Japanese Applaud Unitary Tax Vote : Many Say Ending System Will Boost Investment in State

Japanese business leaders welcomed the decision by the California Legislature to abolish the state’s mandatory unitary tax system, the biggest barrier to Japanese investment in the state.

The unitary tax, which taxes multinational corporations on their worldwide earnings, has drawn sharp criticism from foreign countries, particularly Japan and Britain, as being unfair.

“Many companies which would have located or expanded in California were choosing instead to open plants and offices in non-unitary tax states,” said Akio Morita, vice chairman of the Federation of Economic Organizations (Keidanren). “Now . . . we expect that investment in California by Japan and other countries will be accelerated.”

The Senate on Tuesday voted 27 to 7 and the Assembly voted 65 to 11 to do away with the controversial tax, which brings about $83 million to the state’s coffers each year.

The only states that maintain a unitary tax are Alaska, Montana and North Dakota.

“California is one of the most important states in the United States for Japanese industry,” said Seiki Tozaki, chairman of C. Itoh & Co., who appeared at a Keidanren news conference with Morita.

“More than 800 Japanese firms have subsidiaries or branches in California, employing literally tens of thousands of Californians,” said Tozaki, who is also a member of Keidanren’s council on unitary tax.

“Many new companies, however, have hesitated locating here because of California’s worldwide system of taxing multinational corporations,” he said.

The legislation, expected to be signed by Gov. George Deukmejian within a month, will take effect in January, 1988.

Under the new law, multinational corporations may continue to operate under the unitary tax or may choose what is called an “election fee” system.

It could be an advantage to firms to remain under the unitary tax system if their California profits are a large share of their global profits, Morita said.

But firms that do significant business outside of California are likely to choose the election fee system, where a 0.03% annual tax is imposed on their continental U.S. assets, salary and pay, and sales.

Many Japanese firms have refused to pay the unitary tax in protest, said Morita, who is also chairman and chief executive of Sony Corp.

Under current unitary taxation, Sony would have to pay $2 million annually, but, according to the election fee scheme, would only be charged $200,000 a year, Morita said. He refused to say if Sony was among those refraining from paying.

He said Japanese businessmen and diplomats would continue efforts to rid the United States of the unitary tax completely.

The Keidanren will send an investment study mission to California in the near future, according to Morita.

He also said he welcomed the establishment of a Tokyo office for the state of California.