North Carolina ~ Corporate Income Tax: Senate Passes Bill to Set Procedures for Requiring Combined Reporting

A bill passed by the North Carolina Senate would, if enacted, establish new procedures for the Secretary of Revenue to follow prior to (1) adjusting intercompany transactions between affiliated corporations or (2) requiring a corporation and its affiliates to file a combined return for corporate income tax purposes. The secretary would be required to make a written request to the corporation to supply within 90 days any information reasonably necessary to determine whether the corporation’s intercompany transactions with its affiliates have economic substance and are at fair market value for the accurate computation of the corporation’s net income properly attributable to its business carried on in North Carolina. The legislation outlines the items to be considered in determining whether a transaction has economic substance. If the secretary determines that the applicable requirements are not met, the secretary would be authorized to:

— add back, eliminate, or otherwise adjust intercompany transactions to accurately compute the corporation’s North Carolina net income properly attributable to its business carried on in North Carolina; or

— if the above adjustments are not adequate under the circumstances to redetermine North Carolina net income, require the corporation to file a return that reflects the net income on a combined basis of all members of its affiliated group that are conducting a unitary business, unless specified exceptions to unitary group members apply.

The secretary would be required to make the determination that the corporation’s reported income does not accurately reflect the corporation’s income attributable to its business income in North Carolina each individual tax year and would be required to provide a written statement to the corporation outlining the facts, circumstances, and reasons for the secretary’s determination and the proposed method for computing the corporation’s North Carolina net income.

A corporation would be required to submit a combined return within 60 days of the secretary’s request. However, the bill specifically states that submission of the combined return could not be deemed to be a return or construed as an agreement by the corporation that an assessment based on the combined return is correct or that additional tax is due by the secretary’s deadline for submitting the combined return. Appeals of a secretary’s final determination to the Office of Administrative Hearings in a contested tax case would be reviewed de novo.

A corporation would be able to request in writing from the secretary specific advice regarding whether a redetermination of the corporation’s net income or a combined return would be required under certain facts and circumstances. The secretary would be required to provide the specific advice within 120 days and would be authorized to charge a fee of between $100 and $5,000 to cover the department’s cost in preparing the advice.

H.B. 619, as passed by the North Carolina Senate on June 16, 2011

AUTHOR

Wolters Kluwer Tax and Accounting

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