary

taxation might lead the international community to

conclude that the United States has ceased to speak

with one voice and thus is no longer contributing to

the international tax order toward which the United

22 Brief Amicus Curiae of the United States in Support of Plain-

tiff and Appellant Alcan Aluminum Corporation, Alcan Aluminum

Corporation v. Franchise Tax Board of the State of California,

Court of Appeal of the State of California, Second Appellate Dis-

trict, p. 2, (April 1992).

28 26 U.S.C. § 482,

11

States, Germany and other nations have worked for

sO many years.

If left to stand, the decision of the California courts

below will affirm the impairment of the United States to

speak with one voice. Canada and other trading partners

of the United States would not be able to rely upon the

United States Government’s official declarations of na-

tional policy in the area of foreign commerce if such

policy were to be ultimately determined by a state court’s

interpretation of the “inaction” of Congress.

No approval of FTB’s use of WWCR can be inferred

from the fact that bilateral tax treaties in general, and

the tax treaties to whch Canada and the United States

are a party specifically, do not explicitly prohibit po-

litical subdivisions from using WWCR. In_Inter-

national Law, Sovereign States have the capacity to be-

come parties to treaties, not their political subdivisions,

be they provinces or states. Historically, bilateral conven-

tions have not set standards for the taxes of political sub-

divisions, because it has been considered that once a

treaty has been entered into, in conformity with an inter-

national norm, a political subdivision would not presume

to devise another method of taxing international income

earned outside its jurisdiction by members of multicorpo-

rate groups with no permanent establishment there. As

discussed above, such other methods occur nowhere out-

side of the two states of the United States.

The repeated diplomatic expressions of disapproval of

WWCR by the treaty partners of the United States con-

tradict any claim that their treaties with the United States

24 Memorandum to the United States Department of the Treas-

ury on the Issue of State Taxation by Worldwide Combination and

Formula Apportionment “Unitary Taxation,” Federal Republic of

Germany, Federal Ministry of Finance, p. 5, (Nov. 28, 1983).

25 Many of the bilateral tax treaties to which the United States

and Canada are a party predate the use of WWCR.

12

somehow “approve” of its use.** Numerous examples of

the official expressions of disapproval by Canada and

other trading partners of the United States are detailed

above. Most recently, the British Chancellor of the

Exchequer the Right Honourable Norman Lamont an-

nounced that the British Government will have to take

retaliatory measures in relation to United States-based

companies if there is not a satisfactory resolution of the

problems caused by the FTB’s use of WWCR by the end

of 1993.”

Canada, like the other main trading partners of the

United States, questions the utility and effectiveness of

double taxatiom conventions with the United States when

the application of WWCR by a few states, such as Cali-

fornia, clearly frustrates the spirit of the convention and

impairs the bemefits accruing to Canadian nationals con-

ducting commercial activities in the territory of the

United States. Most recently, Canada and other coun-

26 United States Secretary of State George P. Shultz in his

January 30, 1986 letter to the Governor of California summarized

the international expressions of offense over the use of WWCR:

The Department of State has received diplomatic notes com-

plaining about state use of the worldwide unitary method of

taxation from virtually every developed country in the world.

The unitary issue has been partially responsible for stalling

some bilateral tax treaty negotiations.

Most seriously, the U.K. Parliament, in July, 1985, unani-

mously adopted anti-unitary retaliatory legislation permitting

the U.K. government to deny, on a unilateral basis and retro-

active to April, 1985, a very valuable benefit of the U.S.-U.K.

treaty for U.S. corporations operating in worldwide unitary

states.

Secretary of State Shultz was referring to Section 54 of and

Schedule 18 to the Finance Act of 1985—now reenacted as Section

812-815 of the Income and Corporations Taxes Act 1988.

27 House of Commons Official Report, Parliamentary Debates

(Hansard), Column 528 of the Official Record of 18 May, 1993,

Vol, 224, No. 178,

13

tries have pointed out that determination of the issue

presented here will influence their future bilateral treaty

negotiations with the United States.”*

CONCLUSION

Canada is concerned about FTB’s continued use of

WWCR because, inter alia: Canada-based multicorporate

groups are adversely affected; double taxation of their

income results; WWCR conflicts with the international

framework established to avoid such double taxation;

and the ability to rely upon the United States Govern-

ment to speak with one voice for the nation is put in

doubt. Numerous other countries have expressed these

same concerns.

It behooves this Court as the appropriate agency of the

United States to resolve as it can now do the legal issue

of the validity of the application of WWCR to domestic

corporations with foreign parents. Canada notes that all

the elements that this Court has specified as necessary to

determine the issue are present in this case: ( 1) the seri-

ous divergence between WWCR and the established tax

framework presents an automatic asymmetry; (2) the in-

cidence of the tax falls on a domestic corporation owned

by a Canada parent corporation; and (3) the concern

over FTB’s use of WWCR is international, not local.

In addition, this case presents a clear example of the

double taxation that inherently results from the applica-

tion of WWCR. There also can be no doubt that United

States foreign policy is impaired. The amicus curiae briefs

Submitted by the United States at every level below in

28 Amici curiae brief of the twelve Member States of the Euro-

pean Communities: Belgium, Denmark, France, Federal Republic

of Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands,

Portugal, Spain, and the United Kingdom; and the Governments

of Australia, Austria, Canada, Finland, Japan, Norway, Sweden

and Switzerland, filed in support of Petitioner, p. 2., Barclays Bank

PLC v. Franchise Tax Board, No. 92-1384 (1998).

14

this case and Barclays Bank, PLC v. Franchise Tax Board,

No. 92-1384 confirm it. The major trading partners

of the United States have most recently expressed, in

briefs filed with this Court, their concern over the effect

of that impairment upon their future economic and com-

mercial relations with the United States.”

The Government of Canada asks that Petitioner’s Peti-

tion for a Writ of Certiorari be granted.

Respectfully submitted,

F. EUGENE WIRWAHN

Chestnut Oaks

Route One, Box 176B

Aldie, Virginia 22001

(708) 327-4871

Counsel for the Government of

Dated: June 2, 1993 Canada as Amicus Curiae ,

29 See, for example: amicus curiae brief of the Government of

the United Kingdom and amici curiae brief of the twelve Member

States of the European Communities: Belgium, Denmark, France,

Federal Republic of Germany, Greece, Ireland, Italy, Luxembourg,

the Netherlands, Portugal, Spain, and the United Kingdom; and

the Governments of Australia, Austria, Canada, Finland, Japan,

Norway, Sweden and Switzerland, filed in support of Petitioner in

Barclays Bank PLC v. Franchise Tax Board, No. 92-1384 (1993).