On June 16, 2022, the New Jersey Division of Taxation announced a new voluntary transfer pricing agreement program. According to the division, the program’s intent is to provide “certainty and uniformity to taxpayers” as well as to more efficiently resolve tax controversies in transfer pricing disputes for all open tax years.
The program will allow taxpayers and the division to agree on a settlement amount and transfer pricing methodology for tax years open under New Jersey’s four-year statute of limitations. All businesses that have filed returns in open years, including those under audit or in appeals, are eligible to participate. The program is not available to taxpayers currently in litigation.
To participate, taxpayers must enroll by submitting the required election form by Sept. 15, 2022. By Oct. 31, 2022, taxpayers must provide the division with all requested transfer pricing, tax, and financial information and documentation. The division will make a determination and propose a settlement within 90 days of receipt of the requested information; taxpayers will then have 30 days to accept the division’s proposal. Taxpayers may offer modifications or adjustments to the proposal within this time frame, but an agreement must be reached by the end of 30 days. Extensions to this 30-day deadline will be allowed on a case-by-case basis, at the discretion of the division. All agreements must be fully completed and accepted by both parties before the close of the program on March 2, 2023.
The settlement amount and methodology may be applied by mutual agreement to all open years, and the division will waive all applicable penalties for taxpayers with whom an agreement is reached. The division may disqualify a taxpayer for failure to cooperate or provide requested information, and a taxpayer may also withdraw at any time prior to signing a closing agreement. However, there are serious consequences to taxpayers for failure to participate or reach an agreement with the division. For such taxpayers, the division will assess all applicable penalties and not agree to a methodology or settlement for unaudited open years.
Takeaways
New Jersey has joined a small but growing number of states that have developed programs to resolve transfer pricing issues in an efficient and cost-effective manner. For example, Indiana created an advanced pricing agreement program in 2020, North Carolina previously offered an amnesty program and Louisiana announced a program last fall that offers both voluntary disclosure for open years and prospective relief.
With the initial application deadline for New Jersey’s program only three months away, taxpayers will need to act quickly to analyze the potential costs and benefits of participating in the program. Participation in the program will allow taxpayers to resolve intercompany transfer pricing issues much more quickly than through the regular audit and appeals process. However, as with many voluntary disclosure programs, failure to reach an agreement may expose a taxpayer to greater risk. The department makes clear that for taxpayers who do not elect to participate in this initiative by Sept. 15, 2022, or that fail to successfully complete the initiative, the department will assess all applicable penalties, not provide any penalty waiver and audit according to the department’s regular audit schedule and will not agree to a methodology or settlement for any unaudited open tax years.
Additionally, New Jersey enacted mandatory combined reporting for unitary business groups, beginning with the 2019 tax year. As a result, the exposures associated with intercompany transfer pricing are likely limited only to open years where separate filing still applied.
Before enrolling in the New Jersey program, businesses should carefully assess whether their situation warrants this type of resolution. Taxpayers with questions on the New Jersey transfer pricing agreement program should consult with their state and local tax advisers.
