BARCLAYS BANK INTERNATIONAL LIMITED v. FRANCHISE TAX BOARD

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Court of Appeal, Third District, California.

BARCLAYS BANK INTERNATIONAL LIMITED, Plaintiff and Respondent, v. FRANCHISE TAX BOARD, Defendant and Appellant.

BARCLAYS BANK OF CALIFORNIA, Plaintiff and Respondent. v. FRANCHISE TAX BOARD, Defendant and Appellant.

No. C003388.

Decided: November 30, 1990

John K. Van de Kamp, Atty. Gen., Timothy G. Laddish, Asst. Atty. Gen., Robert F. Tyler, Supervising Deputy Atty. Gen., and Robert D. Milam, Deputy Atty. Gen., for defendant and appellant. Joanne M. Garvey, Joan K. Irion, Teresa A. Maloney, and Heller, Ehrman, White & McAuliffe, San Francisco, for plaintiffs and respondents. Lawrence V. Brookes and Valentine Brookes, San Francisco, as amici curiae for Thorn–EMI PLC and EMI Limited, on behalf of plaintiffs and respondents. Jane H. Barrett, Lawler, Felix & Hall, Los Angeles, and F. Eugene Wirwahn,  Washington, D.C., as amici curiae for the Government of the United Kingdom and the Government of Canada, on behalf of plaintiffs and respondents. David F. Levi, U.S. Atty., Sacramento, William S. Rose, Jr., Asst. Atty. Gen., and Gary R. Allen, David English Carmack, John J. McCarthy, and Richard A. Correa, Attys., Dept. of Justice, Washington, D.C., as amicus curiae for the U.S., on behalf of plaintiffs and respondents.

In this appeal we hold that California's unitary tax method of worldwide combined reporting (based on Rev. & Tax.Code, §§ 25101, 25120–25138), as applied to foreign-based unitary groups, is unconstitutional under the foreign commerce clause of the United States Constitution.  (U.S. Const., art. I, § 8, cl. 3.) 1

BACKGROUND

When a corporation conducts business in more than one jurisdiction, either through branches or subsidiaries, the proper allocation of income for tax purposes becomes an issue.   Essentially, two methods of allocating income have evolved to resolve this issue:  the arm's length/separate accounting method (AL/SA) and the unitary business/formula apportionment method.   As to multinational corporations, California employs a common variant of the unitary method called worldwide combined reporting (WWCR).

Under the separate accounting method, the various affiliated corporations of a multijurisdictional enterprise are viewed as separate from one another and the income attributable to any particular jurisdiction is determined on the basis of internal accounting records reflecting the activity of the affiliate within that jurisdiction.   To preclude tax-manipulative intercorporate transfers of goods, services or other value, this accounting method requires that the tax reporting entity deal at “arm's length” with its affiliated businesses as if they were simply unrelated entities dealing in the marketplace.

In contrast, under the unitary business/formula apportionment method of accounting employed by California (WWCR), the affiliated corporations of a multijurisdictional enterprise are treated as units of a single business—that is, as a “unitary group.”  (Cal.Code Regs., tit. 18, § 25137–6.)   If a corporation doing business in California is deemed to be part of a unitary group, the total income for that group, including corporations or affiliates operating wholly outside California or the United States for that matter, is apportioned to California by a three-factor formula.   The formula takes into account property, payroll, and sales (revenue in this case) for the group in California, as a fraction of total worldwide property, payroll, and sales.  (See Rev. & Tax.Code, §§ 25128–25136;  Notes, State Worldwide Unitary Taxation:  The Foreign Parent Case (1985) 23 Columbia Journal of Transnational Law 445, fn. 2;  hereafter 23 Columbia Journal.)   The fraction is then multiplied against the unitary group's total income, producing an apportioned amount of such income taxable by California.   Because intercorporate transactions are disregarded, it is unnecessary to make “arm's length” adjustments.

The income allocation method used by the United States and all of the other nations of the world, with a couple of minor and limited exceptions, is the AL/SA method, although this method varies in practice.   However, the United States has essentially limited the application of its tax treaties to federal taxes.   Apparently no nation in the world uses WWCR in any meaningful fashion.

The present controversy involves challenges to additional tax assessments for the year 1977 resulting from California's use of WWCR.2  Those additional assessments were levied after the defendant California Franchise Tax Board (Board) determined that the plaintiff taxpayers, Barclays Bank of California (Barcal) and Barclays Bank International (BBI), and their ultimate corporate parent, Barclays Bank Limited (BBL), as well as the significant subsidiaries of BBI and BBL, constituted a unitary group.3  Barcal was directed to pay an additional $152,420 and BBI an additional $1,678.   Under protest Barcal and BBI (hereafter referred to collectively as either plaintiffs or Barclays) paid the additional taxes and this suit ensued.

Plaintiffs challenge the federal constitutionality of these additional tax assessments on foreign commerce clause and due process grounds.   For us, the critical issue concerns the foreign commerce clause.

Foreign Commerce Clause

 Before beginning our analysis, we note that plaintiffs also contend the WWCR unitary method is unconstitutional because it improperly interferes with the power of the executive branch of the federal government to conduct foreign affairs.  (See United States v. Curtiss–Wright Export Corp. (1936) 299 U.S. 304, 57 S.Ct. 216, 81 L.Ed. 255.)   The Board argues here, as it did below, that plaintiffs' failure to raise the latter issue in their claim for refund precludes their assertion on appeal.   The trial court rejected the argument, reasoning that the protest proceedings provided adequate notice of the issue and, more importantly, the Board lacked the authority to address constitutional issues.   There is substantial evidence supporting the trial court's determination of adequate notice;  it would have been a futile exercise to raise this constitutional issue involving sensitive matters of international relations before the Board.  (See Park'N Fly of San Francisco, Inc. v. City of South San Francisco (1987) 188 Cal.App.3d 1201, 1208–1209, 1215–1216, 234 Cal.Rptr. 23.)   Moreover, as we shall explain, the dispute is irrelevant as the foreign commerce clause issue inextricably involves foreign affairs, the subject of foreign affairs inextricably involves the two political branches of our national government, and the foreign commerce clause issue was undeniably raised in a timely fashion.   With these prefatory remarks in mind, we address the substance of the matter.

Article I, section 8, clause 3 of the United States Constitution gives Congress the power “To regulate commerce with foreign nations, and among the several states, ․”

As noted by the trial court, three United States Supreme Court decisions that have construed this provision in the last decade are vital to the positions of each of the parties to this litigation.   Those cases are:  Japan Line, Ltd. v. County of Los Angeles (1979) 441 U.S. 434, 99 S.Ct. 1813, 60 L.Ed.2d 336;  Container Corp. v. Franchise Tax Bd. (1983) 463 U.S. 159, 103 S.Ct. 2933, 77 L.Ed.2d 545;  and Wardair Canada v. Florida Dept. of Revenue (1986) 477 U.S. 1, 106 S.Ct. 2369, 91 L.Ed.2d 1.

In Japan Line, the high court held that instrumentalities of commerce (in that case, cargo containers in seagoing ships) that are owned, based, and registered abroad and that are used exclusively in international commerce may not be subjected to an apportioned ad valorem property tax by a state.  (441 U.S. at pp. 436, 444, 99 S.Ct. at pp. 1815, 1819, 60 L.Ed.2d at pp. 340, 345.)

Through Japan Line, the so-called “dormant” foreign commerce clause test of constitutional review came into being.   The judiciary engages in dormant commerce clause analysis when the Congress has not acted or purported to act;  in such situations, it is the judiciary's responsibility to determine whether an action taken by a state unduly threatens the underlying purpose of the clause:  to ensure a free flow of commerce and that individual states do not work to the detriment of the nation as a whole.  (Merrion v. Jicarilla Apache Tribe (1982) 455 U.S. 130, 154–155, 102 S.Ct. 894, 910–911, 71 L.Ed.2d 21, 40;  Wardair, supra, 477 U.S. at pp. 7–8, 106 S.Ct. at pp. 2372–2373, 91 L.Ed.2d at pp. 9–10.)

This dormant foreign commerce clause test was engendered through the engrafting of two additional inquiries onto the already existing four-part test for dormant interstate commerce clause review.  (Japan Line, supra, 441 U.S. at pp. 444–445, 451, 99 S.Ct. at pp. 1819–1820, 60 L.Ed.2d at pp. 345–346, 349.)

That four-part test upholds a state tax against an interstate commerce clause challenge if the tax “ ‘[i] is applied to an activity with a substantial nexus with the taxing State, [ii] is fairly apportioned, [iii] does not discriminate against interstate commerce, and [iv] is fairly related to the services provided by the State.’ ”  (Japan Line, supra, 441 U.S. at pp. 444–445, 449, 454, 99 S.Ct. at pp. 1819–1820, 1822, 1824, 60 L.Ed.2d at pp. 345, 348, 351, quoting Complete Auto Transit, Inc. v. Brady (1977) 430 U.S. 274, 279, 97 S.Ct. 1076, 1079, 51 L.Ed.2d 326, 331.)   The two additional inquiries prompted by the foreign context are first, whether the tax creates a “substantial risk of international multiple taxation” (441 U.S. at p. 451, 99 S.Ct. at p. 1823, 60 L.Ed.2d at p. 349), and, second, whether the tax “may impair federal uniformity in an area where federal uniformity is essential” (id., at p. 448, 99 S.Ct. at p. 1821, 60 L.Ed.2d at p. 347), and prevents “the Federal Government from ‘speaking with one voice when regulating commercial relations with foreign governments.’   If a state tax contravenes either of these precepts, it is unconstitutional under the Commerce Clause.”  (Id., at p. 451, 99 S.Ct. at p. 1823, 60 L.Ed.2d at p. 349, quoting Michelin Tire Corp. v. Wages (1976) 423 U.S. 276, 285, 96 S.Ct. 535, 540, 46 L.Ed.2d 495, 503;   Container, supra, 463 U.S. at pp. 193–194, 103 S.Ct. at p. 2955, 77 L.Ed.2d at p. 571.)

