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Transfer Pricing

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The Utah Supreme Court recently heard arguments in Utah State Tax Comm’n v. See’s Candies Inc., Utah, No. 20160910-SC, which is an important case for whether Utah will respect arm’s-length transfer pricing.  During the hearing, the Utah State Tax Commission (“Commission”) argued that Internal Revenue Code (“IRC”) § 482 should not limit its discretionary authority to reallocate income between related companies.  The taxpayer, on the other hand, claimed the intercompany transactions at issue were at arm’s length and therefore deductible. 

ExxonMobil Oil Corporation, Hess Corporation, and Shell Oil Company (collectively, the “Oil Companies”) were recently dealt another blow in their ongoing transfer pricing dispute with the District of Columbia Office of Tax and Revenue (“OTR”).  The Oil Companies are among several taxpayers that have been fighting the validity of the transfer pricing methodology employed by Chainbridge Software LLC (“Chainbridge”), the OTR’s third-party transfer pricing consultant.  Just last year, the Oil Companies unsuccessfully sought to estop the OTR from relitigating the validity of the controversial Chainbridge methodology in light of the OAH’s holding in Microsoft Corp. v. Office of Tax and Revenue (2012) that the Chainbridge methodology was arbitrary, capricious and unreasonable (for prior coverage, see DC Office of Tax and Revenue Set to Relitigate Chainbridge Methodology in Oil Company Cases).  In a January 26, 2018 Order, Office of Administrative Hearings (“OAH”) Administrative Law Judge Bernard H. Weberman denied the Oil Companies’ motion for summary judgment, holding that they failed to establish that the transfer pricing method employed by Chainbridge was arbitrary, capricious and unreasonable as a matter of law. Hess Corp., et. al. v. D.C. Office of Tax & Revenue, Case Nos. 2012-OTR-00027, 2011-OTR-00047, 2011-OTR-00049 (Jan. 26, 2018). 

Transfer pricing has occupied the state tax spotlight in recent years, as taxing authorities continue to challenge intercompany transactions (see “Keeping the State at Arm’s Length: State Transfer Pricing Recent Developments” for prior coverage of state transfer pricing developments). Because state revenue departments often lack the resources and expertise necessary to perform a thorough transfer pricing audit, some states have engaged third-party service providers—often on a contingent-fee basis—to conduct transfer pricing examinations or to prepare transfer pricing reports and analyses on their behalf.  The District of Columbia Office of Tax and Revenue (“OTR”) is one example of a local taxing agency that has for years relied on a third-party “expert,” Chainbridge Software LLC (“Chainbridge”), to perform transfer pricing analyses.