Understanding State Transfer Pricing in the Current Tax Landscape

undefined
 
What’s up with State
Transfer Pricing?
 
SEATA 2017
NEW ORLEANS
 
Agenda
 
1.
What is Transfer Pricing?
2.
Overview of Federal Transfer Pricing
3.
Overview of State Transfer Pricing
4.
Update on State Cooperation
the Multistate Tax Commission 
ALAS
 SITAS Project …
and beyond
5.
OECD BEPS Initiative
 
 
2
 
What is Transfer Pricing?
 
 
3
 
What is Transfer Pricing?
 
 
Refers to the mechanism used to establish the arm’s-length price
of transactions between related entities for goods, intangible
assets, services
, loans and management fees
Designed to prevent tax avoidance by requiring pricing equivalent to
prices available with an uncontrolled party
Non-arm’s length transactions can impact the clear reflection of
income across taxing jurisdictions (i.e., internationally, in states
where income is reported on a separate or partial combination basis)
Tax evasion or avoidance generally not a pre-requisite for application
of 
§ 482 adjustment
 
4
 
 
Are Intercompany Transactions an Issue
for Business?
 
5
 
On a major accounting firm’s web seminar within the last year, the
following polling question was asked of nearly 3,000 participants, “Is
your enterprise involved in significant intercompany transactions?”
 
 
Are Intercompany Prices
Up-to-Date?
 
6
 
On another major accounting firm’s web seminar the following polling
question was asked of roughly 2,000 participants, “Where your company
has domestic intercompany transactions, how often do you review and
update the intercompany prices?”
 
 
Overview of Federal Transfer Pricing
Principles
 
7
 
 
Transfer Pricing Authority
 – Federal
Background
 
 
Federal landscape
Codified under IRC 
§ 482
Extensive regulations, detailed methodologies
Developed body of judicial decisions
Disciplined procedures for obtaining advance approval for transfer pricing
Transactions between affiliated entities can be adjusted to  “arm’s length”
if necessary to prevent evasion of taxes or to clearly reflect the income of
such businesses
Statutory language
In any case of two or more organizations, trades, or businesses
. . . owned or controlled directly or indirectly by the same interests, the
Secretary may distribute, apportion, or allocate gross income, deductions,
credits, or allowances between or among such organizations, trades, or
businesses, 
if he determines that such distribution, apportionment, or
allocation is necessary in order to prevent evasion of taxes or clearly to
reflect the income of any of such organizations, trades, or businesses
. . .
 
 
 
8
 
 
Transfer Pricing Authority
 – Federal
Background
 
 
Concepts
 
Existence of Controlled Transactions
Arms length standard
IRC 6662 Contemporaneous Documentation
Best Method Rule (e.g., resale price method, cost-plus method,
comparable profits method (CPM)) -  Treas. Reg. 1.482-1(c)(1)
Intercompany services: probable benefits test -  Treas. Reg. 1.482-
2(b)(2)(i)
Advance Pricing Agreements
 
 
 
 
9
 
 
What is the remedy?
 
 
If the IRS determines that the transfer price of the transaction did not
meet the requirements of 
§ 
482, it can:
Propose settlement with taxpayer
Adjust the transfer price to reflect the proper cost
Make corollary adjustment
Impose penalties for gross understatement of income
Penalties can amount to 20% or 40% of the difference between the tax
paid and the tax owed depending on whether certain thresholds are met
 
10
 
 
State Transfer Pricing Overview
 
11
 
 
Separate Company State Problem and
Perspective
 
Complex tax strategies shift income from separate company states to
combined return jurisdictions via related-party transactions reducing
liabilities in separate company states and not impacting combination
states
States estimate $100s millions lost revenue annually
More complex than 80s/90s intangible holding company and
related structures
Lack of expertise and/or enforcement at the state level
 
Separate company states should accept transfer
pricing responsibilities and administer with
competence and reasonableness
Transfer pricing is the other side of the combined
reporting issue
 
 
 
