On New Year's Eve, 1975, with few people paying close attention, U.S. and British negotiatiors quietly signed a treaty that could cut the state income taxes owed by Marge corporations by tens and potentially hundreds of millions of dollars a year.
Now the treaty is coming before the Senate Foreign Relations Committee for approval, and representatives of the states are asking the senators to vote it down.
The state spokesman claim the treaty was negotiated in secrecy, and to benefit multinational coporations.
And Rep. Al Ultiman (D-Ore.), chairman of the House Ways and Means Committee terming the treaty "unprecedented" in its effort "to restinct the taxing authority of state and local governments," says it raises "important issues" of federal-state relations. If state taxing authority is to be curbed, he says it should be by normal legislation, "not through bi-lateral tax treaties."
But officials of both the Ford and Carter administration defend the treaty. Britain "made very important concessions, particularly in the treatment of dividends paid to U.S. investors," Treasury Secretary W. Michael Bilumenthal has argued. The provision to restrict the states taxing power is "am appropriate quid pro quo," he said in a letter to a California state tax official.
In addition, he told the official, Martin Huff, the provision would avoid imposing on multinationals administrative problems amounting to a "substantial compliance burden . . . We are aware of cases where this burden has discouraged foreign investment in the United States."
The tresty was signed in 1975, after negotiations about which the states claim they had no knowledge. President Ford sent it to the Senate in June, 1976. The Foreign Relations Committee has scheduled a hearing for Sept. 13. If the committee reports the treaty, it will go to the Senate floor: it becomes effective of two-thirds of the senators voting approve to and President Carter ratifies it.
Because the treaty is with only one nation, the restrictions on state taxation powers would apply only to multinationals based in Britain, such as British Petroleum causing a relatively small annual revenue loss of tens of millions of dollars.
But critics say the loss would grow citing the acknowledgement of Treasury representatives that similar pacts wiht other countries almost certainly would follow it would be obviously discriminatory for the United States to allow the states to tax British multimationals less than others.
Moreover, some treaty critics claim, America multinationals eventually would ask the courts to put them on an equal forcing with foreign multinationals. Thus they argue the eventual annual revenue losses to the states could be hundreds of millions of dollars.
North Dakota Faw Commissioner Byron L. Dergaz in a letter to Senate Foreign Relations committee chairman John J. Sparkman (D-Ala.), wrote that approval of the treaty "would be a disaster for many states . . . that are trying to develop and enforce a just and fair tax system so that Foreign Relation Committee on the federal government."
The core of the dispute is the different methods used by the government and some states to compute the tax liability of multinationals.
The government uses the so-called "arms-length" method. It is. Secretary Blumenthal said in his letter to Huff, "accurate" and "far less arbitrary" than the method favoured by some of the states.
Under this method income from sales made by one unit of a corporation to another is allocated for tax purposes just as it would be in a closely comparable transaction between parties who naturally deal at arms length - an independent seller and an independent buyer.
This is "the internationally accepted approach," Blumenthal said. Indeed, all United States tax conventons with other nations contain a basic general rule prohibition one signatory country from taking into account for purposes of tax liability the income and expenses of a corporation's related enterprises in another signatory country except to the extent that transactions among those enterprises are not conducted at arms length.
In contrast California an numerous other states use the "unitary business doctrine" a method that is applied to domestic as well as foreign-based companies that has been used for more than 40 years and that has survived legal challenges all the way through the Supreme Court.
Under the doctrine, a state treats as a unit the income of a conglomerate that operates beyond the state's boudaries, using a formula involving payroll, property and sakes to measure taxable income from sources inside the state.
If the treaty is adopted the controversial provision will require states to adopt the governments method.
The Treasury and University of Minnesota law professor Ferdin and P. Schoettle that only four states - California. New York Oregon and Alaska - used the unitary method. But Indiana tax officials found that of 32 states responding to a querry, 24 including Virginia, used the unitary approach in some degree.
The National Association of Tax Administrators, whose members include revenue chiefs on all 50 states and the District of Columbia, denounced the treaty provision in a resolution unanimously adopted in June , 1976.
The provision "benefits only the world's largest multinational corporations which have never established that they are exposed to tax on all of their income, not that their effective tax rate is comparable to the tax rate imposed on local corporations," the resolution said.
Also opposed is the Multistate Tax Commission, a coalition of 19 mainly Western states which charges that the provision "unremines state prerogatives" and circumvents "the approgriate forums" - the House Ways and Means and the Senate Finance committee.
North Dakota's Doran, accordingmultinationals of "trying in every way possible to avoid paying their fair share of taxes," commented bitterly to Sen Sparkman. "The one-state businessman, the mom and pop store, has no flexibility in shitting income between states . . .
Both taxing methods have drawn sharp attacks.
For example, former Treasury Secretary William E. Simon agrees with business critics that the unitary doctrine is "highly imperfect." His successor, Blumenthal, said the method in some case could be tantamount to taxing profits of foreign enterprises, a practice "inconsistent with accepted tax treaty policy."
Assistant Treasuty Secretary Laurence N. Woodworth has raised the possibility of double taxation. And, Treasury officials have said, it is less effective than arms-length in preventing multinationals from manipulating income for tax advantages.
But Alaska tax official Sterling Callagher told of a corporation that avoided payment of a penny in either federal or Alaska state taxes for 30 years by using the "totally ineffective" arms-length method.
In July, the staff of the congressional Joint Committee on Taxation reported on an Internal Revenue Service survey of agents audits where the issue was pricing in sales between units of a single corporation.
In theory, the agents were guided by closely comparable transactions between independent parties. In fact, the survey found, the agents could find no such transactions to apply to 40 per cent of the audited cases.
The result is that IRS agents use "whatever ad hoe basis seems appropriate," leading to many disputes and to time-consuming litigation, the Joint Committee staff said.
If the government has this kind of trouble with arms-length, critics ask, how could states - usually with manager resources - audit multinationals any one of which may have thousands of transactions among its subsidiaries in a single year?
The state with the biggest stake in the British treaty - tax revenues of an estimated $125 million a year - is California. British oil companies operating in the state account for about $25 million of the total "California first learned of the treaty through a routine press release." State Comptraller Kenneth Cory told the Foreign Relations Committee in July.