State transfer pricing: Are you prepared for increased scrutiny?
This edition of Inside Deloitte provides an overview of intercompany transfer pricing arrangements and related state tax considerations, summarizes the latest developments involving the Multistate Tax Commission’s Arm's-Length Adjustment Service project, and suggests actions that taxpayers may wish to consider in developing exam-ready transfer pricing documentation.
Intercompany transfer pricing arrangements
Businesses operating in more than one state or country often do so through multiple corporate entities. That necessitates intercompany transfer pricing arrangements that are increasingly scrutinized by the states. Many states challenge the pricing of intercompany transactions through statutes and regulations that are similar to or that adopt Internal Revenue Code section 482. States may also negate the effect of intercompany transactions through, for example, the use of discretionary powers to adjust income, statutes requiring the addback of some intercompany payments, or the assertion of nexus principles for entities not physically present in the state.
Many states believe there is significant additional revenue that could be collected by challenging intercompany transactions. Some states have engaged outside consultants to better equip their revenue authorities for this purpose. Also, the Multistate Tax Commission (MTC) is pursuing an initiative directed at developing a multistate transfer pricing service, known as the Arm’s-Length Adjustment Service (ALAS) program, that, if implemented, would support state revenue authorities in their review of intercompany transactions.
While the ALAS program remains under consideration, state interest in the proposed service, and in the related transfer pricing training sessions offered by the commission, suggests that states desire improved transfer pricing audit capability. Accordingly, taxpayers need to be prepared to defend state audits or assessments arising from an adjustment to intercompany charges.
This article provides overview of intercompany transfer pricing arrangements and related state tax considerations, summarizes the latest developments involving the MTC’s ALAS project, and suggests actions that taxpayers may wish to consider in developing exam-ready transfer pricing documentation.
If you have questions regarding this edition of Inside Deloitte, please contact either of the following Deloitte Tax professionals:
Michael Bryan, director, Deloitte Tax LLP, Philadelphia, +1 215 977 7564
Andrew Fisher, director, Deloitte Tax LLP, Los Angeles, +1 213 688 3230
Conrad Krol, director, Deloitte Tax LLP, Orange County, +1 714 436 7570
Karen Notz, senior manager, Deloitte Tax LLP, Los Angeles, +1 213 553 1924