The court in Japan Line assumed, without deciding, that the tax at issue passed constitutional muster under the four-part interstate test, and proceeded to ask the two new questions.  (441 U.S. at p. 451, 99 S.Ct. at p. 1823, 60 L.Ed.2d at p. 349.)

The court had little difficulty in determining that California's property tax failed the first additional test:  since the facts showed that Japan taxed the cargo containers at full value, California's tax created more than the risk of multiple taxation;  it in fact produced such taxation.  (Japan Line, supra, 441 U.S. at pp. 451–452, 99 S.Ct. at pp. 1823–1824, 60 L.Ed.2d at pp. 349–350.)

The court decided rather easily that California's tax prevented the nation from “speaking with one voice” in regulating foreign trade.  (Japan Line, supra, 441 U.S. at pp. 452–453, 99 S.Ct. at pp. 1823–1824, 60 L.Ed.2d at pp. 350–351.)   The court cited the Customs Convention on Containers, which both the United States and Japan had signed, and stated it reflected a national policy to remove all duties and taxes as to temporarily-imported containers in international traffic.  (Id., at pp. 452–453, 99 S.Ct. at pp. 1823–1824, 60 L.Ed.2d at pp. 350–351.)   Since American-owned containers are not taxed in Japan, California's tax creates an asymmetry in international taxation operating to Japan's disadvantage;  under such circumstances, the risk of retaliation by Japan is acute, a retaliation that of necessity would be borne by the entire nation.   Finally, if other states were to follow California's example, taxation would vary port-by-port, making speaking with one voice impossible.  (Id., at p. 453, 99 S.Ct. at p. 1824, 60 L.Ed.2d at pp. 350–351.)

The relative ease with which these constitutional invalidations were made is grounded in the Japan Line court's sensitivity to intrusions by individual states into the realm of foreign affairs.  (See also Hines v. Davidowitz (1941) 312 U.S. 52, 63, 61 S.Ct. 399, 402, 85 L.Ed. 581, 584–585;  United States v. Belmont (1937) 301 U.S. 324, 330–331, 57 S.Ct. 758, 760–761, 81 L.Ed. 1134, 1139.)   As to the first inquiry, the court noted that “[e]ven a slight overlapping of tax—a problem that might be deemed de minimis in a domestic context—assumes importance when sensitive matters of foreign relations and national sovereignty are concerned.”  (Fn. omitted;  Japan Line, supra, 441 U.S. at p. 456, 99 S.Ct. at p. 1825, 60 L.Ed.2d at p. 352.)   When confronted with the assertion that it was Japan's levy rather than California's which created the double tax, the court responded, “California's tax, however, must be evaluated in the realistic framework of the custom of nations․”  (Emphasis added, id., at p. 454, 99 S.Ct. at p. 1824, 60 L.Ed.2d at p. 351.)

Regarding the second inquiry, the court stressed that the foreign commerce power of Congress is greater than its interstate commerce power, and emphasized not only the need for uniformity in dealing with other nations but “the Framers' overriding concern that ‘the Federal Government must speak with one voice when regulating commercial relations with foreign governments.’ ”   (Japan Line, supra, 441 U.S. at pp. 448–449, 99 S.Ct. at pp. 1821–1822, 60 L.Ed.2d at pp. 347–348.)   Of course Japan Line involved a property tax on a foreign cargo container, not a particular method of income tax allocation applied to a foreign-based unitary group.

The case of Container Corp. v. Franchise Tax Bd. supra, 463 U.S. 159, 103 S.Ct. 2933, 77 L.Ed.2d 545, to which we turn now, involved not only a particular income tax method but the one at issue here.

Container held in part that California's application of WWCR to domestic-based unitary groups was constitutional under the dormant foreign commerce clause test enunciated in Japan Line.  (463 U.S. at pp. 185–197, 103 S.Ct. at pp. 2950–2957, 77 L.Ed.2d at pp. 566–573.)   Container Corporation was a business entity incorporated in Delaware and headquartered in Illinois with 20 subsidiaries in 4 European and 4 Latin American countries.  (Id., at pp. 163, 171, 103 S.Ct. at pp. 2939, 2943, 77 L.Ed.2d at pp. 551, 557.)

At the outset of its foreign commerce clause discussion, the court in Container stated that “[t]he case most relevant to our inquiry is Japan Line.”  (463 U.S. at p. 185, 103 S.Ct. at p. 2950, 77 L.Ed.2d at p. 566.)   Following Japan Line, Container applied the two additional foreign commerce clause considerations there set forth.  (463 U.S. at pp. 185–186, 103 S.Ct. at p. 2951, 77 L.Ed.2d at pp. 566–567.)

Before applying those two additional considerations, Container noted the similarities and differences between the two cases.   Similarities included the fact that actual double taxation had resulted, that such taxation stemmed from a serious divergence between California and foreign taxing methods, that the foreign taxing method was consistent with international practice (i.e., AL/SA), and that “our own Federal Government, to the degree it has spoken, seems to prefer the taxing method adopted by the international community to the taxing method adopted by California.”  (Fn. omitted, 463 U.S. at pp. 184, 187, 103 S.Ct. at pp. 2950–2951, 77 L.Ed.2d at pp. 565, 567.)

Three differences were noted.   First, the tax in Container was on income rather than on property, and the court noted the ease with which income traverses boundaries.   Second, the double taxation, although real, was not the “ ‘inevitabl[e]’ result of the California taxing scheme.”   Finally, the tax in Container fell, not on the foreign owners of an instrumentality of foreign commerce, but on a corporation domiciled and headquartered in the United States.  (463 U.S. at pp. 187–188, 103 S.Ct. at pp. 2951–2952, 77 L.Ed.2d at pp. 567–568.)   After essentially analogizing a corporation and an instrumentality of commerce, Container carefully noted “[w]e have no need to address in this opinion the constitutionality of combined apportionment with respect to state taxation of domestic corporations with foreign parents or foreign corporations with either foreign parents or foreign subsidiaries.”   (Id., at p. 189, including fn. 26, 103 S.Ct. at pp. 2952–2953, fn. 26, 77 L.Ed.2d at p. 568.)   It is important to note at this juncture that those issues are the crux of the matter presented here.

In applying the first additional test set forth in Japan Line, Container noted Japan Line's concern that even a slight overlapping of tax assumes importance in the sensitive area of foreign relations, but further noted that this concern did not express an absolute prohibition on state-induced double taxation.   While such taxation deserves close scrutiny, said Container, that scrutiny must take into account the context in which the double taxation takes place and the alternatives reasonably available to the taxing state.   (463 U.S. at p. 189, 103 S.Ct. at p. 2953, 77 L.Ed.2d at pp. 568–569.)   Taking into account the context of the tax, the distinction between an income tax and a property tax, and the fact that even implementing AL/SA would not guarantee an end to double taxation, Container concluded that since California's taxing method did not “inevitably” lead to double taxation, it would be perverse to constitutionally require one method of taxation over another when both could result in a double tax.  (Id., at pp. 189–193, 103 S.Ct. at pp. 2953–2955, 77 L.Ed.2d at pp. 568–571.)

Proceeding to Japan Line's second inquiry—that is, the “one-voice” standard—Container stated:  “In conducting this inquiry, ․ we must keep in mind that if a state tax merely has foreign resonances, but does not implicate foreign affairs, we cannot infer, ‘[a]bsent some explicit directive from Congress, ․ that treatment of foreign income at the federal level mandates identical treatment by the States.’  [Citations.]  Thus, a state tax at variance with federal policy will violate the ‘one voice’ standard if it either implicates foreign policy issues which must be left to the Federal Government or violates a clear federal directive [the second of these considerations being essentially a preemption analysis].”  (Emphasis in original, 463 U.S. at p. 194, 103 S.Ct. at p. 2955, 77 L.Ed.2d at pp. 571–572.)

In applying this refinement of the one-voice standard, Container noted that the most obvious foreign policy implication of a state tax is the threat it might pose of offending foreign trading partners and leading them to retaliate against the nation as a whole.  Container, however, said the judiciary has little competence in making these determinations on a theoretical basis, and even less competence in deciding how to balance a particular risk of retaliation against the sovereign right of the United States as a whole to let the states tax as they please.  (463 U.S. at p. 194, 103 S.Ct. at p. 2955, 77 L.Ed.2d at p. 572.)   The Container court emphasized that the nuances of foreign policy “are much more the province of the Executive Branch and Congress than of this Court.”  (Id., at p. 196, 103 S.Ct. at p. 2956, 77 L.Ed.2d at p. 573.)   According to Container, the best a court can do is try to develop objective standards that reflect general observations about international trade and relations.  (Id., at p. 194, 103 S.Ct. at p. 2955, 77 L.Ed.2d at p. 572.)

