The Future of State Unitary Taxation of Foreign-Owned U.S. Subsidiaries after Barclays Bank PLC V. Franchise Tax Board
Sullivan, Terry, The George Washington Journal of International Law and Economics
The U.S. Supreme Court's recent decision in Barclays Bank PLC v. Franchise Tax Board;' involved California's right to apply a unitary2 or apportionments income taxation method to foreign-owned corporations doing business within the state. The outcome of Barclays Bank PLC was a billion dollar question for California,4 but of even greater consequence than the specific result is the reasoning the Supreme Court applied to reach its conclusion. This reasoning continues to have far-reaching implications for states' rights.
Application of unitary or apportionment taxes to a U.S.-owned multinational corporation was challenged on constitutional grounds in Container Corp. of America v. Franchise Tax BoardS in 1983. In that case the U.S. Supreme Court held6 that California's apportionment tax did not violate the Due Process Clause, the Commerce Clause, or the Foreign Commerce Clause.7 Container Corp., however, left open the question whether a unitary taxation method could be applied constitutionally to a foreign-owned multinational corporation.8
Barclays Bank PLC represents a scenario placing the states against the executive branch in a battle between international trade alliances and state financial independence.9 The U.S. Constitution gives Congress exclusive power over both interstate and international commerce10 and provides the executive branch with control over foreign affairs.ll Though there is some natural overlap between foreign commerce and foreign affairs, Congress may give states the authority to "impinge" on commerce, whether foreign or domestic.l2 The question in Barclays Bank PLC was whether Congress impliedly gave permission to the states to use unitary or apportionment taxation as demonstrated by repeated congressional resistance to any limitations advocated by the executive branch or by U.S. trading partners.lg This Note analyzes the Foreign Commerce Clause portion of the Court's holding in Container Corp. and Barclays Bank PLC as well as other U.S. Supreme Court rulings on the Foreign Commerce Clause, arguing that the Court should have dispensed with the "one-voice" element of the dormant Foreign Commerce Clause analysis because it allows the executive branch veto power over congressional control of foreign commerce.14
A. The Methods of Income Taxation
Corporations doing business in more than one state or both inside and outside the United States present a special challenge for states employing a state income tax.15 The Commerce and Due Process Clauses of the U.S. Constitution dictate that "a State may not tax value earned outside its borders."16 To tax the income of corporations operating in more than one jurisdiction, states must have adequate methods of quantifying the portion of taxable value rationally and reasonably attributable to the corporation's activities in the state.17 Two basic models exist that "have long competed for supremacy in identifying the required division of multijurisdictional income."l8 These two models-arm's length/separate accounting and unitary business/formula apportionment-are discussed below.
1. The Arm's Length/Separate Accounting Method
The first model is the arm's length/separate accounting (AL/ SA) method, which treats a corporation's business operations within the state "separately and distinctly from its business outside the state, and net income for income tax purposes is computed as if the corporation's activities were confined solely to that state."19 The AL/SA model is the dominant method employed by corporations both in the United States and internationally.20 It is also the internationally accepted standard for income taxation by nationstates.21 In Barclays Bank PLC, the petitioner argued that California should be required to use the AL/SA tax method to conform to international standards.22
Two sets of rules are paramount to the international AL/SA standard: " (1 ) those defining a permanent establishment, such as a branch or subsidiary corporation, that can be taxed by the host country; and (2) those specifying the procedures to be used to account for transactions between related parties in measuring the income of a permanent establishment. …