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Tuesday, February 12, 2013

Johnston: Bermuda Robs Sacramento and Albany -- Who Knew?

Tax Analysts David Cay Johnston, Bermuda Robs Sacramento and Albany -- Who Knew?, 67 State Tax Notes 423 (Feb. 11, 2013):

Johnston writes about a report released by the U.S. Public Interest Research Group Education Fund that examines the revenue that is lost by each state to offshore tax havens.

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It is interesting to note that one of the cures adopted by the author (single corporation accounting) and PIRG (which uses the more common worldwide unitary) has in fact been adopted by a number of states, including California. All of the states have adopted a water's edge election that exempts all non-US income and factors from the calculation. (I am actually not sure about Alaska - it doesn't come up that often.)

The Supremes in Container and Barclays ended the discussion if worldwide unitary was constitutional. So every state could adopt it. I was not for unitary but I have filed several unitary returns and therefore I have a practical idea why all the WW unitary states permitted a water’s edge election.

First, WW unitary does reduce some taxpayers’ tax – depending on the location of property, payroll and sales.

Second, and more important were the effects of currency movements. (Huh!) For WW unitary, all inputs – property, payroll and sales – must be translated into US dollars. When the dollar goes up against the basket of currencies, the state wins. When the dollar declines in value, the non-US inputs rise in value sucking profits out of the state.
This makes predicting corporate income a matter of currency arbitrage. Japanese parent companies were perceived as the first target, but in the ‘90s the yen rose against the dollar. Later, the euro followed suit. This not only depressed the corporate tax take, but introduced an element of unpredictability. States found it difficult to budget – and so did the corporate tax departments.

Now the corporate tax department does not move where sales take place. Let’s presume that US salaries and properties are generally higher than in the US. Tax advisors would suggest that moving, let’s say, California personnel and operations to Mexico or Thailand would not only increase operating profits, but would decrease the tax due – the law of unintended consequences kicking in.

It all sounds like such a simple fix. But it ain’t. As an aside, you must also move the rest of the world to a US standard. In 1995, we had a US subsidiary using LIFO. So, we had to find a way to put the world on LIFO. Talk about pain. But it saved $30 million in CA tax, for a total tax that was less than pre-WW unitary. Who knew?

Posted by: air65cav | Feb 12, 2013 8:33:59 AM