In particular some developing countries will soon choose to follow. may feel that the system has its attractions for thea. If such Countries adopt unitary tax, they would be unlikely to follow the three factor formula used, for example, in California. The very different economic conditions which prevail in the develping world would naturally incline them to develop or emphasise factors which allocate a greater proportion of income to the developing country. They might for example focus simply on sales. 23. The effects of other countries taking retaliatory measures, or unitary tax spreading outside the United States, will be keenly felt by the This is because the UK invests on a substantial scale United Kingdom. in foreign countries in, both the developed and developing world. But if the UK is a substantial investor in foreign countries, the United So the adverse impact on the United States is a much larger one. As things stand at States must be expected to be much greater. present the economic burden this imposes will, in large part, fall Because the United State's on the United States Federal Government. Internal Revenue Code allows a credit against United States taxes for taxes paid to a foreign country (subject to certain limitations), any increase in foreign taxes could be offset dollar for dollar by a reduction in United States taxes. 29. In this paper the UK Government has analysed the worldwide unitary system by reference to the universally-accepted criteria of a good tax system - equity, certainty, simplicity and the promotion of economic It has demonstrated that, when applied in the present efficiency. international context, the worldwide unitary method inevitably produces results which are inequitable and uncertain. The method involves Furthermore it is in additional compliance costs for companies. the United Kingdom Government's view objectionable in principle that the method can require the disclosure of the records of companies outside the USA, particularly as these will often apply to transactions entirely unrelated to activities within the United States. '30. If the worldvide unitary system is allowed to persist it will hamper rather than promote economic efficiency distorting investment patterns and inhibiting trade throughout the world. It makes it impossible to achieve the essential objective of providing a consistent and coherent international tax framework for trade and investment. framework is particularly crucial at the present juncture in the development of the world economy, when businesses are seeking_profits throughout the world without regard to national boundaries. The narcOW economic standpolat of the unitary system is incompatible with the harmonious relationship that is the goal of our governments, to the benefit of the American and British people afiky." UNITED KINGDOM GOVERNMENT NOTE PROPOSED UNITARY TAX LEGISLATION. (SB 1974) Introduction 1. Annex B The United Kingdom Government welcome the introduction into the United States Congress on 18 December 1985 of a bill to restrict the use by states of the worldwide unitary method of taxation for corporations. This is a significant step towards resolutio: of the unitary tax issue and they trust that appropriate legislation will be passed into law and take effect by 31 December 1986. As a contribution to the progress that is now possible the United Kingdom Government wish to comment on the proposed legislation and hope that account can be taken of the particular concerns expressed below. 2. The United Kingdom Government recognise the determination of the United States 3. The United Kingdom, however, consider that there are certain features of these Section 7518 (a) Use of the worldwide Unitary Method 4. The structure of the section is to prohibit the use of the Worldwide Unitary Method by states while permitting them to make provision for elections by companies to use the worldwide unitary basis if they so wish. This is a sound foundation to the legislation and the United Kingdom Government welcome the express prohibition of the worldwide Unitary Method as an explicit statement of intent. Nevertheless there are a number of particular points which are giving rise to concern in the United Kingdom and to which the United Kingdom Government wish to draw attention as follows: i. The section permits the use of the worldwide unitary basis of taxation by 11. As a practical point, it seems unnecessary to permit the use of worldwide unitary taxation as a sanction if there are already proper penalty provisions available for enforcing compliance. In this context it is noted that Section 6039a provides for financial penalties where there is a failure to comply with spreadsheek legislation and that states are not precluded from imposing fines or penalties for negligence, fraud, or understatement of income. These provisions would appear to render the reserve powers otiose. (We refer to this point again in paragraph 8 below.) F iii. Section 7518(a)(i) permits the use of worldwide unitary taxation as a sanction for failure to comply with 'the "legal or procedural requirements of the income tax laws" of states. There is much concern that this provision would be used by states to impose inappropriate conditions (for example, an election/entry fee or disinvestment in South Africa), to be fulfilled by particular taxpayers such as multinational corporations, by writing the conditions into the "legal Tor procedural requirements of the income tax laws" of states. Thus, unless the conditions were fulfilled by those