Time to Revisit: The Unitary Business Rules & Water's-edge Election.

• Author: Fang, Ming P.
• Position: CaliforniaTax

Affiliated corporations doing business in California are required to evaluate the unitary business rules. Under the California unitary business rules, unitary businesses are taxed as a single unit where each brporation. is considered a division of the ame corporation and all the activities are combined. The determination of unitary-business is based on three unity tests (unity of ownership, unity of operations, and unity of use of centralized executive force and system of operations) or the dependency of business operations test.

The U.S. Supreme Court has ruled that business functions integration and centralization of management to achieve economies of scale create a unitary business. With the moving workforce and remote work environment during the pandemic, smaller multi-national corporations have seen opportunities to centralize management and business functions. The current economic landscape with many companies tightening budgets to weather a potential recession may further increase the centralization of these functions. The effect of the centralization of management and business functions may mean affiliated corporations that were previously non-unitary businesses are now unitary businesses.

When corporations are determined to be part of a unitary business, the reporting requirements are more complex and extensive. It also requires the determination of lines of businesses within each corporation. Only the line of business attributable to the unitary business must be combined. The combined reporting pursuant to R&TC Sec. 25101.15 apportions income to California based on the apportionment factors of the unitary line of business.

The unitary business rules are further complicated when the unitary group includes foreign corporations. California has always been and continues to be a state where foreign corporations establish operations through a U.S. subsidiary to enter the U.S. market. Executives and key employees of the foreign parent corporations often move to California to establish the U.S. operations. The continued prevalence of remote work allows some of these executives and employees to move back to their home country to be closer to family during the pandemic. This movement tends to increase the centralization of management and business functions creating a unitary-business with foreign parent and affiliated corporations as well as potentially creating nexus for the foreign corporations in California.

California requires worldwide...