The Future of State Unitary Taxation of Foreign-Owned U.S. Subsidiaries after Barclays Bank PLC V. Franchise Tax Board

By Sullivan, Terry | The George Washington Journal of International Law and Economics, January 1, 1995 | Go to article overview

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


I. INTRODUCTION

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

II. DISCUSSION

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. …

The rest of this article is only available to active members of Questia

Sign up now for a free, 1-day trial and receive full access to:

  • Questia's entire collection
  • Automatic bibliography creation
  • More helpful research tools like notes, citations, and highlights
  • Ad-free environment

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited article

The Future of State Unitary Taxation of Foreign-Owned U.S. Subsidiaries after Barclays Bank PLC V. Franchise Tax Board
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Full screen

matching results for page

Cited passage

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited passage

Thanks for trying Questia!

Please continue trying out our research tools, but please note, full functionality is available only to our active members.

Your work will be lost once you leave this Web page.

For full access in an ad-free environment, sign up now for a FREE, 1-day trial.

Already a member? Log in now.