Reuters Ltd. v. Tax Appeals Tribunal, 82 N.Y.2d 112 (1993)
A state’s application of a worldwide net income apportionment method to calculate the corporate franchise tax of a multijurisdictional business enterprise does not violate the nondiscrimination clause of the United States-United Kingdom Tax Treaty.
Summary
Reuters, a UK corporation, challenged New York State’s franchise tax assessment based on worldwide net income apportionment, arguing it violated the U.S.-U.K. Tax Treaty’s nondiscrimination clause. Reuters maintained a branch in New York, incurring losses there, but earned profits abroad. New York calculated deficiencies using the worldwide apportionment method. The Court of Appeals affirmed the Tax Appeals Tribunal’s determination, holding that applying the apportionment formula to a single multijurisdictional enterprise does not violate the treaty. The court emphasized that Reuters-New York is not a separate entity but part of the larger UK enterprise and that the purpose of the nondiscrimination clause is to prevent economic discrimination against foreign taxpayers, which was not demonstrated here.
Facts
Reuters Limited, a UK corporation, operated in about 80 countries, with a branch in New York City serving as its principal U.S. office. During 1977-1979, the New York branch incurred losses, while Reuters earned profits abroad. Reuters initially computed its New York franchise taxes based on U.S. income only, paying no tax due to reported losses. In 1983, the Department of Taxation and Finance audited Reuters and issued deficiency notices totaling $1,280,000 based on a worldwide net income apportionment method, which was later compromised to $96,168.
Procedural History
Reuters challenged the deficiency assessment administratively. An Administrative Law Judge upheld the deficiency notices, and the Tax Appeals Tribunal affirmed this determination. Reuters then initiated an Article 78 proceeding to annul the Tribunal’s decision. The Appellate Division confirmed the determination and dismissed the petition. The New York Court of Appeals initially dismissed Reuters’ appeal, but later granted leave to appeal.
Issue(s)
Whether New York State’s calculation of Reuters’ franchise tax on the basis of the worldwide net income apportionment method violates the nondiscrimination clause of the United States-United Kingdom Tax Treaty.
Holding
No, because applying New York’s apportionment formula to the worldwide net income of a single multijurisdictional business enterprise operating internationally does not violate the nondiscrimination clause of the U.S.-U.K. Tax Treaty.
Court’s Reasoning
The court reasoned that the antidiscrimination clause in Article 24(2) of the U.S.-U.K. Tax Treaty requires a comparison between the taxation of Reuters’ U.S. branch and the taxation of a U.S. corporation with a branch in New York conducting international business through branch offices in other countries. The court rejected Reuters’ argument that its New York branch should be treated as a separate enterprise from its UK parent. The court emphasized that a branch office has no separate legal identity from the corporation. New York’s method ensures that Reuters’ franchise tax is calculated in a nondiscriminatory manner. The court cited Mobil Oil Corp. v Commissioner of Taxes, 445 US 425, 439, upholding the “unitary business” principle as “the linchpin of apportionability in the field of state income taxation.” The court also noted that the legislative history of the treaty supports the view that the treaty was not intended to restrict states’ use of worldwide income apportionment methods for a single business enterprise. As the Senate Foreign Relations Committee Report stated: “[A] state may take into account the income and assets of any other branches of that corporation, wherever located, because a corporation is considered to be a single enterprise regardless of how many separate branches or businesses it has.” The court also cited Bass, Ratcliff & Gretton v Tax Commn., 266 U.S. 271, rejecting a Foreign Commerce Clause challenge to New York’s apportionment methodology on similar facts.