Today, the Arm’s-Length Adjustment Service Committee (“ALAS Committee”) of the Multistate Tax Commission met via teleconference to move forward with its transfer-pricing program. The ALAS Committee is targeting a fall 2016 in-person meeting (i) to provide training sessions to states, as well as (ii) to have discussions regarding specific taxpayer transfer pricing issues. The following states participated in today’s conference call: Alabama, New Jersey, North Carolina, and Pennsylvania.
Background on ALAS The ALAS program can be traced to the 2013 MTC Executive Committee meeting in Washington, D.C. At the suggestion of Michael Bryan, the former, and at that time, director of the New Jersey Division of Taxation, the MTC began to explore member demand for a comprehensive transfer pricing service. In the wake of an increased interest in a transfer pricing service offered by the MTC, the Arm’s-Length Advisory Group (the “Group”) was formed in June 2014 and frequently met to explore and discuss what such a program would entail. Dan Bucks, former MTC Executive Director, was selected as the “project facilitator” for the Group and worked to establish consensus among the states regarding the specific aspects of the transfer pricing effort. States interested in the program from the start included: Alabama, Florida, Georgia, Iowa, Kentucky, New Jersey, North Carolina, and the District of Columbia. At the first meeting, Joe Garrett Jr. from Alabama was elected to chair the Group.
Over the next 13 months, the Group worked to design a comprehensive transfer pricing program to be offered by the MTC. The final design of the program consisted of two primary components: (1) training for state staff to be able to identify intercompany transactions that distorted the true taxable income of taxpayers; and (2) providing third-party support to offer economic expertise to combat transfer pricing studies provided by taxpayers. It is no coincidence that these two aspects evolved from the Group’s work. Rather, the states have long lamented the inability to identify and rectify transactions between related parties, as well as the inability to combat taxpayer transfer pricing studies with economic analyses of their own. While many states have adopted statutes and regulations authorizing a critical examination of intercompany transactions, states claim that they lack both the internal resources and the expertise to do so.
At the MTC Executive Committee meeting in May 2015, the Executive Committee approved the Final Program Design, and the following six states signed on to the program: Alabama, Iowa, Kentucky, New Jersey, North Carolina, and Pennsylvania. Although only six states initially agreed to join, the program had originally been designed to launch with 10 participating states, with each state contributing approximately $200,000 toward program costs.
Difficulties Garnering 10 States to Support the Program Although the ALAS program received extensive coverage in news and media outlets, the MTC has struggled to find states willing to participate in the program. In fact, since last May, the number of states participating in the program has dropped from six to five – Kentucky has withdrawn support and is reconsidering its participation in the project. Without the necessary number of states participating, it appeared as though the project was dead in the water. However, at the MTC Executive Committee meeting last week, it was announced that the ALAS Committee would meet to discuss a modified project able to launch with minimal state support. Today, the Committee discussed that option.
Today’s Conference Call Today’s call focused primarily on the necessary preliminary steps for an in-person meeting of the participating states in fall 2016. The purpose of the fall 2016 meeting would be to discuss taxpayer-specific information regarding ongoing audits, and to provide training to states on how best to approach transfer pricing issues during audits. However, before those conversations can take place, states must execute an information-exchange agreement to permit these open discussions to occur. A revised draft of the information-exchange agreement is currently being reviewed by the MTC staff. When a draft is finalized, it will be shared with states to ensure that the agreement conforms to state-specific taxpayer confidentiality laws. The Committee intends to finalize the agreement by the end of July 2016, with the goal of having the agreement executed in time for the fall 2016 in-person meeting. The information exchanged at the meeting would not include federal taxpayer information, but rather only state-specific taxpayer information, including tax returns.
The ALAS Committee also discussed whether third-party vendors assisting states with transfer pricing audits would attend the fall 2016 meeting. These vendors would provide in-person training to the states regarding how to better approach transfer pricing issues under audit. Third-party vendors have been used by states in transfer pricing cases previously, most notably in Microsoft Corp. v. Office of Tax and Revenue, in which the District of Columbia hired Chainbridge Software to assist in its audit of Microsoft.
The states participating in today’s call also expressed interest in having third-party vendors make presentations at the fall 2016 meeting regarding state-specific remedies to transfer pricing issues. The state landscape for remedying distortive transfer pricing varies tremendously, ranging from the assertion of nexus of related parties, add-backs, and forced combination. This training would identify the specific statutory and regulatory regimes in each state, and recommend the most effective remedies available to each state. This is of particular importance in states like Pennsylvania, where there is no specific statutory or regulatory remedy codified. It is no surprise, then, that Pennsylvania specifically requested this training at the fall 2016 meeting.
While the participating states are eager to move forward with the ALAS program, the financial commitment of the states remains an obstacle. As previously noted, the original program involved a projected estimated cost of $200,000/state with 10 participating states. But with only five states signed on so far, the per-state cost of participation might be prohibitive. This raises the question that, if the fall 2016 meeting will include training sessions from third-party vendors, who will pay that vendor?
What’s Next The next ALAS Committee teleconference is tentatively scheduled for June 21, 2016. In the short-term, the ALAS Committee will continue to revise the draft information exchange agreement to allow open discussions among states regarding taxpayer-specific information. In the long-term, the MTC and ALAS Committee are expected to continue to solicit participation by additional states in the program.
For more information on how the ALAS program, and other state intercompany pricing initiatives could affect your business, contact the authors of this Alert or another member of the Reed Smith State Tax Group.
Client Alert 2016-126