State Taxation of Foreign Source Income through Worldwide Combined Reporting

The primary alternative to worldwide combined reporting is the method used by the United States Government--the arm's length method of taxing foreign source income. Following the explanation of the arm's length method, this Note will outline briefly the due process and commerce clause limitations on a state's jurisdiction to tax and will describe the methods states have chosen to apportion the business income of a unitary business in order to comply with the commerce clause. The impact of worldwide combined reporting depends upon the apportionment formula adopted by the state and the state's definition of the terms "unitary business" and "business income." This Note will attempt to detail the problems posed by worldwide combined reporting from the perspectives of states, corporations, and foreign governments. In addition, this Note will consider the effect of the 1983 Supreme Court decision, Container Corporation of America v. Franchise Tax Board, which finally addressed the issue of whether states could extend the Bass principle--taxation of a corporation's worldwide income--to tax the worldwide combined income of a unitary business having a United States parent corporation and foreign subsidiaries.