Container provided three reasons that weighed strongly against the possibility of justifiable and significant foreign retaliation.   First, California's taxing method as applied to domestic-based unitary groups did not create an “automatic ‘asymmetry’ ” in international taxation operating to a foreign entity's disadvantage.  (Emphasis in original, 463 U.S. at pp. 194–195, 103 S.Ct. at pp. 2955–2956, 77 L.Ed.2d at p. 572.)   Second, the method was imposed not on a foreign entity, as was the case in Japan Line, but on a domestic corporation.   At this point, the Container court noted that a tax falling on a domestic corporation “might be less significant in the case of a domestic corporation that was owned by foreign interests,” that is, the court again noted it was not dealing with the issue presented here.  (Id., at p. 195, including fn. 32, 103 S.Ct. at p. 2956, fn. 32, 77 L.Ed.2d at p. 572.)   Third, even if foreign nations had a legitimate interest in reducing the tax burden of domestic corporations, that burden is more the function of tax rate than of allocation method, and California can simply raise its rate to achieve the same foreign economic effect.  (Ibid.)

After stating that the threat of retaliation was not the only foreign policy implication a state tax may have, the Container court noted there was no amicus curiae brief from the executive branch opposing the tax (463 U.S. at p. 195, 103 S.Ct. at p. 2956, 77 L.Ed.2d at pp. 572–573), and indicated that although the lack of such a brief was not dispositive, it did suggest that United States foreign policy was not seriously threatened by California's application of WWCR to domestic-based corporate groups.  (Id., at pp. 195–196, 103 S.Ct. at p. 2956, 77 L.Ed.2d at p. 573.)

After concluding that foreign affairs were not implicated by California's unitary tax in a domestic-based multinational context, the Container court inquired whether the tax violated a “clear federal directive.”   For the following reasons, no such directive was found.

There was no federal statute on point.   While there were numerous tax treaties that committed the federal government to use an arm's length method in taxing the domestic income of multinational enterprises, that requirement was generally waived as to contracting nations taxing their own domestic corporations.   This fact, if nothing else said the Container court, “confirms our view that such taxation is in reality of local rather than international concern.”  (463 U.S. at p. 196, 103 S.Ct. at p. 2956, 77 L.Ed.2d at p. 573.)   Those tax treaties did not generally cover the taxing activities of states, and in none of them did the requirement of arm's length accounting apply to the states.   Moreover, the United States Senate had on one occasion declined to give its two-thirds consent to a treaty provision that would have prohibited the states from using WWCR.   Finally, the court noted that Congress had long debated but not enacted legislation designed to regulate state taxation of income.   In light of these circumstances, the court in Container could not conclude that California's unitary tax method, as applied to domestic-based unitary groups, was preempted by federal law or fatally inconsistent with federal policy.  (463 U.S. at pp. 196–197, 103 S.Ct. at pp. 2956–2957, 77 L.Ed.2d at p. 573.)

Unlike Japan Line and Container, the United States Supreme Court in Wardair Canada v. Florida Dept. of Revenue, supra, 477 U.S. 1, 106 S.Ct. 2369, 91 L.Ed.2d 1, did not engage in a dormant commerce clause analysis, finding it “abundantly clear” that the federal government had affirmatively acted rather than remained silent with respect to the issue there:  the power of a state to tax all airline aviation fuel sold within the state regardless of the airliner's destination or the amount of intrastate business it did.  (At pp. 9, 12, 106 S.Ct. at pp. 2373, 2375, 91 L.Ed.2d at pp. 10, 12.)

In Wardair, the airliner and the United States as amicus curiae argued there was a federal policy prohibiting such an unlimited tax, a policy manifested by (1) the 1944 Chicago Convention on International Civil Aviation (1944 Convention), which the United States had signed;  (2) a 1966 Resolution of the International Civil Aviation Organization (1966 Resolution), an organization to which the United States belonged;  and (3) more than 70 bilateral aviation agreements, including the 1974 US–Canadian Aviation Agreement (Agreement).  (Wardair was a Canadian airline.)   The court in Wardair saw things much differently.   Not only did this evidence fail to reveal any such policy, said the court, but showed the federal government had affirmatively acted to permit the tax at issue, thus precluding application of the dormant foreign commerce clause test enunciated in Japan Line.  (477 U.S. at pp. 8–12, 106 S.Ct. at pp. 2373–2375, 91 L.Ed.2d at pp. 9–12.)

Wardair's analysis proceeded as follows.   The 1944 Convention only prohibited the local taxation of aviation fuel “ ‘on board an aircraft ․ on arrival ․ and retained on board on leaving.’ ”  (477 U.S. at p. 10, 106 S.Ct. at p. 2374, 91 L.Ed.2d at p. 11.)   That provision, said the court, demonstrated the international community's awareness of the problem of state taxation of aviation fuel, and represented a decision by the Convention parties to address the problem by limiting only some of the localities' power to tax while implicitly preserving other aspects of that authority.  (Ibid.)  While the 1966 Resolution undeniably endorsed an international scheme to exempt fuel tax “ ‘ “from all customs and other duties,” ’ ” neither the executive nor the legislative branch had acted in any way to give the Resolution the force of law.  (Id., at pp. 10–11, 106 S.Ct. at p. 2374, 91 L.Ed.2d at p. 11.)   And after the Convention came into force, the United States entered more than 70 bilateral aviation agreements, not one of which prohibited the states from imposing a tax like Florida's.  (Id., at p. 11, 106 S.Ct. at p. 2374, 91 L.Ed.2d at pp. 11–12.)   The US–Canadian Agreement itself was limited to “ ‘national duties and charges,’ ” an especially striking feature given that (1) the Agreement was completed eight years after the 1966 Resolution specifically addressed the concern of subnational taxation, and (2) both signatories were federalist nations.  (Id., at pp. 11–12, 106 S.Ct. at pp. 2374–2375, 91 L.Ed.2d at p. 12.)   Moreover, throughout the duration of the Agreement, other American states and some Canadian provinces had imposed fuel taxes similar to Florida's without challenge, a course of conduct suggesting that the parties to the Agreement and those most immediately affected by it understood it to permit this taxation.  (477 U.S. at p. 12, 106 S.Ct. at p. 2375, 91 L.Ed.2d at p. 12.)

“What all of this makes abundantly clear,” said the court in Wardair, is that the federal government has not remained silent but “[b]y negative implication” “has at least acquiesced” in the state taxation at issue.  (477 U.S. at p. 12, 106 S.Ct. at p. 2375, 91 L.Ed.2d at p. 12.)   The dormant commerce clause test of Japan Line was deemed inapplicable because “the Federal Government ha[d] affirmatively decided to permit the States to impose these sales taxes on aviation fuel.”  (Ibid.)

Notable is the fact that the Wardair court continually reaffirmed the foreign dormant commerce clause test created in Japan Line, but failed to find an opportunity to employ it.   Also notable is Wardair's recognition of the basic value underlying that clause:  to “ensure that the essential attributes of nationhood will not be jeopardized by States acting as independent economic actors.”  (477 U.S. at p. 12, see also pp. 7–8, 106 S.Ct. at pp. 2375, 2372–2373, 91 L.Ed.2d at p. 12.)   And the heightened importance of this value in the context of foreign commerce was recognized by Wardair when it stated:  “In the unique context of ․ foreign commerce, we have alluded to the special need for federal uniformity:  ‘ “In international relations and with respect to foreign intercourse and trade the people of the United States act through a single government with unified and adequate national power” ’ [quoting Japan Line, supra, 441 U.S. at p. 448 [99 S.Ct. at p. 1821, 60 L.Ed.2d 336], quoting Board of Trustees v. United States (1933) 289 U.S. 48, 59 [53 S.Ct. 509, 510, 77 L.Ed. 1025].”  (477 U.S. at p. 8, 106 S.Ct. at p. 2373, 91 L.Ed.2d at p. 9.)

 With the various holdings and analysis of the problems decided in Japan Line, Container, and Wardair in mind, we turn to the present context.   The first issue to be resolved is whether the Board is correct that our case tracks Wardair, rendering a dormant commerce clause analysis unnecessary.   For the reasons that follow, we think the Board is incorrect in its conclusion.

Preliminarily, we reject the Board's suggestion that the three decisions, Japan Line, Container, and Wardair, together manifest a significant retrenchment in the sensitivity shown to foreign relations.   Both Container and Wardair reaffirmed Japan Line's sensitivity to the unique context of foreign commerce and the special need for federal uniformity in international relations.   To us, the theoretical underpinning has remained intact through these cases.   What was different in them was the degree to which foreign affairs and international commercial relations were implicated.   In Japan Line, the factual context presented an international asymmetry, an acute risk of retaliation, and varying degrees of international multiple taxation.   By contrast, in Container, there was a minimal risk of retaliation, a largely domestic context, and executive branch silence;  and in Wardair, both the American government and the Canadian government (the foreign country involved) had essentially agreed to permit the subnational taxation at issue.   Far from demonstrating any significant retrenchment in the sensitivity shown to foreign relations, the three cases demonstrate how that sensitivity is aligned with the degree to which such relations are implicated.

