Today, the Multistate Tax Commission’s Transfer Pricing Committee voted to adopt an Information Exchange Agreement, which permits states to share taxpayer information with other states participating in the transfer pricing program. The Committee has an October meeting scheduled, at which it intends to discuss specific taxpayers and their transfer pricing regimes.

New Name, Same Goal The MTC has adopted a new moniker for its transfer pricing initiative. Originally coined the ALAS (Arm’s Length Adjustment Service) Committee, the initiative is now officially known as SITAS (State Intercompany Transaction Advisory Service) Committee (the “Committee”). Discussions to change the name of the group developed over the past few months as an effort to increase state participation in the Committee. With its new acronym, the Committee is continuing to develop its transfer pricing project in an effort to combat allegedly distortive intercompany pricing practices by multistate taxpayers (see Reed Smith’s prior coverage).

Current State Participation A recurring issue for the MTC has been maintaining an adequate level of state participation. When the Project Design was finalized in May 2015, it was expected that 10 states would need to participate to launch the program. Fifteen months later, only five states have agreed to participate: Alabama, Iowa, New Jersey, North Carolina, and Pennsylvania. Nevertheless, the Committee is working to launch the program with the current five participants, with the hope that a successful first year will attract additional states.

Information Exchange Agreement A critical component of the transfer pricing program—and the subject of today’s call—is the Participation Commitment and Exchange of Information Agreement (the “Agreement”). The Committee voted to accept the Agreement unanimously. The Committee has worked on a draft of the Agreement over the past few months, and has now published an updated draft. The Agreement permits states to exchange tax returns, audit reports, nexus questionnaires, and other related workpapers. In addition to this information, Article IV, Section 1 of the agreement permits states to share “proprietary taxpayer information,” including “information on intercompany pricing decisions, intellectual property values and profits, comparable industry profits, risk factors, capital costs, employee compensation, division and subsidiary profits, salaries and benefits” and other sensitive information. With the unanimous adoption of the Agreement, all of this information can be exchanged among participating states. The only specific exclusion of shareable information is information received directly from the IRS pursuant to Section 6103(d) of the Internal Revenue Code.

What’s Next The goal of the Committee is to have each participating state execute the Agreement before its meeting October 5–6, 2016, in Indianapolis, Indiana. Once the Agreement has been executed by the participating states, they will be able to use the October meeting to freely discuss and identify taxpayers with potentially distortive intercompany pricing arrangements. Although the Committee has yet to garner the participation it hoped, the current participants are now moving closer than ever to making audit adjustments that would challenge allegedly distortive intercompany transfer pricing arrangements. New Jersey, Alabama, and North Carolina affirmatively stated that they intended to execute the Agreement prior to the October meeting. Pennsylvania and Iowa are still in the process of reviewing the Agreement, but expect to execute it prior to the October meeting. Taxpayers engaged in intercompany transactions with domestic affiliates should seriously consider whether the pricing for those arrangements reflects current market conditions and is adequately documented to minimize exposure moving forward.