On March 23, the State Intercompany Transactions Advisory Service (SITAS) Committee of the Multistate Tax Commission (MTC) met via videoconference for its first meeting since November of 2016. During the meeting, there was a presentation regarding the Committee’s history and goals going forward, discussion of training opportunities for states, discussion of the Committee’s information exchange agreement, and a review of survey results from a survey of Committee members. Here are the highlights.
Krystal Bolton, assistant director of the Louisiana Department of Revenue's field audit income tax division, led the meeting, having recently agreed to serve as chair of the SITAS Committee. Holly Coon, director of the MTC’s Joint Audit Program, assisted in leading the meeting.
Holly Coon provided a brief history of the SITAS Committee, which was started in 2014 and was previously known as the Arm’s Length Adjustment Service (ALAS) Committee. The Committee was formed due to state interest in having the MTC provide expertise in transfer pricing. The Committee completed its initial program design in 2015, but the MTC did not receive the minimum number of commitments from the states necessary to fund and establish the program. Since its creation, the Committee has broadened its scope from focusing only on transfer pricing to now viewing transfer pricing as just one tool states can use to address improper income shifting. The Committee’s primary objective is to facilitate communication and collaboration among states, and also to organize trainings. It was noted that the long gap since the Committee’s prior meeting is due to staff changes at the MTC, including the Committee’s former Chairman Joe Garrett leaving the Alabama Department of Revenue for private practice.
| Eversheds Sutherland Observation: The SITAS Committee’s renewed efforts reflect the increased focus on transfer pricing by the states in recent years. A number of states have placed an emphasis on transfer pricing as part of corporate income tax audits in recent years, with many states engaging third-party consultants with transfer pricing expertise with the expectation of increased tax revenue. These states include Alabama, Connecticut, DC, Georgia, Indiana, Louisiana, Mississippi, North Carolina, and Rhode Island. The Rhode Island Department of Revenue, for example, issued a revenue assessment report where it noted that it expected to realize approximately $6.7 billion dollars of additional revenue in fiscal year 2018 related to transfer pricing audits. |
Ms. Bolton discussed the results of a survey that was sent out to member states, that most states are interested in training opportunities, information exchange and collaboration for audits, and enhanced communication and coordination regarding transfer pricing. The survey responses also indicate that member states do not believe they are currently working together very effectively on this area. Interestingly, the respondents indicated an interest in trainings regarding identifying intercompany transactions prone to improper income shifting as well as trainings regarding other methods of addressing improper income shifting such as economic substance and alternative apportionment. Of the survey responses, approximately 18 percent indicated that their state currently has an advance pricing agreement (APA) process, 45 percent indicated they do not currently have an APA process but would like to, and 23 percent did not believe they have statutory authority in their state to engage in APAs. Eversheds Sutherland partner Jonathan Feldman made a suggestion that the Committee consider drafting a model statute as a legislative solution for those states that may not currently have statutory authority to engage in APAs.
| Eversheds Sutherland Observation: To date, only a few states have publicly encouraged taxpayers to voluntarily come forward and settle their transfer pricing issues. Beginning in 2019, Indiana made practitioners aware of a state initiative to permit taxpayers to voluntarily approach the Department to negotiate an agreement regarding transfer pricing for future periods, typically extending for six calendar years. North Carolina launched a program in late 2020 whereby taxpayers were provided with a limited window of time in which they could voluntarily come forward with their transfer pricing documentation and would receive a proposed adjustment from the Department. This program also provided for waiver of all penalties with respect to the agreed upon issues. |
The Eversheds Sutherland state and local tax team will continue to monitor the activities of the MTC SITAS Committee as well as other developments in the states regarding transfer pricing and provide further updates as they occur.
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