Corporate Close Up: Slipping Through the Cracks – Transfer Pricing and Combined Reporting

On Oct. 5 and 6, the Multistate Tax Commission will focus on tackling transfer pricing issues head on by holding a training session in Indianapolis to discuss real-life cases and examples with state tax officials, as highlighted in Bloomberg BNA reporter Jennifer McLoughlin’s article “Transfer Pricing Cases Top Multistate Tax Group’s Agenda” in the Weekly State Tax Report.

The training session is part of the MTC’s State Intercompany Transaction Advisory Service program. The five states that have joined the program so far are: Alabama, Iowa, New Jersey, North Carolina and Pennsylvania. Will other states join? And if so, which ones are most likely to sign up? The answer most likely rests with each jurisdiction’s combined reporting requirements.

Transfer pricing is the practice of setting prices for services and goods sold between commonly controlled or related entities. This 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 following states have mandatory combined reporting regimes: Alaska, Arizona, California, Colorado, Connecticut, the District of Columbia, Hawaii, Idaho, Illinois, Kansas, Maine, Massachusetts, Michigan, Minnesota, Montana, Nebraska, New Hampshire, New York, New York City, North Carolina (for certain taxpayers), North Dakota, Ohio, Rhode Island, Tennessee (for financial institutions), Texas, Utah, Vermont, West Virginia and Wisconsin (for certain taxpayers).

However, other states have made combined reporting optional, or do not permit it at all. States with elective combined reporting regimes are: Indiana, Mississippi, New Mexico, South Carolina and Virginia. States that generally do not permit combined reporting at all are: Alabama, Arkansas, Delaware, Florida, Georgia, Iowa, Kentucky, Louisiana, Maryland, Missouri, New Jersey, Oklahoma, Oregon and Pennsylvania.

The idea behind combined reporting is that it will act as a catch-all to capture all income of related entities. States without combined reporting, or with elective combined reporting must find another way to prevent the omission of income and the consequent lost revenue. These states may be the most likely to join forces with the MTC’s State Intercompany Transaction Advisory Service.

Continue the discussion on LinkedIn: Should combined reporting be mandatory for all states?

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