COLGATE SOUGHT TREASURY'S HELP IN DEFEATING UNITARY TAXATION OF U.S. COMPANIES.

In his letter, Mark explains that Colgate is currently litigating in California the constitutionality of the worldwide unitary method as it applies to U.S.-based multinationals. He points out that the Department of Justice did not show up to assist Colgate's cause and that the California court appeared to view this absence as "decisive."

"The application of worldwide unitary taxation to U.S.-based multinationals, but not to foreign-based multinationals," Mark writes, "would cede a tremendous advantage to the latter group." He argues that the unitary method punishes U.S. companies that manufacture in the United States and export, rather than produce overseas, through higher state taxes in two ways. "First, due to the mechanics of the unitary tax formula, employment of U.S. workers and investment in U.S. property raise state taxes. Second, higher U.S. wages and property values artificially raise state taxes a second time."

In his letter, Mark states that under California's procedural rules, Colgate has very little time in which its litigation can receive the help that it needs from the federal government. He asks Treasury for its assistance in convincing the executive branch to take prompt action.

[Ed. note: Colgate's fears were realized when the California Court of Appeal in Colgate-Palmolive, Inc. v. Franchise Tax Board, 3 Civil C007044, August 21, 1991, upheld the validity of worldwide combined reporting as applied to domestic-parent unitary corporate groups. (Text of the case is available through AccServ & Microfiche as Doc 91-7384.)]

Your assistance is urgently required to prevent the federal government from inadvertently discriminating against American companies in favor of foreign companies. The federal government has been vigorously assisting foreign companies in upholding the federal policy against worldwide unitary taxation by the states, but has failed to provide the same assistance to American companies. It is now critical for the Department of the Treasury to go on record that this policy equally protects American companies, in order to avoid putting our nation at a severe disadvantage in the highly competitive world of foreign trade.

In a November 8, 1985 statement, President Reagan set forth the Executive Branch's policy opposing the worldwide unitary method of taxation. In that statement, he instructed the Secretary of Treasury to pursue legislation codifying this federal policy.

Recently, the California Court of Appeal ruled in Barclays Bank International Ltd. v. Franchise Tax Board, that worldwide unitary method is unconstitutional as applied to foreign-based multinationals. The court held that the worldwide unitary method interfered with U.S. foreign policy, as clearly expressed by the Executive Branch. The court based this conclusion largely on the fact that the Department of Justice appeared before the court and filed an amicus brief expressing the federal government's policy.

Colgate is also litigating the constitutionality of the worldwide unitary method as it applies to U.S.-based multinational groups. Oral argument before the California Court of Appeal was recently heard. In contrast to the Barclays case, the Department of Justice neither appeared before the court nor filed an amicus brief.

The application of worldwide unitary taxation to U.S.-based multinationals, but not to foreign-based multinationals, would cede a tremendous advantage to the latter group. The worldwide unitary method assigns income to a particular state by comparing the unitary group's property, payroll and sales in the state with similar worldwide amounts. Because of higher wages and property values in the United States, the amount of income assigned to the state is artificially inflated. If this method is applied to U.S.-based multinationals, but not to foreign-based multinationals, then U.S. parent groups will pay substantially higher taxes on non-U.S. earnings than their foreign competitors, even if the only difference between the two is the place of the parent company's incorporation. In the highly competitive foreign trade area, we can not allow this to occur.

Additionally, the unitary method punishes U.S. companies which manufacture in the U.S. and export, rather than produce overseas. Companies such as Colgate which have significant exports but no imports are punished the most severely. This punishment through higher state taxes occurs in two ways. First, due to the mechanics of the unitary tax formula, employment of U.S. workers and investment in U.S. property raise state taxes. Secondly, higher U.S. wages and property values artificially raise state taxes a second time.

Foreign governments have been extremely active in voicing their opposition to the application of unitary taxation to their companies. Indeed, retaliatory foreign (U.K.) legislation would punish foreign affiliates of U.S. companies. The U.S. stands alone in allowing its companies to suffer this unfair foreign trade disadvantage.

It is now time for U.S. government to stand up and defend the right of American companies to a level playing field. This can only happen if the Executive Branch makes its opposition to unitary taxation of U.S.-based multinationals as explicit as it has its opposition to unitary taxation of foreign groups.

At oral argument in the Colgate case, the judges indicated that Colgate would lose because the Department of Justice neither appeared before the court nor filed an amicus brief explicitly supporting U.S.-based multinationals. The Court of Appeal appeared to view the absence of the Department of Justice or an amicus brief as decisive, notwithstanding the fact that, throughout the long history of federal opposition to worldwide unitary taxation, not one single indicia of this federal opposition has ever distinguished between U.S.-based and foreign-based multinationals. Indeed, it is preposterous to believe that the federal government would intend to discriminate against U.S.-based multinationals based solely upon the fact that the parent corporation is American.

American companies need and are entitled to the same support as the Executive Branch has provided to foreign companies such as Barclays. We are therefore urging the Executive Branch to announce explicitly that the federal policy against worldwide unitary taxation applies to U.S.-based multinationals. This announcement could be issued in any number of forms. We believe that the most effective means of communicating this federal policy would be the filing of an amicus brief in the Colgate case. Under the apparent view of the Court of Appeal, if this federal policy is not made explicit, worldwide unitary taxation will be unfairly applied solely to U.S.- based multinationals.

Unfortunately, due to California's procedural rules, we have very little time in which to receive help from the federal government. Thus, if we are to prevent unfair discrimination against American companies, we would appreciate your assistance in convincing the Executive Branch to take prompt action.

If you would like further information or wish to discuss this matter, please telephone Steven Belasco, Vice President, Taxation at (212) 310-3032.

Thank you for your careful consideration of this matter.

Sincerely,