Relying upon five perceived indications of executive and congressional acquiescence in light of the principles of Wardair, the Board contends an affirmative federal policy permitted California's use of WWCR.   Those five factors are (1) the failure to consider state taxes in United States income tax treaties with foreign countries, except in nondiscrimination clauses;  (2) the actions by the executive branch in adopting a Model Income Tax Treaty and in reserving its position on the Organization of Economic Cooperation and Development (OECD) Model Convention's application to subnational taxes;  (3) Friendship, Commerce, and Navigation (FCN) Treaties to which the United States is a party do not require the states to use any particular method of tax accounting;  (4) the absence of enacted congressional legislation prohibiting or restricting the states' use of WWCR;  and (5) the rejection by the United States Senate of article 9(4) in the United States—United Kingdom Tax Treaty, the only attempt by the executive branch to alter federal acquiescence in the states' use of WWCR.

In analyzing the treaties and treaty actions encompassed in factors (1) through (3), we find little, if any, support for the Board's position.   True, these treaties and actions reflect a general policy at the federal level of noninterference in state taxation, but they do so to preserve the general principle of state sovereignty.   Not one of the treaties or actions, except for the U.S.–U.K. Tax Treaty to which we shall come, specifically addresses the unitary tax method or the use of WWCR by subnational units.   The treaties either state in general terms that they apply to national taxes, or contain general provisions regarding subnational taxes.   The reservations were made to model treaty provisions that state generally that the treaties should apply to subnational taxes.   Moreover, it was not until the 1970's when use of WWCR in an international context essentially began that a problem of international dimension arose.  (Cal.Code Regs., tit. 18, § 25137–6;  see Comment, California's Corporate Franchise Tax:  Taxation of Foreign Source Income? (1980) 20 Santa Clara L.Rev. 123, 131–136;  hereafter 20 Santa Clara L.Rev.)   Many of the treaties predate the existence of the problem and therefore do not discuss it.4

Contrast the treaty analysis in Wardair.   There, the specific subject matter encompassing the tax at issue, as well as inextricably related taxes, had been discussed in the 1944 international Convention well before the aviation agreements were negotiated.   Many of these agreements also postdated the 1966 international Resolution which specifically discussed the subject matter encompassing the tax.   The American government and the international community were therefore negotiating these agreements with a keen awareness of the tax involved in Wardair.   In fact, Wardair involved an issue of subnational taxation and the most relevant agreement in that case—the United States–Canadian Agreement—was signed by two federalist nations 30 years after the 1944 Convention and 8 years after the 1966 Resolution;  furthermore, the course of conduct under this agreement indicated the tax at issue was permitted.

The Board's approach is simply too general and ignores historical context in essentially arguing that when a treaty is limited to national taxes or fails to discuss a particular taxation method, a conscious decision has been made to allow states to tax in any manner they please.   Common sense charts a different course while respecting the broad power of a state to tax.  (See Hines v. Davidowitz, supra, 312 U.S. at p. 68, 61 S.Ct. at p. 404, 85 L.Ed. at pp. 587–588.)

In an attempt to be more specific, the Board does note that many of the bilateral tax treaties contain nondiscrimination clauses applicable to the states.   The Board argues that these clauses give rise to a Wardair-like “negative implication” of a decision by the treaty parties to resolve the problem of state taxation by curtailing only some of the states' power to tax, while implicitly preserving other aspects of that authority.   (Wardair, supra, 477 U.S. at pp. 10, 12, 106 S.Ct. at pp. 2374, 2375, 91 L.Ed.2d at pp. 11, 12.)   Again, we disagree.

In Wardair, the negative implication arose because foundation agreements had addressed not only the specific subject matter encompassing the tax at issue but specific taxes within that subject, without addressing the tax at issue.   Subsequent agreements were negotiated and conducted in the atmosphere of these foundational ones.   The nondiscrimination clauses do not provide a similar parallel here.   Those clauses are simply reflections of a general principle that a state shall not tax a foreign company more than it taxes its own companies.   A Wardair-like negative implication concerning WWCR which arises from this generality is impossible.5

Also cloaked in generality is the Board's fourth factor that the Board asserts would preclude a dormant commerce clause analysis:  the absence of enacted congressional legislation prohibiting or restricting the use of WWCR to foreign-based multinationals.

Apparently the Board concedes the trial court's finding that there was no evidence there has ever been a vote in a congressional committee or in Congress itself on legislation prohibiting the use of WWCR.   And the senior career official in the Department of Treasury for WWCR matters during much of the 1970's and 1980's, George N. Carlson, testified that none of the proposed legislation dealt solely with WWCR as to foreign-based enterprises.   It is also true, as reiterated in Container, that “ ‘Congress has long debated, but has not enacted, legislation designed to regulate state taxation of income.’ ”  (463 U.S. at pp. 196–197, 103 S.Ct. at p. 2957, 77 L.Ed.2d at p. 573, quoting Mobil Oil Corp. v. Commissioner of Taxes, supra, 445 U.S. at p. 448, 100 S.Ct. at p. 1237, 63 L.Ed.2d at p. 528.)

The problem with this factor is that in trying to assign a specific reason to legislative inaction, we must enter the realm of pure speculation.   It is difficult enough trying to ascertain legislative intent when a statute has been enacted, but trying to find meaning in legislative silence is about as difficult as hearing sound in a vacuum.

That brings us to the Board's fifth factor and the only one that specifically concerns the application of WWCR to foreign-based enterprises.

In 1975 the executive branch negotiated an income tax treaty with the United Kingdom containing a provision—article 9(4)—that would have prohibited the states' application of WWCR to U.K.–based corporate groups.   The United States Senate ratified the treaty only after article 9(4) was effectively removed through a reservation by Senator Church.   The Board contends this senatorial action “was a significant indication of federal policy to let the states continue to use WWCR.”   Again, the Board simply reads too much into too little.

The Church reservation to article 9(4) was defeated in the Senate Foreign Relations Committee and again on the Senate floor.   However, the treaty with article 9(4) included received a favorable full Senate vote of only 49 to 32, falling 5 votes short of the two-thirds majority needed for ratification.   When the Church reservation was resurrected without a vote and the controversial article was effectively removed, the Senate then provided its constitutional imprimatur.

In light of these Senate tallies, it is difficult to see a congressional policy permitting states to use WWCR.   Moreover, it appears that some of the senatorial opposition to article 9(4) was rooted not in the substance of the article but in the procedural wariness of addressing the problem through patchwork treaties rather than through comprehensive legislation.

The Board asks reasonably why no tax treaty subsequent to the U.S.–U.K. Tax Treaty has included a provision similar to article 9(4).   The Board's answer is that the Senate action on 9(4) indicated a congressional policy permitting states to use WWCR.   Our answer is that the constitutional high hurdle of treaty ratification and a treaty's piecemeal approach to the problem render a resolution via the treaty process ineffectual.   We simply fail to see how three majority votes in the Senate essentially approving article 9(4) can be transmogrified into a congressional policy of disapproval.

Whether the Board's five factors are analyzed individually or collectively, they fall far short of establishing under Wardair an affirmative federal policy permitting California's use of WWCR.   To the court in Wardair the factors there—an international Convention, an international Resolution, and more than 70 post-Convention agreements, including the U.S.–Canadian Agreement and the course of conduct thereunder by its two federalist signatories—made it “abundantly clear” that the federal government had “affirmatively decided to permit the States to impose these sales taxes on aviation fuel.”  (477 U.S. at pp. 9–12, 106 S.Ct. at pp. 2373–2375, 91 L.Ed.2d at pp. 10–12.)   That clarity was grounded in the close connection between those factors and the tax at issue, as the factors specifically discussed the subject matter of and taxes inextricably related to the tax at issue, or actually encompassed the type of tax at issue.

 As we have seen, there is no similar connection between the factors cited by the Board and the WWCR taxation method at issue here.   Only one of the Board's factors specifically addresses WWCR, and it does so in a manner that is at best neutral in respect to the Board's position.   Interestingly, the court in Container had before it many of the same factors upon which the Board relies including the Senate action on the U.S.–U.K. Treaty, and nevertheless engaged in a dormant commerce clause analysis.  (463 U.S. at pp. 185–197, 103 S.Ct. at pp. 2951–2957, 77 L.Ed.2d at pp. 566–573.)   Put most succinctly, while the court in Wardair was dealing with hard and specific evidence, we have been dealt “Five Easy Pieces.”   We proceed to a foreign dormant commerce clause analysis, applying the foreign dormant commerce clause test of Japan Line and Container.

1. The Enhanced Risk of Multiple Taxation.

This consideration need not detain us long.   All of the elements of double taxation involved in Container are also involved here.  (463 U.S. at pp. 189–193, 103 S.Ct. at pp. 2953–2955, 77 L.Ed.2d at pp. 568–571.)   But Container rejected those elements, reasoning that they were not “inevitable” and that resorting to the AL/SA method would not guarantee their demise.   (Ibid.)  We can discern no constitutionally significant differences between domestic-based and foreign-based multinational corporations concerning the enhanced risk of multiple taxation:  in neither case is double taxation inevitable.   Following the precedent of Container, we find California's use of WWCR as to foreign-based multinationals is not unconstitutional on this ground.

