New Jersey ~ Corporate Income Tax: Intercompany Transfer Pricing and Advanced Pricing Agreement Guidance Issued

The New Jersey Division of Taxation has issued guidance on the corporation business tax (CBT) treatment of intercompany transfer pricing and advanced pricing agreements. The Internal Revenue Service (IRS) provides an advance pricing agreement program that provides a voluntary process whereby the IRS and taxpayers resolve transfer pricing issues under IRC §482 in a cooperative manner on a prospective basis. Under N.J.S.A. 54:10A-10, the director may make adjustments in any tax report or tax returns as may be necessary to make a fair and reasonable determination of the amount of CBT payable. The division has advised taxpayers that in most cases, when arriving at a “fair and reasonable tax,” the division will use IRC §482 standards in auditing and adjusting items above line 28 of Schedule A of the CBT return. If a taxpayer can demonstrate that it has met the standards of IRC §482, no adjustments are likely to be made above Line 28 of Schedule A. Because an advance pricing agreement between the taxpayer and the IRS would be accepted by the IRS based on IRC §482 standards, and IRC §482 standards are incorporated into N.J.A.C. 18:7-5.10, the division will take into consideration an advance pricing agreement between the taxpayer and the IRS in the evaluation of the appropriateness of intercompany pricing and the determination of a “fair and reasonable tax.”

However, the language of N.J.S.A. 54:10A-10 goes beyond IRC §482 situations. For example, N.J.S.A. 54:10A-10(b) refers to “any person or persons directly or indirectly interested” rather than being restricted to “two or more organizations, trades, or businesses” as under IRC §482 and gives the director the ability to include a “fair profit” in a taxpayer’s income. Because the language of N.J.S.A. 54:10A-10 goes beyond the scope of IRC §482, IRC §482 is not the only provision that relates to audits of related taxpayers and other issues may arise in a particular audit, such as nexus rules for affiliates. Also, N.J.A.C. 18:7-5.10 provides that, in determining a “fair and reasonable tax,” the division is not limited to indices, trade practices, cost sheets, Internal Revenue Reports, or any other factor in determining the appropriate transfer price for goods, services, intangibles, or other dispositions made to related parties. The regulation also applies where adjustments and redeterminations relate to transfer pricing and other transactions between related persons and entities where evasion or tax avoidance is not a consideration. Thus, the division reserves the right in particular instances to use other criteria besides an advance pricing agreement that may produce “a fair and reasonable tax.”

Technical Advisory Memorandum TAM-17, New Jersey Division of Taxation, June 6, 2011, ¶401-575

Other References:

Explanations at ¶10-520

AUTHOR

Wolters Kluwer Tax and Accounting

Wolters Kluwer Tax and Accounting is a leading provider of software solutions and local expertise that helps tax, accounting, and audit professionals research and navigate complex regulations, comply with legislation, manage their businesses and advise clients with speed, accuracy and efficiency. Wolters Kluwer Tax and Accounting is part of Wolters Kluwer N.V. (AEX: WKL), a global leader in information services and solutions for professionals in the health, tax and accounting, risk and compliance, finance and legal sectors. We help our customers make critical decisions every day by providing expert solutions that combine deep domain knowledge with specialized technology and services. Wolters Kluwer reported 2016 annual revenues of €4.3 billion. The company, headquartered in Alphen aan den Rijn, the Netherlands, serves customers in over 180 countries, maintains operations in over 40 countries and employs 19,000 people worldwide. Wolters Kluwer shares are listed on Euronext Amsterdam (WKL) and are included in the AEX and Euronext 100 indices. Wolters Kluwer has a sponsored Level 1 American Depositary Receipt program. The ADRs are traded on the over-the-counter market in the U.S. (WTKWY).

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