How to Avoid Intercompany Expense Addback and Combination

Does your business operate within a commonly controlled group of corporations?  If so, you most likely have intercompany transactions between the entities in the group.  These transactions can cause problems from a state and local income tax perspective if not managed adequately.

The state and local tax planning of the '90s saw companies create structures which allowed businesses to isolate profitable companies in no or low tax states, while companies with losses or neutral income filed in multiple states.  This result was created mostly by intercompany transactions between entities within the group. 

As a result of this tax planning, states have responded by creating "addback" statutes or requiring commonly controlled groups to file "combined" income tax returns.  The addback of intercompany expenses, or filing of combined returns seeks to eliminate the isolation or transferring of tax liability from one entity to another with the goal of determining what the fair reflection of income is in the state.

What scenarios may cause a state to addback intercompany transactions or force combination?

1. Lack of economic substance and business purpose for the transactions or structure
2. No evidence of expecting or receiving a return of cash or effort to repay an intercompany loan
3. A circular flow of funds
4. Holding intangibles and never licensing them to a third party
5. Parent company retaining control of intangible property and maintaining the benefits and burdens of ownership
6. Asset transferred within the group with charge back to transferring entity
7. Motivation for restructuring or transaction
8. Related party transactions not at fair market value (FMV)
9. Income not accurately reflected in state due to intercompany transactions

There are more factors that come into play, but the above are some of the most common.

How do you fight against addback statutes and forced combination?

1. Have a strong business purpose and ecomonic substance to your intercompany transactions and structure
2. Keep related party transactions at arms-length pricing or fair market value
3. Document all transactions and meet specific state exceptions to addback statutes (i.e., New Jersey)
4. Complete analysis to confirm that state income is an accurate reflection of income in state

These are just a few tips or points to consider.  Each situation is different and requires appropriate analysis.

Bottom line:  Analyzing or re-analyzing your intercompany transactions may provide opportunities to reduce tax, mitigate exposure and/or reduce your FIN 48 reserve and effective tax rate.

State and Local Tax National Tax Office - Do You Need It?

Information overload?  Not the right information?  Too many sources?  What is the best source?  Who is the most reliable source?  Who is right? 

Do these questions ever cross your mind when you have a state and local tax issue or problem to resolve? 

Do these questions cross your mind when you are trying to monitor state and local tax legislation related to an issue your company has?  How about trying to determine if you meet the "more likely than not" threshold for FIN 48 purposes?

What resource do you rely on?  Who is your reliable resource? 

There are the "commercial" resources such as BNA, CCH, RIA, etc.  There are also the "big" accounting and law firms who have national tax offices focused on disseminating technical developments at a increased pace.

Therefore, large companies have several resources to pull from.  But what about smaller, middle-market companies or the "non-big" accounting and law firms?  Who is tracking state and local tax developments for them?  Who is helping them with their state and local tax issues?

My passion is disseminating technical developments of the state and local tax world all across the country.  I enjoy tracking them and explaining them in an "easier" to understand fashion.  Also, helping clients put these developments into action to support their positions.

What do you think of a state and local tax national tax office service?  Would you use it?  Do you need it? 

You're Invited to Learn How to Reduce Uncertainty and Account for State Income Taxes (FAS 109 and FIN 48)

For those of you who live and work in the Richmond, Virginia area or will be in town, I would like to invite you to attend Ernst & Young, LLP's Annual Update on ASC 740 on September 22, 2011.  The event info is provided below.

I will be speaking and providing a State Income Tax Update as part of the seminar.  My update will focus on uncertain state tax positions (the growing problem and potential solutions), and recent state tax developments that impact accounting for state income taxes (FAS 109 and FIN 48).

Accounting for Income Taxes
Ernst &Young's annual update on ASC 740

Thursday, September 22, 2011

Wyndham Virginia Crossings Hotel & Conference Center
1000 Virginia Center Parkway
Glen Allen, Virginia 23059

7:45 am to 8:30 am - Registration, breakfast and networking
8:30 am to 3:30 pm - Program (lunch provided)

Please join us on Thursday, September 22nd for Ernst &Young Richmond's 7th annual Accounting for Income Taxes update. Sample topics include:

• Uncertain tax positions
• Tax accounting for U.S. multinationals
• Business combinations
• Tax function innovation

There is no cost to attend, and attendance will qualify you for CPE credits.

