U.S. to Draft Bill to End Unitary Tax : Treasury Intends to Produce Legislation by the End of the Year
The Reagan Administration said Friday that it intends to draft legislation that would, in effect, eliminate the controversial unitary tax, now used by California and five other states to tax corporations on worldwide earnings instead of only their U.S. profits.
Declaring the issue “a very high priority,” a senior Treasury official said the department will launch a “full court press” and produce legislation for congressional consideration by the end of this year.
Friday’s announcement came in the form of a White House statement attributed to President Reagan.
It declared that Treasury Secretary James A. Baker III has been told “to initiate the process of drafting federal legislation” to put into law the principles of fair taxation of corporate profits under the “water’s edge” formula--that is, only corporate profits earned within the United States or its territorial possessions would be taxed.
For years, foreign-owned multinational corporations and foreign governments have criticized unitary taxation as unfair. And Britain has threatened to retaliate against U.S. firms if the practice is continued.
Britain Consulted
A Treasury official said Britain was consulted before Friday’s announcement and has agreed to postpone any retaliation until January, 1987--the Administration’s target date for passage of the legislation.
“This is a very serious international problem,” said the official, who briefed reporters on the condition that he not be identified. “It has had an adverse impact on relations with our chief trading partners . . . .”
The Administration has been pushing California and the other states to repeal unitary taxation codes for several years. In July, 1984, then-Treasury Secretary Donald T. Regan promised federal legislation within a year if the states failed to act. But action was postponed last summer to give California a chance to repeal its unitary tax system, which Treasury officials said collects about $300 million to $500 million a year.
But the California Legislature adjourned in mid-September without acting on the repeal bill. Besides California, Alaska, Idaho, Montana, New Hampshire and North Dakota tax multinationals on a share of their worldwide profits.
Backers of repeal in California have said that they plan to resubmit their proposal when the Legislature reconvenes next year. Nevertheless, the failure of the California repeal was the signal for action at the federal level, the Treasury official said.
The legislative package in the works at Treasury contains three main features:
- Imposition of the “water’s edge” formula nationwide. This would primarily benefit foreign-owned corporations with headquarters abroad and subsidiaries in the United States.
- Imposition of a national standard of “equitable taxation” of dividends from foreign sources similar to the foreign tax credit that prevents double taxation of income earned by foreign subsidiaries of U.S.-owned companies. This would primarily benefit American-owned multinationals, many of which lobbied against repeal in California on the ground that it would benefit only foreign companies.
- Requiring greater disclosure of all income earned worldwide by all multinationals, whether foreign- or American-owned. The Internal Revenue Service would be required to share this income information with states that apply the “water’s edge” formula. This provision is designed to overcome the objection that large multinationals can hide taxable income by shifting it among foreign sources of profit.
