Corporate Close-Up: New Mexico Joins the Battle Against Transfer Pricing with Proposed Mandatory Combined Reporting


As we wrap up the first month of the new year, states continue to look for effective methods to combat lost revenue resulting from transfer pricing. During the first session of the 53rd Legislature, New Mexico continues the fight, with Sen. Peter Wirth (D) introducing 2017 S.B. 1, a bill that would require mandatory combined reporting for certain New Mexico corporate taxpayers.

New Mexico has been attempting to introduce combined reporting for over a decade. “Mr. Wirth has introduced a form of a combined reporting bill every year since 2005,” noted Suzanne Wood Bruckner, shareholder at Sutin Thayer & Browne in Albuquerque and author of the Bloomberg BNA New Mexico Corporate Income Tax Navigator (subscription required). 

Currently, New Mexico imposes an optional combined reporting scheme, allowing unitary business groups that have not previously filed a combined return or consolidated return in the state to elect to file a combined return with other members of the unitary group. A unitary group is defined as two or more corporations that are at least 50 percent owned and controlled by the same person and have strong centralized management, operate the same general line of business or are functionally integrated. Foreign corporations are excluded from the definition of a unitary group in New Mexico and taxpayers do not use either the water’s-edge or worldwide reporting method.

S.B. 1 would implement mandatory combined reporting for all unitary groups in New Mexico, requiring the groups to file a water’s-edge or worldwide combined report. The bill also proposes an amendment to the definition of a unitary group. A unitary group would include all corporations (except S corporations) that are related through common ownership and are determined to be economically interdependent, using the tests of centralized management, functional integration and economies of scale. The bill also adds a definition of “common ownership,” meaning direct or indirect ownership of more than 50 percent of outstanding voting stock. Foreign corporations would no longer be excluded from a combined report, as taxpayers would have the option to use water’s-edge combined reporting, which allows the inclusion of certain non-U.S. affiliates with significant U.S. business operations, or worldwide combined reporting, which allows the inclusion of all non-U.S. affiliates.

New Mexico has other methods at its disposal to address these issues in addition to S.B. 1. “It is anticipated that a substitute bill will be filed that will include some relief on foreign dividends and will retain a New Mexico-style consolidated election,” said Bruckner. “It will likely be heard in committee next Wednesday [Feb. 8, 2017].” Whether S.B. 1 and related bills will become law remains to be seen.

Continue the discussion on LinkedIn: Which state will introduce mandatory combined reporting next?

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