North Carolina’s Transfer Pricing Voluntary Disclosure Program Recap
In July 2020, the North Carolina Department of Revenue (DOR) announced a Voluntary Corporate Transfer Pricing Resolution Initiative (VCTPRI). The effective dates for the VCTPRI were August 1, 2020, through December 1, 2020. This initiative allowed North Carolina taxpayers with multistate entity structures to report and resolve any potential transfer pricing conflicts or exposure. Taxpayers in North Carolina could elect into the program, even if they were currently under audit by the North Carolina DOR. By the deadline for participation, more than 45 corporate groups and 100 affiliated group companies chose to partake in the DOR’s VCTPRI; approximately half of the participants were taxpayers currently under audit.
The participants in the VCTPRI were given a proposed adjustment within 31 days of submitting documents and then had to decide whether to accept the DOR’s offer (taxpayers were allowed to offer modifications to the DOR’s proposed adjustment). Ultimately, the DOR’s VCTPRI earned the state nearly $100 million in additional revenue.
State tax authorities have historically not been very successful in collecting tax revenue associated with transfer pricing audit examinations. Therefore, many are calling this a victory for the DOR, in terms of both the participation level and the amount of tax revenue collected.
North Carolina’s VCTPRI is a novel idea. In the past, many state taxing authorities did not have the expertise necessary to conduct an audit involving transfer pricing. However, since at least 2014, several states have made significant and continuing efforts to professionalize their transfer pricing audit capabilities. In 2014, New Jersey tax administrators asked the Multistate Tax Commission (MTC) to create a group for that purpose. The MTC ultimately formed the State Intercompany Transactions Advisory Service (SITAS) Committee. SITAS members have included tax agency representatives from Alabama, Florida, Georgia, Indiana, Kentucky, Louisiana, Mississippi, Missouri, New Jersey, North Carolina, Pennsylvania, and South Carolina, among others. To enhance collaboration, each state signs a participation commitment and exchange of information agreement.
Nevertheless, states may be reluctant to spend limited resources from budgets strained by the COVID-19 pandemic on drawn-out litigation of these complex transfer pricing issues, which may lead to other states replicating the DOR’s VCTPRI. The MTC and other member states, especially those separate company tax return filing states participating in the SITAS, will likely pay close attention to the results of the DOR’s VCTPRI and determine if a similar program would be beneficial for their own state tax authority.
If you are interested in discussing the state tax audit risk or transfer pricing documentation for your state tax structure, please contact your BKD Trusted Advisor™ or submit the Contact Us form below.