State still gets a portion of foreign earnings

A tax refund issue dating back to 1989 has been resolved in Apple's favor by the state of California's Supreme Court, but Apple's accompanying request for a change in tax status for multinational companies like itself was denied, meaning Apple and others will not see huge tax breaks in the state for "repatriating" foreign earnings back to the US. The case was specific to Apple's overseas earnings in 1989, but has implications for companies generally, reports the San Francisco Chronicle.

Almost all the big tech and pharma companies, including Apple, and pro-business groups have been lobbying the Obama administration for a "tax holiday" on earnings from foreign sales. Under current law, such earnings would be taxed at 35 percent on a federal level (actually less when normal deductions are added in) when brought back into the United States; the companies are trying to get a "temporary" lowering to five percent, arguing that such an incentive would pump billions of dollars into the US economy.

The government has thus far resisted, saying in essence that not only would the discount hurt tax receipts for the government itself, but the returned money was likely to be used to reward executives and shareholders rather than stimulate the economy or create jobs, as has been the result of most "tax breaks" for corporations so far. Both sides agree there is room for a compromise in the gulf between the two positions.

The case came about because of a change in the rate California charges for taxes on foreign earnings of companies based in the state in 1989. The Supreme Court today denied a review of the appellate court ruling that the Franchise Tax Board overcharged Apple $231,000 in taxes that year, and with interests the amount has grown to $920,000 that will be returned to Apple.

The court also denied a review of the lower court's finding that California can tax multinational companies based on a portion of the company's worldwide income from the same tax year (as opposed to basing the income on previously taxed dividends). The ruling means that at least in California, any attempt to repatriate foreign earnings would also be subject to state taxation on at least a portion of those earnings.

Apple's attorney, Jeffrey Vesely, argued that the ruling "creates some potential issues" for companies that want to repatriate foreign earnings. It was unclear if he meant that companies with physical presences in multiple states might be at risk of multiple state taxations (cash-strapped states are eager to claim portions of foreign profits from companies based in their states), or if he was simply referring to the "penalty" of having to pay both federal and state taxes on foreign earnings.

Deputy Attorney General Kristian Whitten, who represented the Franchise Tax Board, accused Apple of "attempting to avoid, or at least indefinitely defer, payment of tax on its remaining foreign-source income." [via San Francisco Chronicle]

by MacNN Staff