The Constitutionality of Worldwide Combination

Hence, at a time of increasing international competitiveness, many foreign TNCs which had with difficulty established themselves in the important US markets, found their state tax assessments abruptly and unpredictably increased by substantial sums; this especially angered firms such as Barclays and Alcan, whose ventures into the US had been unfortunate and had sustained repeated heavy losses. However, in this period of intensifying pressure on state treasuries, and taxpayer revolts leading to moves to reduce personal taxation where, again, the lead was taken in California, there was not much sympathy for the problems of large, especially foreign­owned corporations. The two main steps that they could take to attempt a reversal of WUT were to lobby government and to appeal cases through the courts.

3. The Constitutionality of Worldwide Combination

In the courts, companies had initially to face the reluctance of the judicial branch to limit the rights of the states. The Supreme Court in the 1980s has upheld the view of its predecessors that the Constitution does not require it to limit state powers of taxation, provided the state does not `tax value earned beyond its borders ¶ In Container Corp. of America v Franchise Tax Board 1983, the Court by a majority of 5­3 upheld the basic principles of Californias worldwide combined reporting and formula apportionment as applied to an American TNC. However, in addition to the other constitutional issues discussed in Section 1 above, worldwide combination required an examination of whether WUT applied by the states impaired the federal governments exclusive powers to deal with foreign affairs and regulate international commerce. In Japan Line v. County of Los Angeles 1979, the Court did indeed invalidate a property tax applied to cargo containers, on the ground that by international agreement both containers and ships are subject to property taxes only in their home ports. Thus the taxation of containers by Los Angeles both created an enhanced risk of multiple taxation the Japan Lines containers were apparently taxed also in Japan, as well as impairing federal uniformity in an area where it was essential, the regulation of international commerce. In Container Corporation however, the Court held that these considerations did not invalidate WUT when applied to net corporate income, principally because it found that there was no clear international arrangement that avoided double taxation of such income. Whereas in Japan Line the alternative to the state tax was a clear international rule allocating taxes on ships and containers to one state, the Court found that the alternative to WUT of corporate income was geographical allocation based on the Arms Length rule, which merely produced a series of national reallocations of income based on potentially conflicting views of the Arms Length criterion. As Brennan, J. put it Allocating income among various tax jurisdictions bears some resemblance ... to slicing a shadow. In the absence of a central coordinating authority, absolute consistency, even among tax authorities whose basic approach is quite similar, may just be too much to ask. Since, in addition, no government amicus curiae brief had been filed to support the argument of interference with foreign relations, unconstitutionality had not been established. The Container Corporation case still left open the question of whether unconstitutionality under the foreign relations clause would apply with more force to a non­American TNC. An even stronger case could be made if it could be shown that WUT directly violates international agreements. Aside from tax treaties, some argued that WUT infringes the `national treatment ¶clauses of commercial treaties, some of which explicitly prohibit any taxation of business income `in excess of that reasonably allocable or apportionable ¶to the territory. The modern US programme of negotiation of treaties of Friendship, Commerce and Navigation had indeed originated in the interwar period, from US concern about discriminatory measures against foreign­owned companies, including French taxation of an allocated portion of dividend distributions by the foreign parents of branches or subsidiaries in France, regarded as `extraterritorial ¶taxation by other countries see Chapter 1 section 4c above, and Granwell et al. 1986, p.742. The non­discrimination provisions of commercial treaties are broader than those of tax treaties and, most importantly, they do not exclude state or local taxation. It may nevertheless be difficult to show that WUT specifically discriminates against non­American companies. Furthermore, the foreign parent company of a US subsidiary may have difficulty in establishing that it has a right of action, or `standing ¶ separate from the subsidiary itself Shell NV v. Graves 1983; Note, 1984. Ironically, then, it seemed that if WUT were to be judicially held unconstitutional, it would not be under the Commerce clause on the grounds of the potentiality of formula apportionment for inconsistencies of application, but as an interference with the federal governments conduct of foreign affairs due to its conflict with the Arms Length standard established internationally. An important procedural obstacle was overcome when Alcan and ICI managed to persuade the 7th Circuit Court of Appeals that they had standing; but their case was initially confined to the state courts by the decision of the Supreme Court that the action was barred from the federal courts under the Tax Injunction Act, since an adequate remedy existed in state courts Franchise Tax Board of California v. Alcan Aluminum et al. 1990. This confidence was borne out when the California courts did decide that the California tax was unconstitutional, both as applied to a US TNC Colgate­Palmolive v. Franchise Tax Board 1988 and to a foreign firm Barclays Bank International v. Franchise Tax Board 1990. Californias WUT would finally perish, it seemed, by a judicial determination of unconstitutionality in its own State Supreme Court.

4. The Political Campaign against WUT