taxpayers the worldwide unitary basis could be imposed. iv. First, ! There are several points of detail relating to Section 7518(a)(ii). Governments would not under present arrangements provide information direct to states as appears to be contemplated here. Secondly, the information referred to is not subject to treaty limitations. This is in marked contrast to Section 6103.4(d)(1) which contains the requisite safeguards regarding information exchanged under double taxation agreements. Thirdly, it is not clear which country is contemplated in the phrase "government of the relevant foreign country". Is this the country of residence of the foreign parent company or of other members of the group? Finally, it does not seem reasonable to penalise the taxpayer .for a foreign government's failure to provide information. It may not for example be available to the government, or the government may be unable to provide information for example for reasons of national security. would V. States are not precluded from providing for a taxpayer to make an "unconditional election" (Section 7518(a) to be taxed on the worldwide unitary basis. There is some doubt as to the meaning of the term "unconditional" in this context: it prevent conditions in favour of the taxpayer, for example being permitted to use the election for specific accounting periods, being introduced? (b) Water's edge definition 5. The United Kingdom Government have consistently maintained that a water's edge solution should be based on the internationally accepted concept of the permanent establishment. They recognise that the definition of permanent establishment in for example the OECD model double taxation convention may require some adaptation for use in state legislation. But, while they welcome the fact that a satisfactory solution seems to have been found for the particular problem of foreign banks, they find it very disappointing that the proposed legislation, by wholly departing from the permanent establishment concept, gives statutory authority to what can only be a damaging derogation from agreed principles of international taxation. It makes it possible for a corporation to be included within a water's edge group, and exposed to̟ state taxation, in a situation where the corporation has no tax presence in the United States for Federal tax purposes. There seems to be no justification for giving state authorities wider taxing rights than the Federal authorities. 6. There are two points which are causing particular concern in the United Kingdom. ii. It is noted that Regulations will be prescribed by the Secretary to determine the definition of "not subject to substantial foreign tax" (Section 7518(c)(3)(C)). As was stated in relation to the Unitary Tax Spreadsheet Legislation published in July 1985 it is important to ensure that countries like the United Kingdom will be protected from any risk of being categorised as tax havens merely because of fluctuations in corporation tax rates. Section 6039A 7. The proposals relating to the reporting and spreadsheet provisions will have many practical implications for United Kingdom corporations and representatives of British business are making representations on this aspect of the proposed legislation. 8. The United Kingdom Government welcome the improvements which have been made in the provisions since July 1985, particularly the increase in the filing period to 180 days and the uplift in the reporting threshold to $m10. There is, however, some concern that Section 6039A(●)(3) (imposition of penalties under state law) might allow states to impose worldwide unitary taxation as a penalty for perceived transgressions of state tax laws. It is reiterated that, apart from this reservation, the penalties which appear in Section 6039A(●) would appear to obviate the need for states to have reserve powers to impose worldwide unitary taxation for failure to provide information or comply with state legal or procedural requirements. It is not thought appropriate to impose the worldwide unitary basis of taxation as a compliance sanction. Jurisdiction 9. It is noted that there is no provision in the proposals for the settlement of disputes to any of the matters covered by the legislation. It is presumed, and it would certainly be desirable, that jurisdiction will be conferred on Federal courts rather than on state courts. Conclusion 10. It is important that the proposed legislation should enjoy the confidence of foreign governments and of multinational businesses and the views expressed in this note arise from the strong desire of the United Kingdom Government to see a satisfactory solution to the present problems relating to state use of the unitary method of taxation on a worldwide basis. On the one hand, the proposals contain a number of features which they welcome, in particular the way in which the problem facing foreign banka has been dealt with. On the other hand, they have considerable reservations about the powers reserved to states to impose worldwide unitary taxation and fear that the legislation could be used by states to obtain more extensive information powers while continuing to impose such worldwide unitary taxation. They also have considerable reservations about the conception of the water's edge definition. They trust that these and other concerns will be addressed in drafting the final legislation. 11. United Kingdom Government officials are prepared to discuss these representations further and could, if it would be helpful, come to Washington for any necessary discussic |