12
 
 
Combined Reporting Map = SEATA
 
 
13
 
Shifting Income
 
Several types of intercompany transaction can result in the
“shifting” of state income tax liabilities
The transfer and licensing of intangible assets
The purchase and resale of tangible goods
Providing and charging for common services
Intercompany financing arrangements
Factoring accounts receivables
Utilizing “embedded royalties”
 
14
 
 
Retailer with Purchasing Company
 
15
 
Retailer sells goods with small mark up and breaks even on its tax return
after paying substantial management fee to Parent
Purchasing sells goods to Retailer at a substantial mark up and reports a
majority of the Group’s taxable income
Parent reports substantial taxable income despite having little in the way of
property or employees
Taxpayer’s transfer pricing study reflects the fact that Purchasing and Parent
own the Group’s intangibles
 
 
Manufacturer  with Sales Company
 
16
 
Sales Co sells goods with small mark up and breaks even on its
tax return
Parent, located in a combined return state, sells goods to Sales
at a substantial mark up and reports a majority of the Group’s
taxable income
Manufacturer sells goods to Parent with small mark up and
breaks even on its tax return
Taxpayer’s transfer pricing study reflects the fact that Parent
owns the Group’s intangibles
 
 
State Adjustments
 
State transfer pricing landscape varies: Used for –
Combination
Expense/Income adjustments or reattribution
Adjustments to international pricing that IRS “missed”
 
Many states have statutes that adopt or are substantially similar to §
482
States may or may not incorporate the federal regulations
promulgated under § 482
Is that important?
 
Nearly every state adopts some statutory regime to adjust transfer
prices of intercompany transactions
Some states rely on general conformity to IRC
Notable states that do not have statutory regime:  Delaware, New Mexico,
Pennsylvania
 
 
17
 
 
State Transfer Pricing Adjustment Authority
 
Example of “express” § 482 adoption
 (Alabama, 
Ala. Code § 40-
2A-17)
(a) In any case of two or more organizations, trades, or businesses . . .
owned or controlled directly or indirectly by the same interests, the
Commissioner of the Alabama Department of Revenue may distribute,
apportion, or allocate gross income, deductions, credits, or allowances, 
if
the Commissioner determines that such distribution, apportionment, or
allocation is necessary in order to prevent evasion of Alabama income
taxes
 or to clearly reflect the income of any such organization, trade, or
business.
(f) The Commissioner . . . shall exercise such authority in a manner
consistent with this act and, to the extent applicable, 26 U.S.C. Section
482 and the rulings and regulations issued thereunder
.
 
See also 
Maryland, Md. Code Ann. Tax-Gen. § 10-109; Arkansas,
Ark. Code Ann. § 26-51-805.
 
18
 
 
Recent Cases
 
Rent-A-Center  Indiana
Rent-A-Center South Carolina
See’s Candy Utah
 
Taxpayer wins
Department could not force combination under 
Ҥ 482-like
authority”
Departments of Revenue held to IRS standards
Transfer pricing studies found to be persuasive and the
Department did not show it was flawed
Department must do more than argue it fails the smell test
 
19
 
 
Multistate Tax Commission 
ALAS
 SITAS Project and
Beyond
 
20
 
 
Arm’s-Length Adjustment Service (“ALAS”)
Project
 
Perceived Need and Program Development
The director of the New Jersey Division of Taxation approached the MTC in
2013 about setting up a program
States recognized that there are significant issues related to transfer pricing
at the state level
Most states lack the expertise, resources, and flexibility to staff such a function themselves
In December 2013, the Executive Committee authorizes MTC executive
director to explore interest among states
Project facilitator for a one-year design project hired in March 2014
Advisory Group of states supporting the design project formed by May 2014
ALAS project design approved 2015
Insufficient number of states committed to launch program
ALAS replaced with less formal SITAS project 2016 which still serves to
promote and facilitate state transfer pricing cooperation
 
