Massachusetts ~ Corporate Income Tax: Interest Payments for Intercompany Transfers From Cash Management System Not Deductible

A multinational wholesale and retail distributor of office supplies was not entitled to the abatement of Massachusetts corporate excise tax, interest, and penalties because intercompany transfers between the parent corporation and its wholly owned subsidiaries were not bona-fide debt for either the income or the non-income components of the tax and, therefore, interest expense deductions by the combined reporting group were not allowed for the tax years in question. Moreover, the Commissioner of Revenue was not required to consider the Massachusetts interest expense addback statute or any of its exceptions because, without true debt, there was no interest that would qualify for a deduction, and, therefore, the addback statute did not come into play. Neither the parent nor its wholly owned subsidiaries treated the net accounts-payable balances from a centralized cash management system (CMS) as arm’s-length, unqualified, legal obligations to repay. There were no checks or limits on the amounts transferred to the parent corporation by its subsidiaries in daily cash sweeps from the CMS. The excess cash transfers were permanent in nature because there were no repayment schedules, no history of repayments, and no other evidence indicating that there was any actual repayment or intent to repay the excess cash retained by the parent to reduce the indebtedness. While payments of interest and principal were referenced in promissory notes, no amounts were ever actually paid to the operating subsidiaries under the CMS. They were mere bookkeeping entries of interest, which were always kept in the parent’s cash sweeps account. Even though promissory notes were written to reflect the indebtedness, the wholly owned subsidiaries lacked control to enforce payment by the parent, and, in fact, the parent made no payments on the debt. Finally, repayment of the debt was not secured in any way. Consequently, the transactions made under the CMS were not true debt and, accordingly, interest payments made by the parent were not deductible interest payments.

Staples, Inc. v. Massachusetts Commissioner of Revenue, Massachusetts Appellate Tax Board, Nos. C310639, C310640, September 4, 2015, ¶401-551

 

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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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