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Perspectives

Global business and states’ challenges to taxable income

Inside Deloitte

​In this edition of Inside Deloitte, the authors discuss the origins of transfer pricing authority, variations in state tax authority in this area, and what the international community and the states have done recently to reinforce the proper reporting of taxable income by taxpayers. They also discuss the recent Organisation for Economic Co-operation and Development (OECD) developments focusing on the US Treasury’s proposed regulations regarding country-by-country reporting and intercompany debt.

Introduction

Before the early 1960s, IRS enforcement efforts using IRC section 482 were primarily directed at the domestic activities of US taxpayers.1 While the IRS focus has shifted by the second decade of the 21st century given the dramatic increase in the international footprint of US companies, the pendulum has swung back to some degree with some states (though not the IRS) applying section 482 in a domestic setting. For decades, states have used numerous tools and techniques to address the revenue impacts of tax planning. In this context, state tax authorities have dedicated additional audit resources to scrutinize intercompany transactions involving debt instruments, royalties, management​ fees, and structural arrangements to determine if companies are reporting the correct amount of tax.

As international tax professionals focus on the October 2015 release of the OECD2 recommendations and actions under the Base Erosion and Profit-Shifting project, state tax professionals are no doubt wondering a few things:

  • What will eventually be enacted by Congress (and promulgated by Treasury) as a result of BEPS that will filter down to the states? 
  • How will state legislatures and tax authorities respond to the federal reforms? 
  • And what impact will those reforms have on my company or clients?

1 IRS Notice 88-123, 1988-2 C.B. 458 at 11.

2 ‘‘The mission of the Organisation for Economic Co-operation and Development (OECD) is to promote policies that will improve the economic and social well-being of people around the world.’’ OECD, available at http://www.oecd.org/about/.
 

​If you have questions regarding this edition of Inside Deloitte, please contact:

Michael Bryan, director, Deloitte Tax LLP

Laura Souchik, senior, Deloitte Tax LLP

The authors thank Joseph Carr, Michael Degulis, John Galloway, Todd Izzo, Kenneth Jewell, Alexis Morrison-Howe, Scott Schiefelbein, Kenneth Stoops, Jennifer Tansey, David Varley, Shirley Wei, Marc Weinstein, and Lance Williams for their contributions, and Tom Cornett for his helpful review and editorial guidance.

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