21
 
 
Arm’s-Length Adjustment Service (“ALAS”)
Project Background
 
Design
Open and transparent
State of the art knowledge from states and experts
Executive management perspective: fitting pieces together
Long-term resource for several contexts & states
Program Features/Elements
Interrelated service elements, all mutually supportive
Training
Analysis of Transfer Pricing Studies
State Capacity Building—Beyond Training
Optional Joint Audits (through Joint Audit Program)
Early voluntary disclosure program
Taxpayers and states will be encouraged to use the Commission’s
existing alternative dispute resolution process to resolve issues
consistently between a taxpayer and multiple states
“Advanced Pricing Agreements” through existing ADR process
 
 
 
22
 
 
State Intercompany Transaction Advisory
Service (“SITAS”) and Beyond
 
SITAS
 
Now functioning as informal MTC vehicle to facilitate state
cooperation collaboration
 
Encourages ad hoc bilateral / multi lateral cooperation
among states to address transfer pricing and other related
party transactions issues
 
States working amongst them selves to address issues
 
23
 
 
SITAS Project — Commentary and
Takeaways
 
1.
Where is it going?
2.
Is it necessary and/or beneficial?
3.
Will it work?
4.
Challenges in implementation and operation?
 
 
 
24
 
 
BEPS – International Action Plan
 
25
 
 
BEPS Actions 9 and 10 - Transfer Pricing
 
 
26
 
 
OECD BEPS Project – State Implications
 
 
27
 
Slide Note
Embed
Share

Delve into the intricacies of state transfer pricing with a focus on federal and state regulations, arm's-length pricing, tax evasion prevention, and updates on cooperation initiatives. Explore the significance of intercompany transactions and pricing in today's business environment.


Uploaded on Sep 06, 2024 | 1 Views


Download Presentation

Please find below an Image/Link to download the presentation.

The content on the website is provided AS IS for your information and personal use only. It may not be sold, licensed, or shared on other websites without obtaining consent from the author. Download presentation by click this link. If you encounter any issues during the download, it is possible that the publisher has removed the file from their server.

E N D

Presentation Transcript


  1. Whats up with State Transfer Pricing? SEATA 2017 NEW ORLEANS

  2. Agenda 1. What is Transfer Pricing? 2. Overview of Federal Transfer Pricing 3. Overview of State Transfer Pricing 4. Update on State Cooperation the Multistate Tax Commission ALAS SITAS Project and beyond 5. OECD BEPS Initiative 2

  3. What is Transfer Pricing? 3

  4. What is Transfer Pricing? Refers to the mechanism used to establish the arm s-length price of transactions between related entities for goods, intangible assets, services, loans and management fees Designed to prevent tax avoidance by requiring pricing equivalent to prices available with an uncontrolled party Non-arm s length transactions can impact the clear reflection of income across taxing jurisdictions (i.e., internationally, in states where income is reported on a separate or partial combination basis) Tax evasion or avoidance generally not a pre-requisite for application of 482 adjustment 4

  5. Are Intercompany Transactions an Issue for Business? On a major accounting firm s web seminar within the last year, the following polling question was asked of nearly 3,000 participants, Is your enterprise involved in significant intercompany transactions? 5

  6. Are Intercompany Prices Up-to-Date? On another major accounting firm s web seminar the following polling question was asked of roughly 2,000 participants, Where your company has domestic intercompany transactions, how often do you review and update the intercompany prices? 6

  7. Overview of Federal Transfer Pricing Principles 7

  8. Transfer Pricing Authority Federal Background Federal landscape Codified under IRC 482 Extensive regulations, detailed methodologies Developed body of judicial decisions Disciplined procedures for obtaining advance approval for transfer pricing Transactions between affiliated entities can be adjusted to arm s length if necessary to prevent evasion of taxes or to clearly reflect the income of such businesses Statutory language In any case of two or more organizations, trades, or businesses . . . owned or controlled directly or indirectly by the same interests, the Secretary may distribute, apportion, or allocate gross income, deductions, credits, or allowances between or among such organizations, trades, or businesses, if he determines that such distribution, apportionment, or allocation is necessary in order to prevent evasion of taxes or clearly to reflect the income of any of such organizations, trades, or businesses. . . 8

