Barclays Bank PLC, the British clearing bank that has been waging a decade-long legal battle with California over taxes, plans to continue its fight despite California's decision to revise its tax code.
On Thursday, the bank filed a brief with the U.S. Supreme Court requesting that the court hear its case against California's unitary tax law.
"Barclays believes that the recent legislation passed in California, adopting a |water's edge' approach to the taxation of foreign companies with operations in the state, does not completely resolve the long-running issue," the bank said in a statement on Friday.
Back Taxes Due
"The basic constitutional right of California, or any other state, to impose a unitary tax system at any time in the future still remains," the bank added.
"There are also substantial amounts of back taxes due to the bank and to other U.K. companies."
The Clinton administration last week sided with California, urging the Supreme Court to deny an appeal by the bank that challenges California's method of taxing foreign-based multinational corporations.
The administration's action makes it less likely that the Supreme Court will consider an appeal filed by the London-based bank challenging the state tax.
At the heart of the dispute between Barclays and California is the state's policy of taxing subsidiaries of foreign-based multinationals on the total income of the parent companies and all affiliated units.
Risk of Paying Twice
This method assesses tax on a company by applying the percentage of payroll, property, and sales receipts in the state to that company's worldwide income.
Intended to prevent multinationals from shifting taxable income to the lowest-cost location, the legislation has aroused protests because it can lead to double taxation.
Foreign multinationals, led by Barclays, have legally contested the legislation because they say it violates the federal government's constitutional monopoly on regulating foreign commerce, while Britain has threatened to retaliate by imposing similar taxes on U.S. companies on Jan. 1.
The administration sided with California after the state legislature this month approved changes in the tax code that allow foreign multinationals to avoid the combined approach.
The legislation allows foreign banks to be taxed on a so-called water's-edge basis. That means they are taxed only on their activities in the United States.
The administration argued that there is no longer a need for the Supreme Court to hear the Barclays appeal, while California has argued that the legislation renders the Barclays complaint moot.
Barclays and the British government, however, have maintained that the Supreme Court needs to rule on the legality of the worldwide combined method of taxation in order to avoid similar disputes in the future.
California, for its part, has filed a brief with the Supreme Court asking it to deny Barclays a hearing.
Both Barclays and the British government are expected to reply with their own briefs, while the Supreme Court is expected to announce on Nov. 1 whether it will hear or dismiss the case.
Britain wants California to eliminate the unitary tax assessment entirely and use only the "water's edge" system.
Support for Barclays' position also came from the governments of 19 other countries, including the 11 other members of the European Community, Japan, and Canada.
In a statement filed with the Supreme Court, Britain and the 19 other countries said they "do not consider that the unitary tax problem is solved."
Worldwide unitary taxation, which is contrary to the internationally agreed on arm's-length principle embodied in the bilateral tax treaties of the United States and disruptive of international economic relations, is still the basis of the tax system in California."
"A complete solution will require the arm's-length principle to be established as the only legitimate basis of taxing foreign companies in any state," the statement concluded.
If California loses the case, it will have to fork over some $533 million in tax refunds to Barclays and other foreign corporations.
Barclays has never confirmed the actual amount, but is said to be seeking a refund for more than $30 million that has already been paid to California.
The state also risks billions of losses in taxes if a negative ruling on unitary taxation is extended to U.S. corporations.
Legal and tax experts said it was highly unlikely Barclays would be able to get a tax refund if the Supreme Court declines to hear the case.