CORPORATE CLOSE UP: ONE STEP CLOSER – ADDRESSING TRANSFER PRICING ISSUES WITH THE MULTISTATE TAX COMMISSION

On Oct. 5 and 6, the Multistate Tax Commission ’s transfer pricing committee held a training and informational session, as highlighted in Bloomberg BNA reporter Jennifer McLoughlin’s article “States Commiserate Over Similar Transfer Pricing Issues” in the Weekly State Tax Report.

Tax representatives from nine states attended the training, and of those nine states, four have already committed to the program. The states in attendance were: Alabama, Indiana, Louisiana, Maryland, Massachusetts, Mississippi, North Carolina, New Jersey and Pennsylvania. Iowa has committed to the program, but was not present at the training.

All of these states, except Massachusetts, lack a mandatory combined reporting requirement, which is the primary weapon states use to combat lost revenue due to transfer pricing adjustments.

 As previously discussed in Corporate Close Up: Slipping Through the Cracks – Transfer Pricing and Combined Reporting, transfer pricing is the practice of setting prices for services and goods sold between commonly controlled or related entities, which allows entities to shift intercompany profits and changes the way they are reported on the entity’s tax return. When related entities file separate tax returns and use a separate method of reporting income, this profit shifting can result in unreported income, and thus lost tax revenue for the states. To prevent this potential revenue from slipping through the cracks, many states have implemented mandatory combined reporting for entities that are part of a unitary business group. The sole representative of this group to attend the conference was Massachusetts.  

The other eight states either have optional combined reporting, or no combined reporting regime at all. This shows that states without mandatory combined reporting are especially interested in ways to combat lost revenue due to transfer pricing adjustments.

Indiana, Mississippi and North Carolina make combined reporting mandatory for only certain groups of taxpayers. In Indiana, combined reporting is mandatory for financial groups only and elective for other unitary business groups. In Mississippi, the commissioner may require unitary business groups to file a combined report if there is evidence that intercompany transactions have shifted profits outside of Mississippi. For all other unitary business groups in Mississippi, combined reporting is elective. In North Carolina, the commissioner may require unitary business groups to file a combined report if there is a factual determination that intercompany transactions are not arm’s length, and adjusting intercompany transactions will not accurately reflect income attributable to North Carolina. Combined reporting is not permitted in other instances in North Carolina.

The rest of the states in attendance: Alabama, Louisiana, Maryland, New Jersey and Pennsylvania, as well as Iowa, are separate reporting states and do not allow or require combined returns. These states are especially vulnerable to base erosion resulting from intercompany transactions. Perhaps joining forces with the Multistate Tax Commission’s transfer pricing committee will be their first step in combating lost revenue from transfer pricing.

Continue the discussion on LinkedIn: Which other states would benefit from training on transfer pricing?

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