Multistate Tax Commission Getting into Transfer Pricing AuditBy Robert Robillard - 16 March 2015
This blogpost originally appeared on rbrt.ca.
The updated report on the Preliminary Design for an MTC Arm’s-Length Adjustment Service was released on February 6, 2015 by the Multistate Tax Commission in the USA.
The complete report is available here.
The executive summary of the report indicates:
“Multijurisdictional enterprises often use complex tax strategies to shift income among jurisdictions, via related party transactions, to reduce their tax liabilities. When wrongly done, these strategies can improperly reduce state revenues substantially, impair market competition, and unfairly shift the cost of public services to other taxpayers. States have found the challenges posed by improper income shifting to be too costly to address on their own. They are joining together to design an Arm’s-Length Adjustment Service (ALAS) to pool their resources to more effectively, efficiently and equitably address this challenge.
The proposed design for the Arm’s-Length Adjustment Service entails two broad components for correcting improper income shifting. The first and largest cost involves using 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. The second component envisions enhancing the ability of states to use this expertise and the resulting analyses effectively in addressing cases of income shifting through related party transactions. This component involves training state staff, establishing information exchanges, helping states improve their tax administrative and compliance processes, expanding audit coverage for related party transactions in the MTC Audit Program, providing assistance to states in developing and resolving cases, and supporting states in defending their work in litigation.
An Arm’s-Length Adjustment Service Committee appointed by the top tax administrator of each participating state will provide advice and guidance for the operation of the service.
The development and initial operation of the service will span four years, beginning ideally on July 1, 2015. States participating in the service will be asked to commit to supporting it for this “charter period,” subject to the availability of appropriations. The critical step in developing this service is the first one—recruiting state participants. An early authorization to MTC staff to recruit states would be a substantial aid to launching the service on the schedule outlined in the design.
The budget for the project is about $2 million annually over the charter period—or an average of $200,000 each if ten states participate. (Actual state costs are proposed to vary partially on state size and usage of services.) While the cost is substantial, it is not overwhelming. Those costs are small compared to the benefits of cooperative action, conservatively estimated at $110 million in revenue over the four-year ALAS charter period—or approximately a 14 to 1 return on investment over that time. Returns are expected to be even higher as the service becomes fully operational.”
Could one day a similar task force be created at the international level for transfer audit purposes?
Very unlikely, if you ask us. But who knows…
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