2. Whether California's Application of WWCR to Foreign–Based Unitary Groups May Impair Federal Uniformity in an Area Where Federal Uniformity Is Essential and Prevents the Federal Government From Speaking With One Voice in International Trade.

A. Foreign Policy Implications

The first issue to consider is whether California's application of WWCR to foreign-based unitary groups implicates foreign policy issues which must be left to the federal government.  (Container, supra, 463 U.S. at p. 194, 103 S.Ct. at p. 2955, 77 L.Ed.2d at pp. 571–572;  see also Japan Line, supra, 441 U.S. at pp. 448, 453, 99 S.Ct. at pp. 1821, 1824, 60 L.Ed.2d at pp. 347, 350.)   We think that it does.

According to Container, “[t]he most obvious foreign policy implication of a state tax is the threat it might pose of offending our foreign trading partners and leading them to retaliate against the Nation as a whole.”   (Emphasis added, 463 U.S. at p. 194, 103 S.Ct. at p. 2955, 77 L.Ed.2d at p. 572.)   Every single nation in the industrialized western world has sent letters to the United States government protesting the use of WWCR by American states.   Many of these protests have also been directed to California.   Among the most vigorous of these remonstrators has been Canada, by far the United States's largest trading partner, and Britain, this country's largest foreign investor.   These protests have been sharp, frequent, and incessant over a number of years.   There was also evidence that no other taxation issue had ever led foreign governments to deal directly with American states.   Even high-placed officials of the Board acknowledged awareness of this international outcry.  (See 20 Santa Clara L.Rev. at pp. 125–126.)

And it is not just talk.   The ultimate test of diplomatic sincerity—watch what they do, not what they say—has been met here.   In 1985, Britain passed retaliatory legislation withdrawing a tax advantage for U.S.-based corporations doing business in both Britain and a unitary tax state.   Though Britain stopped short of pulling the procedural trigger to fully implement this legislation, the law had a retroactive provision that impelled many American companies into preimplementation compliance.   Moreover, Britain cancelled a trade mission to Florida because that state applied WWCR to foreign-based multinationals.   And there were other similar cancellations.   There was also evidence the United States has had problems in negotiating treaties because of objections to WWCR.

The Board claims Britain has orchestrated the international outcry and passed a disingenuous piece of “retaliatory” legislation that does not retaliate.   However, some nation has to take the lead and the often-noted “special relationship” between Britain and the United States makes Britain the obvious choice for conductor.   We doubt that every industrialized country in the western world would have joined the symphony if there were not truly a significant problem.   In fact, a committed leader is more likely, not less likely, to be genuinely devoted.   As to the allegedly devious legislation, Britain, the largest foreign investor in the United States, stood to lose disproportionately if America deemed that legislation completely unfounded.   Many American companies operating in Britain did not believe such legislation was merely for show.   Moreover, the legislation was introduced “back-bench,” that is, by the opposition party, and nevertheless passed unanimously—extraordinary legislative feats according to the bill's author.

Our views are buttressed by analyzing the three general factors identified in Container that “might justifiably lead to significant foreign retaliation.”  (463 U.S. at pp. 194–195, 103 S.Ct. at pp. 2955–2956, 77 L.Ed.2d at p. 572.)   The first factor is whether California's use of WWCR creates an automatic asymmetry in international taxation operating to the foreign-based multinational's disadvantage.   Because no other country in the world uses WWCR, domestic-based multinationals do not face this taxation method abroad.   And while both domestic and foreign-based multinationals are subjected to the method if they do business in an American jurisdiction that employs it, the administrative burdens of compliance, as we shall see, fall much harder on the foreigner.

The second general factor identified in Container inquires whether the legal incidence of the tax falls on a domestic corporation or a foreign one.   (463 U.S. at p. 195, 103 S.Ct. at p. 2956, 77 L.Ed.2d at p. 572.)   This factor was of significant importance in Container, being noted at four places in the opinion.  (Id., at pp. 188–189, 195, including fns. 26, 32, 103 S.Ct. at pp. 2952–2953, 2956, fns. 26, 32, 77 L.Ed.2d at pp. 568–569, 572.)   We face here the precise issue reserved in Container:  “the constitutionality of combined apportionment with respect to state taxation of domestic corporations with foreign parents or foreign corporations with either foreign parents or foreign subsidiaries.”  (Id., at p. 189, fn. 26, 103 S.Ct. at pp. 2952–2953, fn. 26, 77 L.Ed.2d at p. 568.)  Container carefully noted that the tax there was imposed on a domestic corporation, “not on a foreign entity as was the case in Japan Line;”  and that “[a]lthough, California ‘counts' income arguably attributable to foreign corporations in calculating the taxable income of that domestic corporation, the legal incidence of the tax falls on the domestic corporation.”  (Id., at p. 195, 103 S.Ct. at p. 2956, 77 L.Ed.2d at p. 572.)  Container also recognized “that the fact that the legal incidence of a tax falls on a corporation whose formal corporate domicile is domestic might be less significant in the case of a domestic corporation that was owned by foreign interests.”  (463 U.S. at p. 195, fn. 32, 103 S.Ct. at p. 2956, fn. 32, 77 L.Ed.2d at p. 572.)

Here, California's taxation method of WWCR falls directly on a domestic corporation with a foreign parent (Barcal) and directly on a foreign corporation with a foreign parent and foreign subsidiaries (BBI).   As we have seen, foreign governments are none too happy about this state of affairs.   The governments of Britain and Canada have expressed their displeasure to this court through their amici curiae briefs.

Proponents of the worldwide unitary tax method cannot dispel foreigners' concerns by arguing that it is really the United States subsidiary or operation that bears the tax burden.   The premise of the unitary tax system is that it is unrealistic geographically to isolate income derived from the intangible flow of value among the parts of a unitary business.   Similarly, then, it is unrealistic to isolate the tax payments necessitated by that system:  the incidence of taxation falls on the entire business, including the foreign parent.  (See 23 Columbia Journal at p. 466.)

That brings us to the third general factor identified in Container as bearing on the risk of foreign retaliation:  whether the tax burden is more a function of California's WWCR tax rate or its allocation method.  (463 U.S. at p. 195, 103 S.Ct. at p. 2956, 77 L.Ed.2d at p. 572 fn. 32.)

Foreign-based corporate groups incur significantly greater administrative costs to comply with California's WWCR system than do their domestic-based counterparts;  in fact, all of the trial witnesses agreed that literal compliance with the system was cost-prohibitive for the foreign groups.6  (See Comptroller General Report, Key Issues Affecting State Taxation of Multijurisdictional Corporate Income Need Resolving, 3, GAO/GGD–82–38 (1982) [hereafter, GAO Report].)

In a nutshell, this distinction between domestic and foreign-based multinationals is a result of the following:  while domestic-based multinationals keep most of their records in English, in United States currency and in accord with United States accounting principles, the same cannot be said for multinationals based abroad.  (GAO Report at p. 39.)   For the foreign parent, some of the information may not be available because different nations use different accounting methods.   Obviously, the information that does exist is not always in the language, in the currency, and in accord with the principles just noted.   Substantial costs are incurred in obtaining the necessary information and translating and transforming it to these modes.   (See 20 Santa Clara L.Rev. at pp. 143–144;  23 Columbia Journal at p. 471.)

The administrative nightmare for the foreign-based multinational is aptly demonstrated here.   In 1977, BBI, a Britain-based company, was engaged in business directly or through subsidiaries in approximately 55 countries.   During this time, BBI had an interest sufficient for California unitary group purposes, in more than 70 subsidiaries operating in approximately 34 countries outside Britain.   Two of those subsidiaries were organized and operated in the United States:  Barcal and Barclays Bank of New York (BBNY).   In addition to owning BBI and BBI's subsidiaries, BBL, the Britain-based ultimate corporate parent, owned a sufficient interest for California unitary purposes in over 140 subsidiaries that operated outside the United States.   All told then, the Barclays unitary group consisted of over 220 subsidiaries (including subsidiaries of subsidiaries) operating in some 60 countries, but of these only BBI, Barcal, and BBNY, did business in the United States.

Using the Board's own figures, only 1.5 percent of the income generated by the Barclays group worldwide in 1977 can be attributed to California.   Even accounting for the BBNY activity, this means that over 98 percent of the Barclays group's income in 1977 had its source outside the United States.   According to witnesses at trial, it would costs millions of dollars for Barclays to establish and maintain the global system necessary to literally comply with California's WWCR tax method.  (The figures ranged from $6.4 million to $7.7 million to establish the system, and from $2 million to $3.8 million a year to maintain it.)   And note that Barclays, unlike many other foreign multinationals, at least speaks the same language as the California taxing authorities.

That it is California's allocation method rather than its tax rate that is the primary source of difficulty becomes readily apparent when these kinds of circumstances are viewed by foreign entities steeped in the AL/SA tradition.   Foreign anger is even more understandable in light of the critical role the United States has played in attempting to construct a coherent and nondiscriminatory tax policy for all nations based on the AL/SA method.  (See 23 Columbia Journal at pp. 459–462;  20 Santa Clara L.Rev. at pp. 153–154.)

