Reed Smith Client Alerts

Auteurs: Christine M. Maddison Michael A. Jacobs

Today the Pennsylvania Department of Revenue (the “Department”) released its first effort at providing public guidance regarding Pennsylvania’s intangible expense add-back provision.1 In its Discussion Draft of an Information Notice on the add-back provision, the Department takes several positions that (if followed) may be subject to challenge as going beyond the statutory authority.

Some items of note upon initial review of the Discussion Draft include:

  • The Department expands the definition of “intangible expenses” to include items like payments for franchise and contract rights and know-how (in addition to payments for patents, trademarks and copyrights).
  • The Department interprets “intangible expenses” as including “embedded costs,” such as where an intangible expense is passed on in the form of an increased purchase price for tangible goods or services.
  • The Department interprets the add-back to include a presumption that interest expenses are “directly related to intangible expenses or costs” when a corporate taxpayer engages in an intangible property transaction with an affiliated entity and pays interest in that tax year – even if the interest is paid to an unrelated third party.

Not surprisingly, while the Department adopts a broad interpretation of the add-back provision in its Discussion Draft, it at the same time adopts a narrow interpretation of the statutory exceptions to add back. For example:

  • The Department interprets the statutory exception for arms-length transactions that did not have as “the principal purpose” the avoidance of Pennsylvania corporate net income tax as requiring that a corporate taxpayer demonstrate a non-tax business purpose using contemporaneous documentation.
  • The Department also adds a presumption that the principal purpose is avoidance of Pennsylvania corporate net income tax when the “overall economic position” (excluding tax effects) of the taxpayer is not changed in a meaningful way.
  • The Department interprets the foreign treaty exception as including a requirement that the transaction with the foreign affiliate have a business purpose and be conducted at arms-length.
  • The Department interprets the conduit exemption to apply only where the payments are identical in kind and amount.
  • The Department interprets the credit provision to apply only to taxes paid in separate company states.

We are still reviewing additional implications of the various provisions in the Discussion Draft. If you have questions on how the Discussion Draft would apply to your business or would like to participate in submitting comments on the Discussion Draft, please contact one of the authors of this Alert or another member of the Reed Smith State Tax Group. For more information on Reed Smith’s Pennsylvania tax practice, visit

  1. Pennsylvania’s intangible expense add-back provision (72 P.S. § 7401(3)(t)) went into effect for tax years beginning on or after January 1, 2015.


Client Alert 2016-039