State tax authorities have the ability to increase the tax base of your state affiliates if they can assert that your intercompany pricing is inconsistent with the arm’s length principle. Under section 482 in the Internal Revenue Code, state action may take the form of transfer pricing adjustments, the adding back of related party expenses, disguised transfer pricing adjustments, or even forced combined reporting.
States often rely on outside economists to make their case for the non-arm’s length nature of your intercompany pricing and have recently turned to Chainbridge Software LLC to make their case. Chainbridge has made transfer pricing news based on its application of the Comparable Profits Method (CPM). While a summary judgment in Microsoft Corp. v. District of Columbia Office of Tax and Rev. provided for a win for Microsoft Corporation, the tax authority lost in this particular case because Chainbridge did not properly segment the financials of the legal entity to focus on the actual transfer pricing issue. Join us for a ONESOURCE Transfer Pricing webcast on October 23 and October 24 where we will examine the Microsoft Corporation, Inc. v. Office of Tax and Revenue case and the implications it may have on your state transfer pricing.