California Global Tax Proposal Could Impact Korean Companies
California Global Tax legislation advancing in the California State Assembly could significantly expand corporate tax obligations for multinational companies operating in the state, including major Korean firms.
California lawmakers are considering a major revision to the state’s corporate tax system that would eliminate rules limiting taxation primarily to U.S.-based business income. Instead, the proposal would allow California to calculate taxes using the worldwide profits of multinational corporations and their global affiliates.
If enacted, the measure could affect Korean companies with California operations, including subsidiaries of Samsung Electronics, SK hynix, Hyundai Motor Company, LG Electronics, and Hanwha Group.
AB 1790 Seeks to End ‘Water’s Edge’ Tax System
Debate over the proposal intensified after California Assembly Bill 1790 (AB 1790) passed the Assembly Revenue and Taxation Committee on April 27 by a 4-2 vote.
The bill would gradually phase out the so-called “Water’s Edge” tax system by 2028. The policy was originally introduced in 1986 during the administration of former U.S. President Ronald Reagan to encourage foreign investment and economic activity in the United States.
Under the current Water’s Edge framework, multinational corporations are generally taxed based on the net income generated by their U.S. entities rather than the combined profits of overseas affiliates.
AB 1790 would replace that structure with a worldwide combined reporting (WWCR) system, requiring multinational corporations to disclose global affiliate income for tax calculation purposes.
Under the proposal, California would apply taxes using factors including:
- Worldwide net profits of affiliated companies
- Percentage of sales generated in California
- California’s corporate tax rate of 8.84%
Why Korean Companies Are Watching Closely
Industry observers say the proposed California Global Tax framework could substantially increase tax liabilities for foreign corporations whose California subsidiaries generate relatively low profits while their overseas headquarters remain highly profitable.
For example, Samsung Semiconductor Inc. (SSI) and SK hynix America reportedly posted net profit margins of approximately 0.74% and 0.4%, respectively, last year. In contrast, the global headquarters of Samsung Electronics and SK hynix recorded profit margins of roughly 13.5% and 44.2%.
Because AB 1790 would broaden taxation calculations beyond U.S.-based subsidiary earnings, companies are concerned that California tax obligations could increase sharply if worldwide profits become part of the formula.
Some industry estimates suggest that certain multinational corporations could see their California corporate tax burdens increase by as much as tenfold if the bill becomes law.
Democratic Lawmakers Support Revenue Expansion
The legislation was introduced primarily by Democratic lawmakers who argue the measure would close corporate tax loopholes and generate additional state revenue.
The bill was co-authored by Assemblymembers Damon Connolly, Sade Elhawary, and Alex Lee.
Supporters of the proposal include progressive organizations such as Service Employees International Union (SEIU), California Environmental Voters, and United Domestic Workers.
Connolly said the Water’s Edge system has allowed multinational corporations to shift profits overseas and reduce their California tax liabilities. He argued the bill could generate an additional $3 billion to $4 billion annually for the state, with revenue potentially funding childcare and other public programs.
What Comes Next?
AB 1790 still must pass several legislative stages, including review by the Appropriations Committee and full floor votes in the California Legislature.
However, Democrats currently control both chambers of the California Legislature, and Governor Gavin Newsom is also a Democrat, leading some observers to believe the bill has a realistic chance of advancing further.
As discussion over the California Global Tax proposal continues, multinational corporations with operations in California are closely monitoring whether the state will move toward taxing worldwide corporate profits on a broader scale.
