Court delays action on California's foreign tax

NEW YORK - The US Supreme Court put off taking any action yesterday on complaints by Britain and other countries that California is unfairly taxing foreign companies, setting the stage for a diplomatic row over the issue later this year, writes Larry Black.

The Supreme Court was to have announced whether it would hear arguments in a test case of California's 'unitary tax' scheme involving Barclays Bank. But the justices decided to ask the Clinton administration to offer its opinion on the merits of the case, a process that could take months, delaying resolution of the issue beyond a year-end deadline set by the Chancellor of the Exchequer last Thursday.

For years multinational companies operating in California have faced what amounts to double taxation because of the state's unique method of assessing taxes based on the firms' global earnings instead of their local profits.

Although California's scheme contradicts the 'arm's length' system in place elsewhere in the US and in most of the trading world, the Clinton administration, unlike its predecessors, has decided against supporting the Barclays appeal, apparently fearing that refunding the back taxes will bankrupt the struggling state government.

Were California to lose the case it would have to refund somewhere between dollars 800m and dollars 2.3bn, foreign tax experts estimate.