By Davinia Lyon and Judy Vorndran
Numerous states are moving to crack down on tax shifting by multistate businesses. What does this mean for your business?
Global tax shifting has been a hot spot of legislative and regulatory enforcement for decades. Now, these same corporate tax avoidance schemes have moved to the state level, where states are now cracking down on multistate taxpayer activities that shift income and assets to low-tax jurisdictions.
Multistate taxpayers that use tax planning to reallocate income through intercompany charges, transfers and agreements can move large sums across state borders and reduce the overall tax burden. A taxpayer with income in California, which has an 8.8% state tax rate, could use intercompany transfers to shift income to Colorado to be taxed at the lower 4.65% Colorado state tax rate. This practice includes parking high-value assets in subsidiaries located in low-tax states.
State Enforcement
Restricting this type of tax rate shopping is part of a larger global initiative by the Organisation for Economic Co-operation and Development (OECD). Attuned to the actions of global players shifting income to low tax countries, the OECD mandates that transfer pricing and intercompany reporting be disclosed.
A number of U.S. states are now piggy-backing on this global initiative with enforcement of their own to stop rate shopping domestically and make sure they are not getting shortchanged under the same principles. States most at risk of tax avoidance are the separate-reporting states requiring tax returns for each affiliate.
According to Bloomberg Tax, 12 states are aggressively moving to recapture lost tax dollars with new collaborative strategies for auditing intercompany transactions.
The states, primarily in the Southeast, are meeting monthly to share information and discuss audit strategies aimed at transfer pricing an accounting method for valuing related-company transactions. Several states are working with consultants to train their audit teams, select audit targets, and build analytical frameworks for reviewing corporate tax returns.
The new strategies could double or triple tax collections from large multistate corporate taxpayers, one economist working with the states believes.
The Takeaway
Each company must have basis for charges they are making between related parties within the same organization. Intercompany agreements must be written and available to justify intercompany changes that move revenue and intercompany expenses around the multijurisdictional entity.
Work with your tax advisor to analyze your domestic transfer pricing practices, and when at fault, use available settlement options, such as North Carolina’s Voluntary Corporate Transfer Pricing Resolution Initiative, and negotiation strategies to get compliant.
Let’s Talk Tax
Davinia Lyon can be reached at dlyon@taxops.com or 720.512.5438.
Judy Vorndran can be reached at jvorndran@taxops.com or 720.227.0420.
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