The Multistate Tax Commission (“MTC”) is set to revamp its transfer pricing collaboration and enforcement initiatives following the first public meeting of its State Intercompany Transactions Advisory Service (“SITAS”) Committee in over four years. At the end of last year, the SITAS Committee appointed its new Chair- Krystal Bolton, who is also an assistant director at the Louisiana Department of Revenue’s field audit income tax division. On March 23rd, Ms. Bolton hosted representatives from state revenue agencies, practitioners, taxpayers, and other members of the public in a virtual conference to overview the history of the SITAS Committee and to present the results of a multistate survey regarding intercompany transactions and transfer pricing.
Historical Background of the SITAS Committee
Originally formed in 2014 as the “Arm’s-Length Adjustment Service,” SITAS was designed to pool resources among at least 10 charter member states who would each agree to fund the program with $200,000 annually. The goals of the program included providing participating states with: 1) training, including “strategically focused … courses that address both specific needs for skills by state staff and general topics in related party tax law and compliance administration;” 2) transfer pricing analysis “as a cost-effective means of evaluating taxpayer transfer pricing studies” through a combination of dedicated in-house MTC economists and hired third-party consulting firms, e.g., RoyaltyStat LLC/Ednaldo Silva, Chainbridge Software LLC, Economic Analysis Group LLP, etc.; 3) information exchange agreements, whereby participating states execute “a memorandum of understanding for a confidential taxpayer information exchange process,” and according to the information sharing agreement posted on the MTC’s website, allows states to disclose/share confidential taxpayer information, such as: taxpayer identities, tax returns and schedules, completed nexus information/questionnaires, and audit reports (available on the MTC’s website, here); 4) case resolution and litigation support services, including a joint voluntary disclosure process and dedicated litigation support staff, e.g., to provide legal advice and hire expert witnesses; and 5) audit assistance, where the MTC program would “expand audit coverage of related party and transfer pricing issues” through “joint audits [featuring] the same training, transfer pricing analysis, and case assistance ….”
In sum, SITAS’s primary objective is (and has always been) to facilitate collaboration among its member states. Over the years, the group broadened the scope of its program from just focusing on transfer pricing to covering all issues relating to intercompany transactions. Despite these goals, SITAS historically has failed to attract the required number of charter member states to fund the program.
State Survey Responses
During the second portion of the meeting, Ms. Bolton overviewed the responses of 24-member states to an informal SITAS Committee survey. Notably, 18% of the participating states responded that they currently utilize an advance pricing agreement (“APA”) process, whereby taxpayers currently under audit can agree with the state on a specific transfer pricing methodology to be used over a specific timeframe. While the identities of those states are not publicly known, it appears likely that the APA process is not limited to Indiana’s and North Carolina’s widely publicized 2020 initiatives. See “States Revisit Transfer Pricing Enforcement with New Initiatives,” for our earlier coverage. In addition, 70% of the members surveyed indicated that confidential information sharing agreements with other states for audits would be “extremely valuable.” The vast majority of participating states are also very interested in developing their transfer pricing mechanics and abilities to identify intercompany transactions prone to improper income shifting through formal training sessions.
With regard to next steps, Ms. Bolton encouraged interested states to execute the State Intercompany Transactions Advisory Service Committee Commitment and Exchange of Information Agreement, and provide feedback to the SITAS Committee on what other measures they would like to see implemented.
While much of the recent survey responses are in line with what we would expect, this is the SITAS Committee’s first formal step in years to bring states together and begin formalizing a collective approach to transfer pricing enforcement. Looking further ahead into 2021 and beyond, we expect the SITAS Committee will continue to leverage its new Chair’s experience in transfer pricing enforcement, along with the success of recent state programs in Indiana and North Carolina, to revamp its transfer pricing initiatives. With renewed interest, it is possible the SITAS Committee might receive the required interest and financial backing of member states to finally move the program forward.
Baker McKenzie’s state and local tax practice will continue to actively monitor MTC-related transfer pricing developments in the coming months.
Contact the Authors: Ted Bots and Drew Hemmings