After nearly a year of planning, the Multistate Tax Commission Executive Committee today approved the Arm’s-Length Adjustment Services Advisory Group (the Group) Final Program Design. The following six states have agreed to participate in the Program:  Alabama, Iowa, Kentucky, New Jersey, North Carolina and Pennsylvania.

Today’s discussion focused on some startling statements. The design itself claims that states lose collectively $20 billion in revenue by not adjusting transfer pricing. Another claim, citing a survey described during an accounting firm webinar, was that one-third of taxpayers never or rarely update state transfer pricing studies. Several attendees gasped at that claim.

The Group has identified summer 2015 as the target implementation date. The Program has three distinct phases:

  1. Pre-Launch Stage – January 2015 through June 2015
  2. Developmental Stage – July 2015 through June 2015
  3. Fully Operational Stage – July 2017 through June 2018
  • The Pre-Launch Stage began in January and is nearly complete. It was designed to garner support among states for the Program. 
  • The Developmental Stage will sequentially implement elements of the Program. During this stage, the Program intends to establish information exchange procedures, complete an initial round of economic analyses of transfer pricing studies, and begin to expand the MTC Joint Audit Program to incorporate transfer pricing issues. 
  • The Fully Operational Stage will run from July 2017 through June 2018. At this stage, the Group intends to fully implement all elements of the Program, including training, process improvement, case assistance, case resolution and litigation support.       

One hurdle that ALAS may need to overcome is the lack of interest by the states in joining the Program. The estimated cost of the Program per state is $200,000 annually, but this estimate is based on ten states participating. It is unclear how the annual charge to the states will change if interest remains below the ten-state threshold.