The trial court deemed these costs of compliance sufficient to invalidate WWCR as an unconstitutional discrimination against foreign commerce—i.e., as a breach of one of the original four tests set forth in Complete Auto (430 U.S. 274, 97 S.Ct. 1076, 51 L.Ed.2d 326).   While we do not here use costs alone to constitutionally invalidate the use of WWCR (see Bibb v. Navajo Freight Lines (1959) 359 U.S. 520, 526, 79 S.Ct. 962, 966, 3 L.Ed.2d 1003, 1008), this legal analysis by the trial court—based upon a factual foundation of substantial evidence—demonstrates just how serious the administrative burden can be for the foreign entity.

The Board argues that literal compliance is a nonissue because regulations have been adopted by which a foreign-based multinational can use reasonable approximations to figure its California tax.  (Cal.Code Regs., tit. 18, § 25137–6;  Rev. & Tax.Code, § 25137.)   These approximations, according to the Board, can be derived from annual reports and other data that are already publicly available.  (See 23 Columbia Journal at p. 472.)

There are several problems with the Board's argument.   The Board decides whether to allow a foreign entity the route provided by regulation 25137–6, and such discretion is a powerful instrument in light of the cost-prohibitive alternative of literal compliance.   Moreover, California state tax authorities have at least once threatened to impose penalties for failure to produce detailed information needed to apportion income, even though the British-based company involved claimed the information was confidential under Britain's national security laws.  (See EMI Ltd. v. Bennett (N.D.Cal.1982) 560 F.Supp. 134;  Capitol Industries—EMI, Inc. v. Bennett (9th Cir.1982) 681 F.2d 1107, 1110–1111;  23 Columbia Journal at p. 472.)   These tax authorities cannot maintain on the one hand that reasonable approximations derived from already publicly available data are sufficient, and on the other hand demand under sanction more detailed information that is not readily available or even producible.   Logically, detailed information on payroll, property, and sales is needed to apply the WWCR formula in an uncapricious manner.   But more fundamental is why a state which has so little faith in the AL/SA method would so willingly embrace another method that is based on approximations derived from very general data?   In light of these observations, the practical availability of the reasonable approximation approach is seriously open to question.

In contrast to Container then, we do not have to speculate on whether the taxation method at issue may offend our foreign trading partners and lead them to retaliate against the nation as a whole.  (463 U.S. at p. 194, 103 S.Ct. at p. 2955, 77 L.Ed.2d at p. 572.)   They are offended;  they have retaliated.   And the three general factors identified in Container that might justifiably lead to significant retaliation—asymmetry, upon whom the tax falls, and tax rate versus allocation method—are all present in this case.  (Id., at pp. 194–195, 103 S.Ct. at pp. 2955–2956, 77 L.Ed.2d at p. 572.)

Also in marked contrast to Container stands the amicus curiae brief from the federal executive branch opposing California's application of WWCR to foreign-based corporate groups.   That brief reiterates many of the points noted above and delineates an executive branch policy we will discuss below.   We are mindful of Container's observation that in the context of the foreign commerce clause the foreign policy nuances of the United States are much more the province of the executive and the Legislature than of the judiciary.   (463 U.S. at pp. 195–196, 103 S.Ct. at p. 2956, 77 L.Ed.2d at pp. 572–573.)

B. Clear Federal Directive

That brings us to the other avenue identified in Container by which a state tax will violate the “one-voice” standard:  if the tax violates a clear federal directive.  (463 U.S. at p. 194, 103 S.Ct. at p. 2955, 77 L.Ed.2d at pp. 571–572.)   As this consideration is an integral component of the dormant commerce clause test, obviously such a directive is not synonymous with an affirmative federal policy precluding dormant commerce clause analysis.   (Id., at pp. 193–194, 103 S.Ct. at p. 2955, 77 L.Ed.2d at p. 571.)

In dealing with this issue, the court in Container looked for specific indications of congressional intent after noting that no amicus brief from the executive branch had been filed.  (463 U.S. at pp. 195–196, 103 S.Ct. at p. 2956, 77 L.Ed.2d at pp. 572–573.)   Examining much of the same evidence relied on by the Board here to preclude a dormant commerce clause analysis, Container did not find any such indications and concluded that California's application of WWCR to domestic-based corporate groups was not preempted by federal law or fatally inconsistent with federal policy.   (Id., at pp. 196–197, 103 S.Ct. at pp. 2956–2957, 77 L.Ed.2d at p. 573.)

Like the court in Container, the trial court in this instance found “no Congressional expression either way on this subject.”   Our earlier discussion as to why Wardair does not preclude a dormant commerce clause analysis supports this finding.

However, the trial court found the evidence unequivocal “that the executive branch all along, under three administrations since the WWCR problem in the present context became known, has steadfastly adhered to a policy of use of the arms length/separate accounting (AL/SA) method and not WWCR, both as to the States and the Federal Government.”   In the context presented here, we agree with the trial court.

George Carlson, who was the Treasury Department's (the executive department charged with formulating tax policy) senior career official for WWCR issues during most of the 1970's and 1980's, testified regarding the executive branch's policy on WWCR application to foreign-based corporate groups.   That policy was officially pronounced in 1975 when the U.S.–U.K. Tax Treaty was signed, and essentially proscribed such an application while advocating an accounting restriction to the “water's-edge” of the United States.   The genesis of the policy can be found in Treasury Department studies confirming complaints from foreign governments about increased risks of double taxation, disproportionate administrative burdens, and possible retaliation.   Additionally, those studies found that WWCR in a foreign context was interfering with the federal government's foreign commercial policy and its ability to negotiate bilateral tax treaties.   In short, the Treasury Department—again, the executive department charged with formulating the executive branch's tax policy—concluded that WWCR was an irritant in our foreign commerce relations.

This executive policy remained constant through four presidential administrations, starting when negotiations on the U.S.–U.K. Tax Treaty began, to the point when this case was litigated.   And though there was a change in political party of the executive during this time, there was no change in policy:  the executive branch did not want WWCR applied to foreign-based corporate groups.

Negotiations on the U.S.–U.K. Tax Treaty began during President Nixon's administration.

That treaty, with article 9(4) included, was signed during President Ford's tenure.

President Carter's Secretary of the Treasury, Michael Blumenthal, in a 1977 letter to Martin Huff, then the executive director of the Board, stated:  “The unitary apportionment system is inconsistent with accepted tax treaty policy which prohibits one country from taxing the business profits of an enterprise of the other unless that enterprise is engaged in business through a permanent establishment in the first country․ [¶] ․ The arm's length standard is the internationally accepted approach.”   And President Carter's Assistant Secretary of the Treasury for Tax Policy, Donald Lubick, explained the administration's position to both houses of Congress in March and June of 1980.   Lubick emphasized that WWCR application to foreign-based corporate groups was the preeminent concern, citing the firmly-documented problems of foreign policy interference, double taxation, administrative burdens, and possible retaliation.

Faced with a deluge of complaints from all of our major trading partners and his patience exhausted by the failure of the states to resolve the WWCR problem voluntarily, President Reagan in 1985 publicly issued a directive on the matter.   He instructed the Attorney General to pursue through litigation and the Secretary of the Treasury to pursue through legislation and where appropriate, through treaty amendment, the federal policy that multinational corporations be taxed by states only on income derived from the United States and not on income derived from foreign subsidiaries.   Under the aegis of that directive, Secretary of State Schultz in early 1986 wrote to Governor Deukmejian urging him to support efforts to end California's use of WWCR.   Not only did this letter explain that it was the long-standing policy of the United States to follow the AL/SA method, which was also the international standard, but that, “[y]our state's employment of the worldwide unitary method of tax accounting is at odds with the position of the United States and has become a source of conflict with foreign states;”  furthermore, the letter pointed out that “[t]he worldwide unitary issue has seriously complicated our economic relations with many of our closest allies.”   California passed the “water's-edge” legislation a few months later.

On this record we feel confident in saying that the executive branch has spoken clearly.   Through that branch, the policy of the United States since the WWCR problem in the present context arose in the 1970's has been established:  WWCR is not to be applied to foreign-based corporate groups—those groups are to be taxed by the states only on income derived from the United States.

Naturally, the question arises as to whether the executive branch alone can establish national policy in the field of foreign commerce or does it need the concurrence of the legislative branch?

Undoubtedly, the legislative branch can establish national policy in the field of foreign commerce without the concurrence of the executive branch.   Specifically, the federal Constitution grants Congress this power (U.S. Const., art. I, § 8, cl. 3).

