New Jersey is the latest state to unveil a voluntary initiative to examine transfer pricing for taxpayers with intercompany transactions. The initiative is similar to recent programs in North Carolina, Indiana, and Louisiana (see our prior coverage here and here, as well as our prior coverage of the Multistate Tax Commission’s ongoing transfer pricing collaboration and enforcement initiatives).
The New Jersey Division of Taxation published guidance outlining the voluntary transfer pricing initiative last week (NJ Division of Taxation – Transfer Pricing Initiative). The initiative begins June 15, 2022 and continues through March 2, 2023. It applies to all filed corporate income tax returns within the statute of limitations that have intercompany transactions that would be subject to adjustment under New Jersey’s applicable laws.
Taxpayers eligible for the initiative include:
- Taxpayers currently under audit;
- Taxpayers notified of upcoming audit;
- Taxpayers with a case pending before the Conference and Appeals Branch; and
- Unidentified taxpayers with related party intercompany pricing.
However, matters in any stage of litigation are not eligible.
Taxpayers eligible for the initiative are required to agree in writing to participate (by September 15, 2022), and will be required to effectively undergo an audit by providing the Division of Taxation with transfer pricing information and other tax and financial information. After completion of the initiative, the Division will propose a settlement amount and methodology, which may be applied to all open tax years (including tax years currently under audit). The Division will also attempt to settle any other corporate tax issues for the applicable tax years. Taxpayers can accept the Division’s proposal and sign a closing agreement.
As an incentive to participate in the program, the Division is offering to waive any penalties that would apply, and to waive all rights to assess any additional tax, interest, or penalties for the tax years subject to the closing agreement except for adjustments relating to federal corrections. It is important to note that New Jersey adopted mandatory unitary combined reporting for tax years ending on or after July 31, 2019, before which New Jersey required taxpayers to compute their Corporation Business Tax on a separate-entity basis. Accordingly, the transfer pricing issues for New Jersey’s separate reporting years may differ significantly from the issues in the later combined reporting years.
The Division’s published guidance also specifies that for taxpayers that do not elect to participate in the initiative (or that participate and do not successfully complete the initiative), the Division will:
- Assess all applicable penalties;
- Not waive any penalties; and
- Audit according to the Division’s regular audit schedule and will not agree to a methodology or settlement for any unaudited open tax years.
The Division’s position is concerning, as it would penalize taxpayers for not electing to participate in this “voluntary” program. Effectively, the Division is requiring taxpayers to both participate in the initiative and agree to the Division’s resulting settlement offer or it will assess penalties without considering a potential waiver. Notably, it is questionable whether the Division can even impose penalties in the context of discretionary adjustments, such as transfer pricing.
As with other states’ programs, the New Jersey initiative is purportedly designed to provide an efficient mechanism for taxpayers to resolve audit disputes and promote certainty with respect to the state’s treatment of intercompany transactions. However, taxpayers should approach these programs with caution, including considering whether the state is staffing the program with auditors that have sufficient transfer pricing experience and could be expected to take reasonable transfer pricing positions, particularly in the expedited timeframes contemplated by the program (for example, taxpayers have only 30 days to review, consider, respond to and ultimately finalize any proposal by the Division). There is also risk that a state may share confidential information obtained during a voluntary transfer pricing initiative with other states (see our prior coverage regarding confidentiality concerns here). 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). Accordingly, these programs may create more risk than benefit for many taxpayers.
Contact the Authors: Maria Eberle, Lindsay LaCava, and Dmitrii Gabrielov