US ruling could trigger tax war

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NEW YORK - Britain could be pitched into a full-scale tax war with the US if a Supreme Court decision tomorrow goes against Barclays Bank, which is challenging the way the state of California taxes foreign companies, writes Larry Black.

The court is to decide whether to intervene in Barclays' conflict with the California Franchise Tax Board, a test case in a long battle between the state and multinational companies that claim they have been charged billions of dollars in illegal taxes.

The Chancellor, Norman Lamont, warned the US publicly last Thursday that Britain would consider tax sanctions against California-based companies in the UK if the tax issue was not resolved favourably by the end of the year. This could cost some US companies operating in Britain hundreds of millions of pounds in extra taxes.

For years, international companies operating in California have faced what amounts to double taxation because of the state's unique method of assessing taxes based on a conpany's global earnings instead of its local profits. Although California's scheme contradicts the 'arm's length' system in place elsewhere in the US and in most of the trading world, the state's own courts have consistently upheld its right to impose such 'unitary' taxes.

Barclays' particular appeal to the Supreme Court involves only dollars 154,000 worth of double taxes incurred in 1977. But if the court were to overturn the California scheme - which has applied to perhaps half the foreign companies operating in the US - it could end up costing the economically-beleaguered state between dollars 800m and dollars 2.3bn in tax refunds and interest.