On Aug. 1, 2020, the North Carolina Department of Revenue began a voluntary corporate transfer pricing resolution program designed to allow businesses to resolve intercompany pricing issues quickly. The program ends Dec. 1, 2020.
The disclosure program applies to all taxpayers who have filed corporate income tax returns in North Carolina, including those under audit, those who have been notified of upcoming audits, those in the process of requesting reviews and those who haven't been identified for audit by the department but have related-party intercompany pricing. The program applies to all open tax years within the statute of limitations.
According to the department, taxpayers must agree in writing by Sept. 15, 2020 to participate in the program. By Oct. 16, 2020, businesses would have to provide all transfer pricing and tax and financial information and documentation to the department. Within 31 days of the receipt of documentation, the department provides a proposed adjustment via a report with its methodology and conclusions. Businesses would then have 15 days to accept the proposal or offer modifications, after which the parties would enter into a settlement. All penalties would be waived for issues resolved as part of the settlement.
The department noted that intercompany transactions between members of affiliated groups must have economic substance or a fair market value. The department reminded taxpayers that if a taxpayer has an intercompany pricing issue, the department may redetermine the state net income of the corporation properly attributable to its business carried on in the state.
Corporate taxpayers in North Carolina with significant intercompany transactions should be aware of this voluntary disclosure program. This is particularly true for companies that have not conducted a transfer pricing study. Transfer pricing audits are time consuming and costly. The ability to avoid an audit and to avoid underpayment penalties may be beneficial. North Carolina and many other states are likely to increase transfer pricing audits in the coming year. The voluntary disclosure program provides an opportunity to address transfer pricing issues more efficiently and favorably. Taxpayers should consult with their state and local tax advisors for more information.