California Mulls New Tax Rule Following Pressure From UK

by Leroy Baker, Tax-News.com, New York

26 September 2006

The government of the United Kingdom and a number of multinational companies have joined forces to successfully persuade the Californian tax authorities to overturn a transfer pricing rule that would have cost foreign firms hundreds of millions of dollars in tax.

According to a report by the UK's Financial Times newspaper, companies including Barclays, Nestle and Sony had argued that the rule, which had been in place since the 1990s but was only recently enforced, unfairly discriminated against foreign firms with subsidiaries in California.

Opponents had said that the rule would have made it more expensive for US subsidiaries of foreign companies to borrow money or acquire licences from their parent companies, and warned that such a rule could deter foreign investment at a time when California was seeking to boost investment from overseas.

The decision by the California Franchise Tax Board to recommend a change to the rule was reportedly forthcoming after the Washington DC office of the Confederation of British Industry alerted the Prime Minister's office to the problem. It also followed closely a vote by the Washington-based Organization for International Investment - which represents foreign companies operating in the US - to support a petition for a change.

The Board is now said to be working on alternative language that will form the basis of an amended rule.

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