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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 have already put designs on increasing 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 MTC 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 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 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 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 plan would be to 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 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 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 and the coordination of state resources and approach, should cause taxpayers to reexamine the “designs” of their state transfer pricing practices, and in particular their transfer pricing studies.

 

 

© 2022 McDermott Will & EmeryNational Law Review, Volume V, Number 38
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About this Author

Chief Economist, Transfer Pricing

A. Tracy Gomes is Chief Economist for the Transfer Pricing practice in the law firm of McDermott Will & Emery LLP and is based in the Firm’s Houston office.

Tracy advises firm clients on a range of tax matters relating to international transfer pricing and competent authority proceedings, as well as the valuation of intellectual property, business enterprises and financial products.  He has particular experience in the valuation of technology and brand intangibles.

713-653-1787
Stephen P. Kranz Lawyer McDermott Will
Partner

Stephen P. Kranz is a partner in the law firm of McDermott Will & Emery LLP and is based in the Firm’s Washington, D.C., office.  He engages in all forms of taxpayer advocacy, including audit defense and litigation, legislative monitoring, and the formation and leadership of taxpayer coalitions.  Steve is at the forefront of state and local tax issues, including developments arising in the world of cloud computing and digital goods and services.  He assists clients in understanding planning opportunities and compliance obligations for all states and all tax types. ...

202-756-8180
Counsel

Diann Smith is counsel in the law firm of McDermott Will & Emery LLP and is based in the Firm’s Washington, D.C., office.  Diann focuses her practice on state and local taxation with an emphasis on tax challenges relating to compliance, controversy, planning and legislative activity.   

202-756-8241
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