California Tax Reform Could Have International Tax Implications

By Sylvia Chan, Tax Senior

There has been much discussion about restructuring the California Tax System. Currently, California relies significantly on personal income tax collection to fund its state expenditures.  Tax revenue based on personal income relies heavily on the unpredictability of capital gains which makes it impossible to forecast the state’s future revenue. This puts California in a very vulnerable situation should the stock market collapse, creating an abrupt shortfall in the State budget. Most people would agree that the California tax system is outdated, unfair, unreliable and long overdue for tax reform.

California has looked at other States for ideas in order to broaden its tax base.  One of the strategies explored is by implementing tax haven provisions. Many states are expressing interest in expanding unitary taxation beyond the U.S. border (known as “water’s edge”).  States like Alaska, Connecticut, Montana, Oregon, Rhode Island, West Virginia, and the District of Columbia enacted tax haven provisions. Twelve other states are proposing to implement tax haven provisions. Tax haven legislation generally comes in two forms:  1) states statutorily adopting a blacklist of designated countries and including the income of foreign affiliated corporations located in those countries in the combined income calculation, or 2) states adopting a list of criteria giving state tax agencies the discretion in audits to determine which nations may be considered tax havens, thereby including income from foreign subsidiaries operating in such nations in the tax base.

As California continues to search for more stable forms on revenue, the implementation of tax haven provisions appears to be the justifiable solution. If your business currently has business operations in any foreign tax havens, the possibility of California implementing tax haven provisions is definitely something you need to take in consideration for future tax planning purposes.

For more information on tax havens, please see article published in Tax Notes:

California Cross Border Accountant