In the News November 5, 2015

Bloomberg BNA Quotes Matt Hedstrom on Transfer Pricing

States are dealing with issues of transfer pricing as corporate structures and tax planning become more advanced, said Matt Hedstrom of Alston & Bird’s State & Local Tax Group, who discussed these issues during a panel at the 22nd Annual Paul J. Hartman State and Local Tax Forum.

“In recent years, and particularly in the past year, transfer pricing has received increased consideration at the state level,” said Hedstrom. “In part, this is due to the amount of revenue purportedly escaping taxation” and the perception among states that “traditional ways to address purported income shifting are not reaching current structures.”

States face issues that the international tax community doesn’t, such as the difference between separate entity states and combined reporting states.

Hedstrom, who coauthored Bloomberg BNA’s Unclaimed Property (Portfolio 1600), noted that “the issue can arise in situations where members of a combined group engage in transactions with entities that are excluded from a combined return (e.g., 80/20 companies, non-unitary entities, etc.).”

Also drawing states’ attention is “the transfer and/or licensing of intangibles (including patents and trademarks), the transfer of tangible goods (including inventory and supplies), factoring, provision of common services, intercompany financing arrangements and payment of management fees,” he said.

In addition to the inherent risks of transfer pricing, taxpayers must also consider the disconformity among states.

“Given the variation in state law and how states approach intercompany adjustments as a matter of administrative practice, it is hard to prescribe a one-size-fits-all strategy to assess a client’s risk profile,” Hedstrom said.

“Changes in facts can render an existing study out-of-date and subject to greater scrutiny and challenge,” he said. “Sometimes a bad transfer pricing study is worse than not having a study at all, so taxpayers need to make sure they follow proper procedures and resist shortcuts.”

Taxpayers may also have to face other adjustments beyond transfer pricing audits, as Hedstrom explained: “States do not just focus on adjusting the intercompany price to cure alleged income shifting; rather, perceived shifting is typically addressed through the assertion of other challenges, including economic nexus, forced and mandatory combination, economic substance and business purpose-based challenges.”

Hedstrom also addressed the Multistate Tax Commission’s proposed Arm’s-Length Adjustment Service (ALAS).

“Although it is unclear whether the ALAS Program will proceed, the discussion around the program will inevitably draw further attention to transfer pricing and other issues related to income shifting and base erosion.”
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