Tax Policy and Administration:

California Taxes on Multinational Corporations and Related Federal Issues

GGD-95-171: Published: Jul 11, 1995. Publicly Released: Aug 10, 1995.

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Pursuant to a congressional request, GAO provided information on: (1) California's experience in conducting formulary apportionment audits of multinational corporations; and (2) issues that would have to be considered before adopting a formulary system at the federal level.

GAO found that: (1) under worldwide formulary apportionment, California first had to determine whether California corporations that were part of a multinational enterprise were engaged in a unitary business with affiliated U.S. and foreign corporations based on an analysis of the enterprise's ownership and business operations; (2) auditors then used the parent enterprise's financial records, particularly its federal tax returns and audited financial statements, to ensure that state tax was based on the income and the apportionment factors for all corporations comprising the unitary business; (3) California assessed millions of dollars of additional state taxes based on unity determinations, but corporations contested most of the additional assessments; (4) California adjusted for U.S. and foreign accounting standards and recordkeeping differences that had material impacts on its audits; (5) because taxpayers did not always supply requested information, the auditors used estimates and assumptions in making their adjustments; (6) matters that need to be considered before adopting formulary apportionment at the federal level include the design and administration of a federal unitary system, how to reconcile accounting rules differences and obtain and verify financial information, and the transition from a separate accounting system to a unitary system; and (7) tax experts do not agree on whether problems associated with a unitary system could be resolved.

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