Registration link: http://response.ey.com/CSG3/?2011_ASC_740

To register, please click on the registration link above (or enter "http://response.ey.com/CSG3/?2011_ASC_740" into your browser). TIP: Be sure to double check your email address when registering. Once you have successfully registered, you will receive an automatic email confirmation.

FIN 48 Reserve for Uncertain State Tax Positions: Will It Ever End??

If your company is like most, it probably has a large FIN 48 reserve on its books for uncertain state tax positions.  It is also probably growing year after year, after year, after year.  The question is:  when will it stop growing?  Is it possible to make it stop growing or even eliminate it?

Well, as part of your annual FIN 48 review and analysis, all positions should be examined.  As part of that process, your company should determine if any "triggering event" has occurred that would reduce or eliminate a reserve that is on the books.  That "triggering event" may be a recent audit, court case, statutes, regulations, changes in administrative practices or policies by a state, a private letter ruling request or voluntary disclosure agreement (VDA) that your company entered into, or the expiration of the statute of limitations.

A large number of companies went through a thorough FIN 48 analysis when FIN 48 was enacted and implemented.  Since then, the reserve related to those issues originally set-up have continued to grow under the guise that the exposure or issue related to the reserve still exists.  The question is, does it still exist? 

The problem with uncertain state tax positions, often times, is that the authority or reason why the FIN 48 reserve was set-up in the first place was grey or vague.  Meaning, there was no authority which directly addressed the issue; however, you couldn't get to the "more likely than not" standard to NOT record a reserve.  Therefore, trying to identify a "triggering event" to reduce or eliminate the reserve today is more difficult (but not impossible). 

So What?

If your company has a large and growing FIN 48 reserve for uncertain state tax positions, additional analysis may be able to identify "triggering events" to reduce or eliminate those reserves and lower your company's effective tax rate.

NOTE:  Keep in mind that this is a complex analysis which may require substantial support and documentation.  This is not as easy as 1, 2, 3.

"Fantasy" State Tax Time!

The NFL season has started and so has the "Fantasy" football leagues.  This is my first year participating in a fantasy football league.  At first, I thought it was a little crazy and waste of time; however, I have already found myself getting into it.  I guess it is my competitive nature. 

With that said, since I am new to the league, I didn't get the best players.  We'll have to wait and see how it plays out.

Real v. Fantasy?

In regards to state taxes, what is real and what is "fantasy"?  If you have dealt with state taxes for several years, you have seen states propose complex legislation, and burdensome legislation. You have also seen states piggy-back off each other or follow each other's lead when adopting new legislation.  Legislation in one state often becomes an epidemic across the country. 

Simplification and uniformity appear to be "fantasy."  It has been tried and is continuing to be tried with organizations like the Mulitstate Tax Commission, federal legislation and the streamlined sales tax project.

The opposition to simplification and uniformity, I believe, continues to be the fact that each state has different economies which require different taxing structures.  Also, each state has different political climates which can play a big part.  The other significant piece in this ongoing discussion is how state sovereignty plays into it.  All states actually have the right to impose their own taxing structures.  Why should states have the same tax laws? 

Well, the obvious answer is that businesses need uniformity and simplification to decrease the burden of compliance.  However, maybe the problem isn't that the laws are all different, its that the implementation and compliance is burdensome.  Meaning, it may be okay to have different laws as long as complying with those laws is simple. 

As a state tax consultant that seeks to provide businesses with leverage (knowledge, judgment and advocacy), I don't mind the lack of uniformity and lack of simplification.  What may produce a bad result in one state, could produce a good result in another.  Meaning, the lack of uniformity not only presents challenges, but also opportunities.

My fantasy is that the state and local tax world would continue to evolve (remain complex) and create more challenges and opportunities.  Maybe that wish is more reality than fantasy.

What do you think?  What do you want to see happen with state and local taxes across the country? 

Do you see the lack of uniformity as a burden or opportunity?  Is your glass half-full or half-empty?