MTC finalized ALAS transfer pricing program design document
Arm’s-Length Adjustment Services (ALAS) program launch expected in July
TAX ALERT |
On May 7, 2015, the Multistate Tax Commission (MTC) Executive Committee voted to approve the Arm’s-Length Adjustment Services (ALAS) final program design, marking a significant step in the development of the MTC’s effort to assist the states in pooling their resources to more effectively utilize transfer pricing challenges to address intercompany transactions that result in multistate income shifting.
Pursuant to the ALAS program, the MTC will utilize “advanced economic and technical expertise to produce analyses of taxpayer-provided transfer pricing studies and, where appropriate, recommend alternates to taxpayer positions taken based on those studies.” Additionally, the MTC will assist states in using this data and price adjustment approach to reduce the tax benefit of multistate intercompany transactions. This second activity will include training state staff in performing transfer pricing audits, establishing a multistate transfer pricing information exchange, driving audit process improvements, expanding transfer pricing coverage in the MTC’s audit program, assisting states in developing and resolving transfer pricing audits, and supporting the states in favorably resolving litigation in this area.
The MTC is taking a three-phased approach to implementing the ALAS program:
- Phase 1: Pre-launch
- Phase 2: Developmental
- Phase 3: Fully operational
The pre-launch phase started in January 2015 and is expected to be complete in June 2015. During this phase, the program advisory group was tasked with developing a program design document and implementation plan and garnering support from the states. With the approval of the final program design, the MTC has taken a significant step in bringing this program to fruition. At present, it appears that the reception of the program by the states has been lukewarm, with only Alabama, Iowa, Kentucky, New Jersey, North Carolina and Pennsylvania agreeing to participate. However, with a projected $20 billion on the table, a four-year projected benefit of $110 million and an annual cost of $2 million, more states are likely to join in the program.
The developmental phase is expected to launch in July 2015, with anticipated completion in June 2017. In this phase, the MTC intends to sequentially implement elements of the program until all elements are in place and operational. From an audit perspective, the MTC will ramp up their transfer pricing audit capabilities and initiate reviews of taxpayer transfer pricing studies. Additionally, during this period, the MTC will work to develop information exchange procedures and implement the exchange platform.
The fully operational phase is expected to launch in July 2017, with anticipated completion in June 2018. In this phase, the MTC will complete final implementation of all program elements, and will focus on training and process improvement initiatives. By the end of this phase, the MTC will be fully invested in the audit process and the provision of litigation support.
The implementation of the ALAS program could mark a shift in the focus of state challenges to multistate intercompany transactions. Historically, states have challenged the tax benefits generated by these types of transactions using the sham transaction doctrine, intercompany addback rules and forced combination. Challenging the transfer price utilized in these transactions generally has been kept off the table because of the lack of expertise in this area within the state tax authorities. The audit and litigation assistance, information exchange, and training being offered by the MTC through the ALAS program may break through this barrier and lead to an avalanche of protracted and highly confrontational audits where the only issue is whether the appropriate profit margin in an intercompany transaction is 3.8 percent and not 3.9 percent as indicated by the taxpayer’s transfer pricing study.
Taxpayers that engage in intercompany transactions should review the parameters of this program and prepare to defend their transfer pricing on audit. Taxpayers that have not recently updated their general and state-specific transfer pricing studies should do so as soon as possible. Taxpayers that have never performed a transfer pricing study in relation to their intercompany tansactions should perform such a study now, in order to help protect transfer prices on transactions going forward.