Court to Rule on Tax Challenges by Foreign Multinational Firms

The Supreme Court agreed Monday to settle some key questions involving the ability of multinational corporations to challenge state taxes in federal court.

What the justices decide sometime next year in a California case could carry big-money significance for most states and many big businesses.

The court action, granting an appeal by California officials, said that the justices will review a ruling that allowed two multinational corporations to challenge a state tax in federal court.

In a 1984 ruling seen as a major victory for states, the justices ruled that California may tax multinational corporations based on the businesses’ worldwide income.

But that decision applied only to multinationals whose parent company is situated in the United States. The case acted on Monday involves multinationals whose parent company is based in a foreign country.

California’s business tax--the same levy upheld in the 1984 ruling--was challenged by Alcan Aluminium Limited, a Canadian corporation, and Imperial Chemical Industries PLC, a British corporation.

California taxed subsidiaries of the multinationals doing business in the state.

The California tax employs what is known as the unitary system. The method bases the tax on a share of worldwide earnings, payroll and property value of each multinational and its subsidiaries.

At issue in the appeal is whether multinationals based abroad have legal standing to challenge such unitary state taxes in federal courts in the United States.

Alcan and Imperial challenged the California tax in a federal court in Chicago, where the California Franchise Tax Board has an office. A federal judge threw out the suits on grounds that the parent companies contended that they were injured only in their capacity as shareholders of their subsidiaries--and therefore lacked legal standing.