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Let the Training Begin: MTC Transfer Pricing Audits Draw Near

Deputy Executive Director Greg Matson (a nice guy at heart) announced this week that the Multistate Tax Commission (MTC) has hired its first transfer pricing training consultant and is scheduled to begin training state auditors.  The training, titled “Identifying Related Party Issues in Corporate Tax Audits” will be hosted by the North Carolina Department of Revenue from March 31 to April 1, 2015 in Raleigh, North Carolina.  While the much anticipated Arm’s Length Adjustment Service (ALAS, discussed in more depth in our February 6, 2015 blog post, available here) is still pending approval of the MTC Executive Committee and ratification at the annual meeting this summer, it has not stopped MTC officials from moving forward with training state auditors on transfer pricing.  This training (and any subsequent training offered before the annual meeting) will be conducted as part of the MTC’s “regular training” schedule (and is not directly tied to the ALAS program since authority to train for that program has not vested).  Nonetheless, Executive Director Joe Huddleston made it clear in a recent letter to the states that “[t]his course will preview the training to be provided through the Arm’s-Length Adjustment Service.”

The kickoff training session at the end of this month will be conducted by former Internal Revenue Service Office of Chief Counsel senior economic advisor, Ednaldo Silva.  He is the founder of RoyaltyStat LLC, one of the transfer pricing consulting firms that is being considered by the MTC to provide their services for the ALAS.  During yesterday’s teleconference of the ALAS Advisory Group, Matson and Huddleston were optimistic that additional training sessions would be offered by the MTC before the ALAS is finalized.  It remains to be seen whether this training will be offered by Silva or another participant from the October 2014 Advisory Group meeting that has submitted a bid to be the contract firm for the ALAS.  Because these trainings are a fundamental threshold step to commencing ALAS audits (projected to begin December 2015), they provide a strong signal that the MTC is optimistic that they will have sufficient support from the states to continue the ALAS program.

Too Soon?

In a letter distributed to 46 states and Washington, D.C. in February 2015, the MTC officially solicited state commitments to the ALAS program.  States were given until the end of March 2015 to respond.  By the terms of the ALAS proposal, the MTC will need a commitment from at least seven states for the program to move forward.  MTC officials announced at yesterday’s Advisory Group teleconference that the current count is zero (with one state declining).  While there is still time to respond, several revenue department officials voiced concern about making a commitment without more detailed estimates of costs.  Others voiced uncertainty about the ability to enter into a contract for such a long period under state law (the program requests that each state commit to four years).  While there was no significant undertone of opposition to [...]

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MTC Puts Designs on Increasing State Transfer Pricing Revenues

This past December, the Multistate Tax Commission’s (MTC) transfer pricing advisory committee and its project facilitator Dan Bucks recommended what it calls the “preliminary design” approach for a proposed Arm’s Length Adjustment Services (ALAS) program.  While still subject to approval, states already anticipate that the program will increase their state transfer pricing revenues.

The MTC ALAS is an attempt to bring to state governments a comprehensive and coordinated program to address income shifting and the loss of state tax revenues, much along the lines of what the United States and other foreign governments have been trying to do, most recently in their Base Erosion and Profit Shifting (BEPS) initiative.  The ALAS program is intended to address both interstate income shifting, which is never addressed at the federal level, and international income shifting, which the MTC believes is massively under-audited at the federal level.  According to some estimates, state revenue losses from transfer pricing total as high as $20 billion a year.

Fundamental to the preliminary design will be the hiring of a mix of MTC in-house and contract consulting expertise for advanced economic and technical analysis of taxpayer-provided transfer pricing studies, including providing alternative recommendations to taxpayer positions.  This approach (in contrast to a fully outsourced or in-house approach) recognizes the highly specialized and interdisciplinary nature of transfer pricing analysis, and the need to both quickly and effectively address and resolve immediate cases, as well as to build the capabilities and capacity (through training, information exchange, process improvements, etc.) to support state transfer pricing needs for the long-term.

Set to be voted on by the MTC’s Executive Committee at its May meeting, the ALAS program would kick-off in July 2015 with the hiring of an in-house tax manager, followed shortly thereafter with the engagement of one or more private economic consulting firms and an in-house senior economist by the end of the year.  The program would begin transfer pricing analyses by December 2015, with the completion of up to 18 joint economic studies by the end of 2017.

The focus of the initial stages of the ALAS approach will be on reviewing and analyzing the taxpayer’s existing transfer pricing study—questioning, critiquing and (re)-computing the taxpayer’s results– rather than attempting to re-create the transfer price whole cloth.  The effect is likely to produce a more rigorous, sophisticated and traditional analysis, one that paradoxically is likely to corroborate those taxpayer studies that are both thorough and orthodox in their approach, but at the same time pose a serious challenge to those that are not.

To the extent taxpayers don’t have formal documentation, they would be well-served to get it, or at least develop external third party benchmarks to corroborate their cross-border intercompany pricing.

The MTC’s proposed ALAS program is quite ambitious, not only in terms of its operational goals and timing, but also in its conception.  Preliminary or not, the programs’ combination of outside expert consultants with coordinated state resources, should cause taxpayers to reexamine the “designs” of their state transfer pricing [...]

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