Transfer pricing is usually considered an international affair, but state governments, like there larger national brethren, have increasingly, and painfully, come to realize that inter-state transfer pricing has become a leaky valve in serious need of “professional” attention, if states are going to try and stem, if not reverse the outflow of state tax revenues and shore up their depleted state budgets.
So it is perhaps not surprising that the Multistate Tax Commission (MTC) announced at this winter’s Audit Committee meetings, that former executive director Dan Bucks would head up an advisory group of state tax directors to design and develop the outlines of a state transfer pricing audit program, with preliminary recommendations due by December 2014 and a final plan for submission and approval to the full membership in time for its annual meeting in July 2015.
It was a year ago that the New Jersey Division of Taxation Director, Michael Byron challenged the MTC in creating a separate, dedicated transfer pricing audit program, or risk a coalition of states splintering off and developing its own program. Byron’s request came after that states—or more specifically, the District of Columbia—suffered a string of transfer pricing defeats for its “do it yourself” Chainbridge Software approach for computing transfer prices and asserting tax adjustments against several major companies.
In announcing the project, current executive director Joe Huddleston, noted that more than a dozen states had come forward in with support, and more importantly, funding to launch the development phase of the program. Interestingly, the support comes from both separate entity states and combined reporting states. Bucks said that combined reporting states are likely to be interested in transactions between the unitary group and other related parties outside the legally limited group, such foreign related parties, or so-called 80/20 domestic entities.
At this stage, according to Bucks, the MTC program is likely to be comprised of three types of services:
Pre-audit services, consisting of analysis and audit selection, training services, and transfer pricing policy and best practices development;
Audit services, including economic services; and
Post-audit services, including legal assistance with litigation, expert witness and economic services.
Interestingly, Bucks said the program is “not a 482 project,” noting that most states are not bound by federal rules, and that states were seeking to develop their own approaches to arm’s length adjustments that were simpler, more certain and more effective—perhaps, profit split, safe harbors, required minimum profit percentages, etc.
Despite its claims to differentiate and distance itself from its national and international counterparts, the MTC transfer pricing project is not all that dissimilar to the OECD/G20, and its Base Erosion and Profit Shifting (BEPS) project, which is equally inclined to eschew traditional transfer pricing concepts, and equally ambitious in its timetable to implement change.
It will be interesting to see if Mr. Bucks and the MTC are any more successful in achieving consensus or effective resolution of transfer pricing matters at the state level than has been the case with attempts of the various national governments.