Two states recently unveiled transfer pricing enforcement tactics to, in their view, combat improper intercompany profit shifting.
On July 30, 2020, the North Carolina Department of Revenue (“NC DOR”) announced a voluntary corporate transfer pricing resolution initiative. The goal of the initiative is “to fairly and consistently expedite the resolution of corporate Intercompany Pricing Issues …, provide certainty and uniformity to taxpayers, reduce time in disputes, and form an efficient basis for resolution … for all open tax years.” The initiative applies to all filed corporate income tax returns with an open statute of limitations that have intercompany transactions that could be subject to adjustment under N.C. Gen. Stat. section 105-130.5A. This includes taxpayers in the request for review process, currently under audit, notified of upcoming audit, and “unidentified taxpayers” with related party intercompany pricing. Applications must be submitted directly to the NC DOR on or before September 15, 2020. By October 16, 2020, all required transfer pricing documentation must be submitted to the NC DOR. The NC DOR will issue a proposed adjustment and summary of its methodology within 31 days of receiving the taxpayer’s documentation. The taxpayer then has only 15 days to review the NC DOR’s methodology, negotiate and accept the proposal in exchange for waiver of penalties. Details regarding the initiative can be accessed here.
North Carolina’s transfer pricing initiative follows the Indiana Department of Revenue’s (“IN DOR”) transfer pricing initiative, including an advance pricing agreement (“APA”) initiative informally announced earlier this year. Under the IN DOR’s APA initiative, taxpayers currently under audit can agree with the IN DOR on a specific transfer pricing methodology to be used over two audit cycles or six years in total (it is unclear whether taxpayers that are not under audit can enter into similar arrangements). Like the North Carolina initiative, the IN DOR’s program is purportedly designed to provide an efficient mechanism for taxpayers to resolve audit disputes and promote certainty for future periods with respect to intercompany transactions. Interestingly, both North Carolina and Indiana are associate members of the Multistate Tax Commission (“MTC”) and are among several states that have executed special information exchange agreements related to the MTC’s attempt at streamlining multistate transfer pricing matters. Whether the North Carolina and Indiana programs will be successful, i.e., attract more than handful of participants, remains to be seen. Businesses with operations across the U.S. and beyond should be cautious of these programs and carefully review and consider any transfer pricing methodologies proposed by the states. Furthermore, participation in these programs does nothing to resolve similar issues taxpayers may have in other states (e.g., there is no current state mechanism to enter into bi-lateral or multi-party pricing arrangements). For example, if a taxpayer was to agree with Indiana on the appropriate transfer price to be paid to the income recipient filing in Indiana, would Pennsylvania similarly agree to that price if, for example, the payor was in Pennsylvania? We will continue to monitor developments in North Carolina, Indiana, and any other states following suit.
Our State and Local Tax Team provides further insights, along with economists from our Economics Services group, on state transfer pricing developments in a webinar that can be viewed here.