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United Kingdom threatens retaliation against California unitary tax.

The government of the United Kingdom threatened to retaliate against U.S. companies if the California unitary tax problem is not resolved by the end of the year.

This was the latest British action protesting the state's unitary tax, which requires combined reporting of a worldwide unitary business group's income. A percentage of the group's worldwide income is apportioned to the state based on certain ratios of activity in the state to worldwide totals.

The British government threatened to deny refunds of advance corporation tax (ACT) to U.S. corporations with a qualifying presence in California and other states with such taxes.

Under U.K. tax law, British corporations must pay ACTs when they distribute dividends to shareholders. Corporations can use the taxes to offset their ordinary British corporation taxes. Further, under the U.K.--U.S tax treaty, U.S. parent companies receiving dividends generally can apply for refunds from the British government of one-half of the ACT paid, less 5% notional withholding taxes.

In an effort to discourage California's worldwide application of the unitary tax, the U.K. in 1988 passed retaliatory legislation denying ACT refunds to U.S. parent companies that have a qualifying presence in a unitary tax state. However, the provision requires a further resolution by the House of Commons to be activated. Once activated, it could apply retroactively to any dividends distributed after December 31, 1989.

The U.k.'s threat to activate this legislation came four days before the U.S. Supreme Court was to decide whether to hear Barclays Bank PLC v. Franchise Tax Board of California, a case in which Barclays challenged the constitutionality of the unitary tax's application on a worldwide basis. The Court subsequently delayed its decision to hear the case, requesting instead that the U.S. solicitor general submit a brief expressing the federal governments' views.

President Clinton said during his campaign he supported the state of California in this case. However, the British government has attempted to persuade the administration to file a brief arguing the California law is unconstitutional.

Observation: It is uncertain whether the British government actually will implement the retaliatory legislation or whether the threats merely were made to influence the executive branch, Congress and state legislatures to resolve the unitary tax problem.

If activated on a retroactive basis, U.S. corporations with U.K. subsidiaries would be required to return significant amounts money to the United Kingdom.

Edited by Michael F. Lynch, CPA, Esq., assistant professor of accounting at Bryant College, Smithfield, Rhode Island (Individual); Andrew R. Biebl, CPA, Biebl, Ranweiler & Co., New Ulm, Minnesota (small business); Robert Willens, CPA, senior vice-president at Lehman Brothers, New York City (corporate); Marianne Burge, CPA, director of international tax services, Kenneth Kral, CPA, international tax partner, and Jack Serota, Esq., international tax manager, at Price Waterhouse, New York City (international).
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Publication:Journal of Accountancy
Article Type:Brief Article
Date:Sep 1, 1993
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