By SMF, NARA, Date 3/28/00
The White House
May 14, 1984
Thank you for your timely letter on unitary taxation. As we discussed last year, I fully appreciate your concern on this issue and the problems it has posed for your government.
I am pleased to say that I have been informed by Secretary Regan that at its May 1 meeting the Worldwide Unitary Tax Working Group reached agreement in principle to recommend that the states adopt a “water’s edge” limitation to the application of unitary taxation. This would apply to both U.S. and foreign-based companies. I believe such a limitation would meet your concerns about the taxation of British multinationals in the United States, and I will urge that the states implement this recommendation as quickly as possible.
As you noted, the states are very concerned about the effect a “water’s edge” approach would have on their revenues. Largely for this reason, the Working Group did not reach agreement on how states should tax dividends American firms receive from their foreign subsidiaries; of course, this issue does not directly affect British firms.
The recommendations agreed upon by the Working Group include a number of measures for increased federal efforts to assist in the administration of separate accounting and arms-length pricing and greater sharing with the states of federal tax [end p1] information. These measures will greatly aid the states in administering their tax systems, but they are contingent on state acceptance of the Working Group’s recommendation on “water’s edge”.
While implementation of the Working Group recommendations is the responsibility of each state, I am confident that competition between states for new investment will spur them to act quickly on this issue. A number of state officials, as you have probably heard, have recently expressed reservations over continued use of the unitary method.
Thank you for writing. I look forward to seeing you in less than a month.