  9. Transfer Pricing Authority Federal Background Concepts Existence of Controlled Transactions Arms length standard IRC 6662 Contemporaneous Documentation Best Method Rule (e.g., resale price method, cost-plus method, comparable profits method (CPM)) - Treas. Reg. 1.482-1(c)(1) Intercompany services: probable benefits test - Treas. Reg. 1.482- 2(b)(2)(i) Advance Pricing Agreements 9

  10. What is the remedy? If the IRS determines that the transfer price of the transaction did not meet the requirements of 482, it can: Propose settlement with taxpayer Adjust the transfer price to reflect the proper cost Make corollary adjustment Impose penalties for gross understatement of income Penalties can amount to 20% or 40% of the difference between the tax paid and the tax owed depending on whether certain thresholds are met 10

  11. State Transfer Pricing Overview 11

  12. Separate Company State Problem and Perspective Complex tax strategies shift income from separate company states to combined return jurisdictions via related-party transactions reducing liabilities in separate company states and not impacting combination states States estimate $100s millions lost revenue annually More complex than 80s/90s intangible holding company and related structures Lack of expertise and/or enforcement at the state level Separate company states should accept transfer pricing responsibilities and administer with competence and reasonableness Transfer pricing is the other side of the combined reporting issue 12

  13. Combined Reporting Map = SEATA 13

  14. Shifting Income Several types of intercompany transaction can result in the shifting of state income tax liabilities The transfer and licensing of intangible assets The purchase and resale of tangible goods Providing and charging for common services Intercompany financing arrangements Factoring accounts receivables Utilizing embedded royalties 14

  15. Retailer with Purchasing Company Management Management fee fee Parent $$ $$ Widgets Widgets Retailer / Retailer / Taxpayer Taxpayer Purchasing Company $$$$ $$$$ Retailer sells goods with small mark up and breaks even on its tax return after paying substantial management fee to Parent Purchasing sells goods to Retailer at a substantial mark up and reports a majority of the Group s taxable income Parent reports substantial taxable income despite having little in the way of property or employees Taxpayer s transfer pricing study reflects the fact that Purchasing and Parent own the Group s intangibles 15

  16. Manufacturer with Sales Company Parent Parent $ $ $$$$ $$$$ Widgets Widgets Manufacturing Sales Co Sales Co Sales Co sells goods with small mark up and breaks even on its tax return Parent, located in a combined return state, sells goods to Sales at a substantial mark up and reports a majority of the Group s taxable income Manufacturer sells goods to Parent with small mark up and breaks even on its tax return Taxpayer s transfer pricing study reflects the fact that Parent owns the Group s intangibles 16

  17. State Adjustments State transfer pricing landscape varies: Used for Combination Expense/Income adjustments or reattribution Adjustments to international pricing that IRS missed Many states have statutes that adopt or are substantially similar to 482 States may or may not incorporate the federal regulations promulgated under 482 Is that important? Nearly every state adopts some statutory regime to adjust transfer prices of intercompany transactions Some states rely on general conformity to IRC Notable states that do not have statutory regime: Delaware, New Mexico, Pennsylvania 17

  18. State Transfer Pricing Adjustment Authority Example of express 482 adoption (Alabama, Ala. Code 40- 2A-17) (a) In any case of two or more organizations, trades, or businesses . . . owned or controlled directly or indirectly by the same interests, the Commissioner of the Alabama Department of Revenue may distribute, apportion, or allocate gross income, deductions, credits, or allowances, if the Commissioner determines that such distribution, apportionment, or allocation is necessary in order to prevent evasion of Alabama income taxes or to clearly reflect the income of any such organization, trade, or business. (f) The Commissioner . . . shall exercise such authority in a manner consistent with this act and, to the extent applicable, 26 U.S.C. Section 482 and the rulings and regulations issued thereunder. See also Maryland, Md. Code Ann. Tax-Gen. 10-109; Arkansas, Ark. Code Ann. 26-51-805. 18