Does the same obtain for the executive branch?   In the steel industry seizure case of Youngstown Sheet & Tube Co. v. Sawyer (1952) 343 U.S. 579, 72 S.Ct. 863, 96 L.Ed. 1153, Justice Jackson wrote a concurring opinion analyzing the scope of presidential power.  (343 U.S. at pp. 634–656, 72 S.Ct. at pp. 869–880, 96 L.Ed. at pp. 1198–1210.)   It has been said that Jackson's opinion “brings together as much combination of analysis and common sense as there is in this area, ․”  (See Dames & Moore v. Regan (1981) 453 U.S. 654, 661, 101 S.Ct. 2972, 2977, 69 L.Ed.2d 918, 929.)   In that opinion, Jackson set forth the following tripartite framework as a guide in resolving issues involving presidential power:  “1. When the President acts pursuant to an express or implied authorization of Congress, his authority is at its maximum, for it includes all that he possesses in his own right plus all that Congress can delegate.   In these circumstances, and in these only, may he be said (for what it may be worth) to personify the federal sovereignty․  A seizure executed by the President pursuant to an Act of Congress would be supported by the strongest of presumptions and the widest latitude of judicial interpretation, and the burden of persuasion would rest heavily upon any who might attack it.  [¶] 2. When the President acts in absence of either a congressional grant or denial of authority, he can only rely upon his own independent powers, but there is a zone of twilight in which he and Congress may have concurrent authority, or in which its distribution is uncertain.   Therefore, congressional inertia, indifference or quiescence may sometimes, at least as a practical matter, enable, if not invite, measures on independent presidential responsibility.   In this area, any actual test of power is likely to depend on the imperatives of events and contemporary imponderables rather than on abstract theories of law.  [¶] 3. When the President takes measures incompatible with the expressed or implied will of Congress, his power is at its lowest ebb, for then he can rely only upon his own constitutional powers minus any constitutional powers of Congress over the matter․  Presidential claim to a power at once so conclusive and preclusive must be scrutinized with caution, for what is at stake is the equilibrium established by our constitutional system.”  (Fns. omitted, 343 U.S. at pp. 636–638, 72 S.Ct. at pp. 870–871, 96 L.Ed. at pp. 1199–1200.)

Based upon our previous analysis, the executive action here aligns with Justice Jackson's second category.   And as noted by Justice Jackson, it is the imperative of events and contemporary imponderables rather than abstract theories of law that primarily guides our review.

We begin by emphasizing the field in which the executive branch has acted:  foreign policy.   That is a field in which the executive possesses substantial power of its own.  (See United States v. Curtiss–Wright Export Corp., supra, 299 U.S. at pp. 319–320, 57 S.Ct. at pp. 220–221, 81 L.Ed. at pp. 262–263;  United States v. Belmont, supra, 301 U.S. 324, 57 S.Ct. 758, 81 L.Ed. 1134;  United States v. Pink (1942) 315 U.S. 203, 62 S.Ct. 552, 86 L.Ed. 796;  Container, supra, 463 U.S. at pp. 165–166, 103 S.Ct. at p. 2940, 77 L.Ed.2d at p. 553;  U.S. Const., art. II, §§ 1, 2.)   Although the Constitution grants to Congress the power to regulate commerce with foreign nations, the executive's rightful power in the foreign policy arena inextricably involves international commercial relations.  (Container, supra.)

Particularly is this true in this era of increasingly “globalized” and rapidly changing economic forces, and the beginnings of economic displacement of military competition in big power relations.   The rapidity with which global changes in economic structure are occurring places an imperative on the exercise of swift and effectual national power, the kind of power most suitably exercised by the executive.   Recall Wardair's reiteration that “ ‘[i]n international relations and with respect to foreign intercourse and trade the people of the United States act through a single government with unified and adequate national power.’ ”  (477 U.S. at p. 8, 106 S.Ct. at p. 2373, 91 L.Ed.2d at p. 9, quoting Japan Line, supra, 441 U.S. at p. 448, 99 S.Ct. at p. 1821, 60 L.Ed.2d at p. 347, quoting Board of Trustees v. United States, supra, 289 U.S. at p. 59, 53 S.Ct. at p. 510, 77 L.Ed. 1025.)

If Congress were to enact legislation or take some other affirmative action contrary to the executive branch policy, that would most likely be the end of the matter.   But Congress must act as a consensual body before a legislative policy can be discerned.   Before that happens, the legislative branch, in contrast to the executive branch, resembles more a cacophony than a chorus of voices, each legislator having his or her own reason for speaking.   As detailed earlier, we discern no congressional policy regarding the states' use of WWCR.

We are mindful of the Board's concern about unbridled executive power and about national policy being nothing more than what the executive says it is.   Again, however, we must emphasize that we are dealing with a critical foreign policy issue on which the executive has affirmatively acted and the Congress has not.   Nor would it have been difficult for the Congress to act:  one simple sentence in a piece of legislation, a treaty, or a resolution would have sufficed.

The evidence here reveals that as soon as the problem of WWCR in an international context arose, executive departments began studying the issue.   Those studies confirmed the validity of the complaints from foreign governments and culminated in the official and public expression of executive branch policy in 1975 with the signing of the U.S.–U.K. Tax Treaty.   In a nutshell, that policy sought the elimination of WWCR as applied to foreign-based corporate groups, and an accounting restriction to the “water's-edge” of the United States.   The policy has never wavered though the party affiliations of the administrations continuing it have.   In fact, through the years, the policy has grown stronger:  the Reagan administration sought to eliminate WWCR as applied not only to foreign-based multinationals, but to domestic-based ones as well.

Public expressions of the executive policy have been made continuously since the mid–1970's.   Even the executive director of the Board was explicitly informed by President Carter's Secretary of the Treasury in 1977 that the unitary apportionment system was inconsistent with accepted tax treaty policy—i.e., with the AL/SA method.   And one cannot doubt the clarity of the executive's position.

In this context, it is unnecessary to fret about national policy being formulated through executive whim.   Found here is a clear, continuous, and thoroughly-grounded policy developed by the executive branch in the face of congressional inertia and inaction, and directly involving an issue—foreign policy—to which great deference to the executive has traditionally been given.  (See United States v. Curtiss–Wright Export Corp., supra, 299 U.S. at pp. 319–320, 57 S.Ct. at pp. 220–221, 81 L.Ed. at pp. 262–263;  Container Corp. v. Franchise Tax Bd., supra, 463 U.S. at pp. 195–196, 103 S.Ct. at p. 2956, 77 L.Ed.2d at pp. 572–573.)   This context also strikes the proper balance between the purposes of the commerce clause—to avoid “economic balkanization,” promote free trade and prevent individual states from working to the detriment of the nation as a whole—and the legitimate interest of the states in exercising their taxing power.  (See Boston Stock Exchange v. State Tax Comm'n (1977) 429 U.S. 318, 328–329, 97 S.Ct. 599, 606–607, 50 L.Ed.2d 514, 523–524;  National Meat Ass'n. v. Deukmejian (9th Cir.1984) 743 F.2d 656, 659.)   While we realize that a state's power to tax is bottomed on a broad base, we cannot ignore that California's application of WWCR to foreign-based corporate groups directly affects international relations.  (See Hines v. Davidowitz, supra, 312 U.S. at p. 68, 61 S.Ct. at p. 404, 85 L.Ed. at pp. 587–588;  Zschernig v. Miller (1968) 389 U.S. 429, 88 S.Ct. 664, 19 L.Ed.2d 683;  Bethlehem Steel Corp. v. Board of Commissioners (1969) 276 Cal.App.2d 221, 80 Cal.Rptr. 800;  Amarel v. Connell (1988) 202 Cal.App.3d 137, 248 Cal.Rptr. 276.)

We must also emphasize that our determination has little to do with the technical merits of the WWCR method in the abstract.   Theoretically, that method may very well be a superior one were it to be applied fairly by nations around the globe.   But the international community is presently enmeshed in the tradition of separate accounting, a tradition largely engendered through American efforts.   When an American state in isolation employs a method which radically departs from that tradition and which demands an accounting of foreign corporations that have nothing to do with the state or with the United States for that matter, the adverse implications for American foreign policy are not hard to imagine.

We hold that California's unitary tax method (worldwide combined reporting, WWCR) as applied to foreign-based unitary groups is unconstitutional under the foreign commerce clause of the federal Constitution because it not only implicates foreign policy issues which must be left to the federal government but violates a clear federal directive as well.  (Container, supra, 463 U.S. at p. 194, 103 S.Ct. at p. 2955, 77 L.Ed.2d at p. 571.)

The Board argues that even if this application of WWCR is unconstitutional under the foreign commerce clause today, such a determination is irrelevant to its constitutionality in 1977.   We disagree for two reasons.

First, we have determined the trial court was correct in finding that the executive branch since 1975 has clearly and consistently opposed applying WWCR to foreign-based corporate groups.   Second, and more importantly, the “one-voice” standard of Japan Line and Container does not depend on the outcome of events for its application.   In applying that test, the courts inquire whether a state tax “may impair federal uniformity in an area where federal uniformity is essential” (emphasis added, Japan Line, supra, 441 U.S. at p. 448, 99 S.Ct. at p. 1821, 60 L.Ed.2d at p. 347);  and they analyze “the threat [the tax] might pose of offending our foreign trading partners and leading them to retaliate against the Nation as a whole” by employing general standards to see if the tax “might justifiably lead to significant foreign retaliation.”  (Emphasis added, Container, supra, 463 U.S. at p. 194, 103 S.Ct. at p. 2955, 77 L.Ed.2d at p. 572.)   In short, the judiciary asks whether the probability of justifiable, adverse foreign response and actions is too strong to permit the state tax to stand.   This judicial application of the foreign commerce clause thus aligns with the underlying premise of the clause:  to “commit[ ] to the exclusive authority of the Federal Government the regulation of those aspects of foreign commerce that by their very nature ‘necessitate a uniform national rule.’ ”  (Emphasis added, Wardair Canada v. Florida Dept. of Revenue, supra, 477 U.S. at p. 18, 106 S.Ct. at p. 2378, 91 L.Ed.2d at p. 16 [dis. opn. of Blackmun, J.], quoting Japan Line, supra, 441 U.S. at p. 449, 99 S.Ct. at p. 1822, 60 L.Ed.2d at p. 348.)

