INSIGHT: North Carolina Announces Transfer Pricing Resolution Initiative for Corporate Taxpayers

The North Carolina Department of Revenue recently announced a transfer pricing resolution initiative for corporate taxpayers to resolve complex disputes concerning their North Carolina tax liability. According to the department, the purpose of the program is to “fairly and consistently expedite the resolution” of transfer pricing issues and “provide certainty and uniformity to taxpayers.” The program also aims to “reduce time in disputes.”

North Carolina is a “separate entity” state, meaning corporations are not permitted to file consolidated or combined returns. Instead, each corporate entity must file a return reporting its net income computed separately. As a result, North Carolina has had a long history with adjusting intercompany transactions among related companies. Historically, the Department of Revenue required “forced combinations” to remedy perceived abuses of North Carolina’s tax system.

But as a result of legislative enactments, the first remedy is now to adjust intercompany transactions under the federal transfer pricing rules. The department has statutory authority to adjust a corporation’s separate return if the department determines that intercompany transactions “lack economic substance” or are “not at fair market value.” Regarding fair market value, the department has specifically adopted by published rule the federal transfer pricing regulations and related case law. The North Carolina General Assembly has deliberately eschewed the federal definition of “economic substance,” however, and instead adopted its own statutory definition.

The program begins Aug. 1, 2020, and runs through Dec. 1, 2020. It is open to any corporation with intercompany transactions for years still in statute and specifically includes companies currently under audit or administrative review. There are various deadlines the corporation must comply with in order to participate in the program.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Author Information

Kay Miller Hobart, attorney at law firm Parker Poe has more than 25 years of experience in state tax controversy matters and tax litigation at all levels of state and federal court. As the former lead tax counsel for the State of North Carolina, she has litigated numerous high profile, complex multimillion-dollar cases before the North Carolina Business Court, Court of Appeals and Supreme Court.