Cancel ExxonMobil’s Transfer Pricing Assessments: Court Brief

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By Sony Kassam

The District of Columbia Office of Administrative Hearings should cancel the tax and revenue office’s “controversial and meritless assessments” to ExxonMobil Oil Corp. and two other oil companies to protect against litigation over the same issues, the Council On State Taxation said in a friend-of-court brief.

“The transfer pricing regulations are not a one-way street for OTR and Chainbridge to adjust profitability up but not down when the situation warrants,” COST argued ahead of a Sept. 14 hearing. “OTR’s assessment against ExxonMobil is clearly based on a report supplied to OTR by Chainbridge that misapplied the transfer pricing statute and regulations and is clearly erroneous.”

COST said it’s “deeply troubled” by the D.C. Office of Tax and Revenue’s assessment of ExxonMobil on the assertion that the oil giant’s overall profit is lower than the profits of its competitors. That assertion is inconsistent with the way transfer pricing studies should be conducted, the group said.

“Allowing OTR to rely on Chainbridge’s flawed methodology produces absurd results,” COST said in its Aug. 30 brief. “In essence, it would allow OTR to artificially increase a taxpayer’s income for a given tax period if the taxpayer, when compared to its businesses competitors in the same industry segment, has a profit level that is not within the interquartile range (25th percentile to 75th percentile) of its competitors’ profit level for the same period.”

The taxpayer group filed the same brief with the D.C. OAH in cases with Shell Oil Co. and Hess Corp. COST is a Washington, D.C.-based trade association composed of about 600 multistate corporations engaged in interstate and international business.

COST is strongly interested in the issue because its members engage in various intercompany transactions subject to the Section 482 rules, the brief said, and thus, those companies rely on the federal regulations to price their transactions.

‘Distorted’ Scheme

Exxon, Hess, and Shell are challenging multimillion-dollar assessments for tax years 2007-09 based on transfer pricing studies conducted by Chainbridge Software LLC, an outside contractor for the OTR.

Chainbridge’s transfer pricing method compares the overall profits of a taxpayer to the overall profits of its competitors. COST said that method is “a distorted and erroneous transfer-pricing scheme that failed to comply with the comparable profits method prescribed” in Section 482 of the Internal Revenue Service regulations, which is similar to a section of the D.C. Code.

“Any suggestion that a taxpayer, like ExxonMobil, with multiple products, divisions, business segments, and operations can be analyzed under a single top-level profit analysis is contrary to the appropriate use of Section 482,” COST’s brief said.

Exxon correctly argued that the comparable profits method used by Chainbridge doesn’t authorize tax agencies to make upward adjustments to a taxpayer’s overall income, according to the brief. “Instead, it only permits a tax agency to make adjustments to income for specific transactions between related entities within the taxpayer’s related group,” COST said.

Fruitless Litigation

Continuous litigation over Chainbridge’s transfer pricing method is unnecessary, the taxpayer group said, because the OTR is relitigating an audit approach the D.C. OAH struck down in 2012 in a case involving Microsoft Corp. Although the D.C. OAH rejected the method, the OTR maintains the decision has no precedential value for similar cases.

Still, COST said the court “should expeditiously grant ExxonMobil’s motion for summary judgment and avoid protracted litigation that is expensive and fruitless for both taxpayers and the District.”

COST further argued the OTR’s use of Chainbridge’s method violates taxpayers’ substantive due process rights and that the OAH “should send a strong notice to OTR that these types of assessment practices are not permissible.”

The group also questioned what the OTR does with taxpayers that have profit margins greater than the 75th percentile of its peers. COST’s brief said the OTR should grant refunds to those taxpayers to place them at the 50th percentile.

“Is OTR really willing to commit to doing that?” COST said. The group doesn’t think so.

To contact the reporter on this story: Sony Kassam in Washington at skassam1@bna.com

To contact the editor responsible for this story: Kevin A. Bell at kbell@bna.com

For More Information

Text of the brief is at http://src.bna.com/seq.

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