United States

Indiana releases studies on combined reporting and transfer pricing


On Oct. 1, 2016, the Indiana Legislative Services Agency (LSA) released two corporate income tax studies. The studies were required by Indiana Senate Bill 323 to study both the combined reporting approach to corporate income taxes and issues related to transfer pricing. Senate Bill 323 was originally introduced in January 2016, mandating combined reporting, but after an outcry from multistate businesses and tax policy groups, the bill was revised to study the impacts of combined reporting and transfer pricing.

Combined reporting study

The LSA’s study on combined reporting addresses the current state of corporate income tax reporting, the history and issues related to combined reporting, and the potential fiscal and economic impact of Indiana adopting combined reporting. The report’s executive summary explains that corporate tax rates are scheduled to phase down from 8.5 percent in 2012, to 4.9 percent by 2022, and that the Indiana corporate tax base has been growing in the past few years. However, the state generally has not kept up with the growth in U.S. corporate profits and federal corporate tax base. The report cites several reasons for this tax base erosion, identifying the primary reason as the shift in use from C corporation status to pass-through entity status. Additionally, multistate businesses have employed other tax planning strategies available in separate reporting states. Significantly, the report identifies that combined reporting ‘neutralizes’ several related-party tax planning strategies like the use of intellectual property holding companies, transfer pricing and oversees management affiliates.

Additionally, the report finds some evidence that suggests the impact of combined reporting on state revenues has been mixed. Using econometric techniques as described in the study, the LSA concludes that combined reporting may result in an initial positive impact on corporate income tax revenue, but would be short lived, ultimately reducing to zero impact after a few years. The econometric models estimated the correlation between annual state corporate income tax revenue and several economic and tax policy factors including a state’s gross state product, a state’s sales tax rate and a state’s personal income tax rate. The statistical estimates from these models were generated using 18 years of data from 44 states that have imposed corporate income taxes during that period. None of the three models indicated combined reporting would produce a long-term revenue impact.

Transfer pricing study

The LSA’s study on transfer pricing examines intercompany transfers, state enforcement of intercompany transfers and compliance challenges related to transfer pricing strategies. The study highlights that transfer pricing examination and analysis is complex and expensive, requiring substantial state resources. In addressing other states’ approaches to transfer pricing, the study notes that most states have adopted statutes requiring addbacks and disallowing tax benefits that occur from related-party transactions to reduce the number of disputed transactions. Indiana’s statutes require the addback of deductions taken on royalties, intangible related-party expenses and intercompany interest. Other states, like Kentucky, South Carolina and Wisconsin, have broader addback provisions. For more information on recent Indiana Tax Court and Department of Revenue findings regarding transfer pricing, please read our alert, Indiana department finding accepts taxpayer’s transfer pricing study.


Indiana corporate taxpayers should take note of the recent analysis outlined in the LSA’s study on combined reporting. In recent years, both Maryland and Rhode Island underwent combined reporting studies—Rhode Island adopting combined reporting effective in 2015 and Maryland, which found no benefit to combined reporting, has yet to make the change. While the LSA study sheds some light on the various benefits and disadvantages of combined reporting, the study did not overwhelmingly advocate for combined reporting and none of the econometric models indicated a long-term benefit to corporate tax revenues. It would not be unexpected to see a combined reporting bill reintroduced, although it is likely the opposition will be just as significant as before.

As the study on transfer pricing suggests, transfer pricing examination and analysis is complex and expensive. Adopting combined reporting would alleviate some of the compliance challenges related to transfer pricing strategies. Indiana taxpayers will want to watch closely for legislative action on these issues.


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