United Kingdom Threatens Retaliation against California Unitary Tax

Journal of Accountancy, September 1993 | Go to article overview

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. …

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