The Senate gave formal approval yesterday to the much-debated U.S. British tax treaty, But without a controversial provision that would have limited the power of states to tax multinational corporations.
Reversing an earlier rejection of the treaty, the Senate voted an over-whelming 82 to 5 to endorse it with the single reservation. Thefinal tally gave proponents 24 votes more than the two-thirds majority needed for approval.
The provision deleting the clause that would have limited state taxing powers was struck by unanimous consent last week after the Senate earlier rejected the fully treaty in protest over the taxing measure.
Yesterday's action left the future of the treaty in doubt. The pact now must be resubmitted to the British Parliament. Although lawmakers there had not regarded the clause as a major one, they may object as a face-saving move.
Sen. Jacob K. Javits (R-N.Y.), a key proponent of the treaty, said after the vote he hoped the United Kingdom would "go along with this treaty" as is, and then try to "negotiate another" one involving the state taxing issue.
However, Raymon E. Dore, chairman-elect of the Multistate Tax Commission, the primary lobby group against the treaty, applauded the Senate's refusal to accept the state taxing provision as a protection for the states.
The crux of the issue involves how far states should be able to reach in taxing multinational corporations. Under present law, they may tax firms either on the basis of business done in their states or a share of world profits.
The provision struck from the treaty would have prohibited the states from using the broader basts, known as the "unitary apportionment system," under which states employ a formula to tax portions of a firm's profit abroad.
The Treasury contends only three states - Alaska, California and Oregon - now are using this broader method. Private estimates indicate that had the provision gone into effect, the three would have lost $40 million in revenues.
However, some states have argued that the unitary method provides them with only available system for ensuring that big multinationals are taxed fully. Officials say they are unable to obtain access to some firm' records.
The clause involving state taxing powers was only one provision in a lengthy - and rather complex -treaty.
In return for this and other tax breaks, the British agreed to allow Americans investing in the U.K. to claim the same tax credit as Britons to avoid double taxation of profits and dividends, and to provide $375 million in refunds.
The Treasury had hoped to use the U.S.-U.K. treaty as a precedent for negotiations with other nations. The administration announced last week it will hold a public hearing August 21 on a treaty being negotiated with Jamaica.