As the trial court aptly noted in this regard, “[t]his case factually demonstrates as extreme an example of predictable international consequences stemming from a local tax as can be conceived.”   Succinctly stated, the Board required the Britain-based Barclays group, which derived over 98 percent of its income from business activity outside the United States, to supply detailed accounting information on all of its more than 200 subsidiaries operating in some 60 countries because the group did a little over 1 percent of its business in California.   In light of the custom of nations making AL/SA the international standard, the radical differences between AL/SA and WWCR, and the distinctions between this case and Container, a direct, adverse impact on foreign affairs was inevitable.   The international furor that resulted was justified and therefore entirely predictable.

The Board unnecessarily worries whether such a holding would subject a state's power to tax to the mercy of a foreign government's vocal chords.   Our opinion has made clear, substantially more than mere complaints are involved in this case.   The essentials of the dilemma were concisely summarized by one witness at the U.S.–U.K. Tax Treaty hearings:  “To permit them [the states] to roam the world threatening U.K.-based companies having no permanent establishment in the U.S., demanding information which the U.S. would have no treaty right to demand, and generally acting like a bull in the international china shop, is unbecoming to the dignity of the U.S., to the placidity of its relations with those countries with which it solemnly negotiates treaties, and accomplishes no purpose necessary for the protection of the revenue of the taxing states.”  (23 Columbia Journal at p. 467.)

Having decided that California's application of WWCR (Rev. & Tax.Code, § 25101) to foreign-based unitary groups is unconstitutional under the foreign commerce clause of the federal Constitution, it is unnecessary for us to consider the plaintiffs' due process challenge.

The judgment is affirmed.

FOOTNOTES

FOOTNOTE.  

1.   During the tax year at issue (1977), section 25101 of the Revenue and Taxation Code provided in pertinent part as follows:  “When the income of a taxpayer subject to the tax imposed under this part is derived from or attributable to sources both within and without the state the tax shall be measured by the net income derived from or attributable to sources within this state in accordance with the provisions of Article 2 (commencing with Section 25120 of this chapter);  ․”Article 2 contains the California enactment of the Uniform Division of Income for Tax Purposes Act (UDITPA), which provides for formula apportionment of the net income from business activities both within and outside California in order to reach the net income attributable to California activities.  (Rev. & Tax.Code, §§ 25120–25138.)In 1982, section 25101 was amended in an insignificant fashion for our purposes.  (Stats.1982, ch. 466, § 104, p. 2055.)

2.   In 1986, California passed legislation, operative January 1, 1988, permitting taxpayers to make a “water's-edge election” notwithstanding section 25101 (Rev. & Tax.Code, § 25110 et seq.).The “water's-edge” method is essentially an AL/SA method, and offers an alternative to the WWCR method for determining taxable income.  (See Rev. & Tax.Code, §§ 25101, 25110.)   Instead of accounting for the income and apportionment factors (property, payroll, and sales) of all the members of its worldwide unitary group, a corporate taxpayer making such an election accounts for the income and apportionment factors of the following entities affiliated with it, subject to some technical exceptions:  corporations incorporated in the United States;  any corporation, wherever incorporated, if the average of its apportionment factors within the United States is 20 percent or more;  affiliated corporations which are eligible to be included in a federal consolidated tax return;  domestic international sales corporations and foreign sales corporations engaged in sales in the United States;  export trade corporations;  any corporation not set forth previously but only to the extent of its income derived from or attributable to sources within the United States;  and any affiliated corporation which is a controlled foreign corporation as defined in the Internal Revenue Code.   Any corporation not subjected to WWCR under Revenue and Taxation Code section 25101 need not be included in this “water's-edge” accounting.  (Rev. & Tax.Code, § 25110, subd. (a).)In general, this election permits a taxpayer corporation to exclude the income and apportionment factors of foreign incorporated affiliates from the corporation's California tax base.   In the context of state taxation of multinational corporations, an accounting restriction to the water's edge of the United States means that a state tax authority relies only on income derived from permanent establishments of the corporation in the United States, and not on income derived from wholly foreign interests, to calculate the corporation's franchise tax.   Essentially, then, California's “water's-edge election” is a separate accounting method with the United States as the jurisdictional boundary.Only “qualified taxpayers” can make a water's-edge election.   To qualify, the corporate taxpayer must (1) consent to the taking of depositions from key corporate personnel and to the production of documents to ensure the Franchise Tax Board has the information necessary to make genuine arm's length adjustments and unitary business investigations, and (2) agree that dividends received by any affiliated entity from corporations significantly related to the unitary business constitute business income of the taxpayer.  (Rev. & Tax.Code, § 25110, subd. (b)(2).)   Additionally, to make the election the corporate taxpayer must enter into a five-year contract with the Franchise Tax Board, pay an annual fee, and subject itself to various conditions.  (Rev. & Tax.Code, §§ 25111—25115.)A foreign-based multinational corporation that does not make this election is subjected essentially to the 1977 taxation method at issue here.  (See fn. 1, ante, pp. 2–3.)   We emphasize, however, that the issue we confront is the constitutionality of California's unitary tax method of WWCR as applied to foreign-based unitary groups (Rev. & Tax.Code, § 25101 et seq.).   Because California's “water's-edge election” is not involved in this case, we express no view regarding it.  (Rev. & Tax.Code, § 25110 et seq.)

3.   Barcal and BBI do not challenge the determination that they are part of a unitary group.

4.   The Board chides the trial court for determining that pre–1978 tax treaties were largely irrelevant to this case.   To support its position, the Board cites the 1924 United States Supreme Court decision in Bass, Ratcliff & Gretton v. State Tax Commission (1924), 266 U.S. 271, 45 S.Ct. 82, 69 L.Ed. 282.   In Bass, the court constitutionally validated New York's application of a unitary business/formula apportionment method to the overall income of a British brewing company that imported a portion of its product through branch offices in New York and Chicago.   Because of Bass, says the Board, the international community has been well aware since 1924 of this income allocation alternative to the AL/SA method.Rather than support the Board's argument, we think Bass undermines it.   Awareness of a particular tax theory is one thing;  to be subjected to that theory in practice is quite another.   Though Bass and its foreign-based unitary tax concept have been around since 1924, it was not until the early 1970's when the concept began to be noticeably applied that the problem of unitary taxation in the international arena arose.   That history supports the idea that such a tax, though known as a concept, was little applied in international practice and thus largely irrelevant beyond our borders.   (See Mobil Oil Corp. v. Commissioner of Taxes (1980), 445 U.S. 425, 438–439, 446–448, 100 S.Ct. 1223, 1232, 1236–1237, 63 L.Ed.2d 510;  Container, supra, 463 U.S. at pp. 163–165, 168–169, including fn. 7, 185–197, 103 S.Ct. at pp. 2939–2940, 2941–2942, fn. 7, 2951–2957, 77 L.Ed.2d 545.)   All of this supports the trial court's eminently sensible determination that a tax treaty cannot be relevant to a tax problem that did not exist and was not foreseeable at the time the treaty was negotiated.   Like judicial decisions, the older tax treaties here cannot sensibly be considered authority for propositions not considered.In a somewhat related vein, the Board also cites Bass as constitutionally validating the unitary tax method as applied to foreign-based corporations.   For a number of reasons, we disagree.   First, Bass was decided before the United States developed its network of international tax treaties.  (See 23 Columbia Journal at p. 450, fn. 32.)   Second, Bass did not discuss foreign policy implications.   Third, Bass obviously did not have the opportunity to apply the foreign dormant commerce clause test as enunciated in Japan Line.   Finally and most importantly, Container cited Bass three times in passing yet twice explicitly reserved determining the constitutionality of the unitary tax method as applied to foreign-based corporate groups.  (Container, supra, 463 U.S. at pp. 164–166, 189, fn. 26, 195, fn. 32, 103 S.Ct. at pp. 2939–2941, 2952, fn. 26, 2956, fn. 32, 77 L.Ed.2d 545.)  Bass's importance fades considerably in light of these factors.  (See 20 Santa Clara L.Rev. at pp. 126–128.)

5.   Our determination is supported by the fact that less tax-specific treaties such as the FCN Treaties contain a comparable nondiscrimination clause.  (23 Columbia Journal at p. 471.)

6.   The Board contends the trial court should have excluded all evidence on cost of compliance because plaintiffs failed to adequately raise the issue in administrative proceedings.   We disagree.   Plaintiffs' original and supplemental protests raise the compliance issue as part of their overall constitutional challenge.   Moreover, the Board was apprised of this issue in correspondence during the administrative process.

EVANS,* Associate Justice. FN* Assigned by the Chief Justice.

PUGLIA, P.J., and DAVIS, J., concur.