Some of the major international corporations that stand to gain the most from repeal of California's unitary tax system are disputing the payment of millions of dollars in taxes the state claims they owe.
Reports of the tax disputes involving these businesses have dribbled out in recent days and are linked to the intense lobbying effort under way at the Capitol to pass unitary tax reform legislation.
Companies that have been among the most active in the lobbying effort to overturn the tax also are among those challenging assessments made by the Franchise Tax Board, including International Business Machines Corp., Sony Corp., Shell Oil Co., Barclays Bank, Kyocera International Inc., and Bridgestone Tire Co., among others.
16 Companies Involved
Sixteen multinational corporations with operations in foreign countries currently are appealing assessments by the Franchise Tax Board to the Board of Equalization, with the amounts in dispute running into the millions, tax records show.
The 16 companies either have not paid the full tax or have paid it under protest and are seeking refunds.
Under the proposed unitary tax repeal bill, multinational corporations would stand to save an estimated $258 million in taxes each year. Although the bill would save future taxes and have the likely effect of reducing appeals, it would not be retroactive, meaning that the existing disputes will ultimately have to be resolved.
The companies claim that the tax is unfair because it is based on worldwide income of corporations, rather than just the profits generated within California or the United States. Companies say that numerous and complex issues are involved, such as lower wage rates overseas, differences in the value of currency from country to country, and lower costs of plant and equipment. They contend that to link an unrelated subsidiary in Peru, for instance, with one in California creates gross distortions.
Fear Accounting Tricks
Supporters of the tax claim that without the state's global reach, companies could use accounting tricks to hide California-generated profits.
One of the biggest disputes involves IBM.
During a private meeting recently with two legislators, IBM executives said their company had not paid its full state tax obligation under the unitary system for about 10 years, according to a source familiar with the issue. The source, who asked not to be named, said an IBM official estimated that the underpayment for one year, 1983, was $14 million.
Company officials would neither confirm nor deny the figure, but said that in 1983 IBM paid $44 million in taxes to the state (not including its local and federal tax obligations), and that its state tax bill for 1984 and 1985 will be an estimated $90 million. The amount in dispute is over and above that.
Dick O'Connell, a spokesman in San Jose for IBM, said, "We have never objected to paying our fair share of the tax," but added, "We view the unitary tax as an unfair tax, an inequitable tax."
Another company, Kyocera International, a firm based in Japan that manufactures ceramics packages used extensively by the semiconductor industry, is protesting a $10-million assessment by the Board of Equalization for the years 1972 to 1978. It paid the tax, but under protest, according to board documents.
Sony Corp. has disputed nearly $1 million in assessments for the years between 1962 and 1972.
The issue surfaced at an Assembly Ways and Means Committee hearing Thursday night, when Board of Equalization member William Bennett called the IBM situation "outrageous."
Others Not Alarmed
State tax officials other than Bennett so far have not expressed alarm. They describe unitary tax protests as part of the routine operation of the Franchise Tax Board and Board of Equalization, and entirely within the legal rights of the corporations. Such cases are usually decided by batteries of lawyers and accountants who argue the fine points of tax law and the relative value of corporate assets.
Franchise Tax Board officials refused to discuss how much money was involved in the appeals cases. Tax information is privileged and protected by law. But board officials said they expect to prevail.