  19. Recent Cases Rent-A-Center Indiana Rent-A-Center South Carolina See s Candy Utah Taxpayer wins Department could not force combination under 482-like authority Departments of Revenue held to IRS standards Transfer pricing studies found to be persuasive and the Department did not show it was flawed Department must do more than argue it fails the smell test 19

  20. Multistate Tax Commission ALAS SITAS Project and Beyond 20

  21. Arms-Length Adjustment Service (ALAS) Project Perceived Need and Program Development The director of the New Jersey Division of Taxation approached the MTC in 2013 about setting up a program States recognized that there are significant issues related to transfer pricing at the state level Most states lack the expertise, resources, and flexibility to staff such a function themselves In December 2013, the Executive Committee authorizes MTC executive director to explore interest among states Project facilitator for a one-year design project hired in March 2014 Advisory Group of states supporting the design project formed by May 2014 ALAS project design approved 2015 Insufficient number of states committed to launch program ALAS replaced with less formal SITAS project 2016 which still serves to promote and facilitate state transfer pricing cooperation 21

  22. Arms-Length Adjustment Service (ALAS) Project Background Design Open and transparent State of the art knowledge from states and experts Executive management perspective: fitting pieces together Long-term resource for several contexts & states Program Features/Elements Interrelated service elements, all mutually supportive Training Analysis of Transfer Pricing Studies State Capacity Building Beyond Training Optional Joint Audits (through Joint Audit Program) Early voluntary disclosure program Taxpayers and states will be encouraged to use the Commission s existing alternative dispute resolution process to resolve issues consistently between a taxpayer and multiple states Advanced Pricing Agreements through existing ADR process 22

  23. State Intercompany Transaction Advisory Service ( SITAS ) and Beyond SITAS Now functioning as informal MTC vehicle to facilitate state cooperation collaboration Encourages ad hoc bilateral / multi lateral cooperation among states to address transfer pricing and other related party transactions issues States working amongst them selves to address issues 23

  24. SITAS Project Commentary and Takeaways 1. Where is it going? 2. Is it necessary and/or beneficial? 3. Will it work? 4. Challenges in implementation and operation? 24

  25. BEPS International Action Plan Base erosion and profit shifting ( BEPS) -globally deployed description for tax planning strategies that rely on mismatches and gaps that exist between the tax rules of different jurisdictions. Organization for Economic Cooperation and Development ( OECD ) is implementing a plan (approved by the G20) which seeks to identify standardized international tax rules to address BEPS. The BEPS Action Plan aims to ensure that profits are taxed where economic activities generating the profits are performed and where value is created. (Source: OECD Action Plan) Three Core Principles Substance - align taxation to value creation Coherence - avoid double non-taxation Transparency - visibility to global information 25

  26. BEPS Actions 9 and 10 - Transfer Pricing Overview Actions 9 & 10, in combination with Action 8, comprise the transfer pricing recommendations They are designed to ensure that profit is realized in accordance to economic substance Key Points Action 8 Intangibles: Purpose is to ensure that profit is aligned to value creation Strict economic substance requirements for attribution of IP driven profits Action 9 TP Aspects of Risk & Capital: Ensures that profit does not accrue to entities solely based on contractually assumed risks or capital Action 10 High Risk Transactions: Addresses other high-risk transactions that may be subject to recharacterization Action 10 addresses low value services Services can be charged only if a benefit inures to the recipient 26

  27. OECD BEPS Project State Implications Proceeding toward global uniform standards are the states aligned? Arm s length standard still prevails Will states respect federal and international transactional analyses? Global mechanisms available for avoiding double taxation (e.g., competent authority) - will states develop a mechanism of their own? Do apportionment methodologies (e.g., market sourcing and single sales factor) distort true jurisdictional profit attribution? vs. international concepts for PE (i.e., nexus) and profit attribution Does BEPS renew interest in worldwide combined reporting? Focus on tax haven legislation? 27

Related


More Related Content

giItT1WQy@!-/#giItT1WQy@!-/#giItT1WQy@!-/#giItT1WQy@!-/#giItT1WQy@!-/#giItT1WQy@!-/#giItT1WQy@!-/#