U.S. tax ruling

Press, 13 December 1989, Page 46

U.S. tax ruling

NZPA-Reuter Washington

The United States Supreme Court yesterday limited the way multinational corporations can use foreign tax laws to reduce their United States taxes, a ruling the Bush Administration said might save the Government hundreds of millions of dollars.

The Court ruled unanimously against Goodyear Tyre and Rubber Co in a case stemming from operations of Goodyear’s British subsidiary in the early 19705.

The British subsidiary of the Ohio-based corporation incurred net losses in 1972 and 1973, at least under British tax law.

The subsidiary’s 1973 loss included British tax deductions that were not allowed under American law.

fa a result, the British Government refunded to the subsidiary tax payments made there for 1970 and 1971.

The refunds prompted the United States Internal Revenue Service to recompute the .taxes it said Goodyear owed in that country.

Multinationals are entitled to claim a share of taxes paid by subsidiaries overseas as credits against United States taxes.

In Goodyear’s case, since the IRS said American law did not recognise the 1973 deductions permitted the company in Britain, the corporation’s loss was converted into a profit.

The redetermination had the further effect of wiping out, for United States tax purposes, the foreign tax

credits previously allowed Goodyear in 1970 and 1971. As a result, the IRS assessed Goodyear $U5791,240 (JNZ1.330 million) in taxes and interest for 1970 and 1971.

Goodyear then filed suit in the United States Claims Court, saying the IRS erred in applying American law instead of British law to determine the company’s accumulated profits.

The Claims Court ruled against Goodyear. But a Federal Appeals Court in Washington reversed the decision last year. The Appeals Court said a multinational company was entitled to use a foreign nation’s tax laws to determine accumulated profits made by a subsidiary in that country.

The Supreme Court yesterday overruled the Appeals Court.

Justice Thurgood Marshall, in his opinion for the Supreme Court, said the approach favoured by Goodyear would lead to unequal tax treatment for subsidiaries — as opposed to companies set up as foreign branches of United States corporations —

That result would not square with federal laws aimed at assuring tax parity between corporations that operate through foreign subsidiaries and those that operate through foreign branches, Justice Marshall said.

The Justice Department said hundreds of millions of dollars were at stake, even though United States tax law was changed in 1986 to bar multinationals from using a foreign country’s calculation of its accumulated profits for most future tax payments there.