How did revised NJ TAM 2011-22(R) address pre-July 31, 2023 intangible-expense payments to foreign affiliates?

Plain-English summary

This revised TAM described New Jersey's treatment of intangible-expense payments to foreign affiliates for privilege periods ending before July 31, 2023, and warned that unsupported or non-arm's-length deductions could be disallowed in full.

The revision says N.J.S.A. 54:10A-4(k)(2)(I) and 54:10A-4.4 were repealed for privilege periods ending on or after July 31, 2023. The TAM's sections tied to those provisions therefore apply only to earlier periods.

Add-back and exceptions

For the covered periods, corporate taxpayers generally had to add back intangible expenses paid to related members or entities. The TAM noted statutory and regulatory exceptions, including an exception involving a related member in a foreign nation with a comprehensive U.S. income-tax treaty.

Arm's-length review

The Division could examine royalties and other intangible payments from a domestic affiliate to a foreign affiliate or parent. It could apply I.R.C. § 482-style arm's-length principles and New Jersey's fair-and-reasonable-tax rules to decide whether the deduction reflected true income and economic reality.

Acceptable supporting material could include:

• an overview of the business and organizational structure;
• the selected transfer-pricing method and why it was appropriate;
• the supporting economic analysis;
• I.R.C. § 6662 documentation;
• a third-party transfer-pricing study; or
• an IRS-approved advance pricing agreement.

An IRS APA could satisfy the documentation requirement but remained reviewable by the Division.

Adjustment and documentation consequences

The Director could adjust the domestic taxpayer's entire net income, including disallowing up to 100% of the royalty or intangible-expense deduction, when the reported amount did not reflect true income or expenses.

If the taxpayer failed to provide requested documentation, the Director could likewise disallow up to 100%. The TAM gave the taxpayer 90 days from the request to supply support, with extensions possible for good cause or agreement.

What this means for you

Taxpayers reviewing pre-July 31, 2023 periods

Confirm that the historical add-back rule, any claimed exception, and the transfer-pricing support all match the period under review.

Multinational groups

Keep New Jersey-ready documentation even when an IRS APA exists. The TAM allowed the Division to review the payments and underlying assumptions independently.

Current-period compliance

Do not apply this historical TAM mechanically to periods ending on or after July 31, 2023. The document itself says the cited add-back provisions were repealed for those periods.

Common questions

Q: Does this TAM govern the cited add-back provisions for periods ending after July 30, 2023?
A: No. It says those sections apply only to privilege periods ending before July 31, 2023.

Q: Could an IRS APA satisfy the documentation request?
A: Yes, but the Division could still review it.

Q: Could the Division disallow the entire deduction?
A: Yes. The TAM describes potential disallowance of up to 100%.

Q: How long did the taxpayer have to provide requested documentation?
A: Ninety days, subject to extension for good cause or agreement.

Q: Was a foreign treaty-country payment automatically deductible?
A: The TAM identified a treaty-related exception among several exceptions, but the taxpayer still had to establish that the applicable requirements were met.

Citations and references

• N.J.S.A. 54:10A-4(k)(2)(I) and 54:10A-4.4 — provisions the TAM says were repealed for periods ending on or after July 31, 2023
• N.J.S.A. 54:10A-4(k)(3), 54:10A-8, and 54:10A-10 — adjustment authorities described in the TAM
• N.J.A.C. 18:7-5.10 — arm's-length analysis and documentation
• N.J.A.C. 18:7-5.18 — add-back exceptions
• I.R.C. §§ 482 and 6662 — transfer pricing and documentation standards
• I.R.C. §§ 318 and 1563 — ownership and related-member definitions discussed in the TAM

Source

• Landing page: https://www.nj.gov/treasury/taxation/tam-pubs.shtml
• Original PDF: https://www.nj.gov/treasury/taxation/pdf/pubs/tams/tam22.pdf

Original ruling text

International Affiliate Transactions Involving Intangibles and Intellectual Property
for Privilege Periods Ending Before July 31, 2023
TAM 2011-22(R) – Revised July 25, 2023
Tax: Corporation Business Tax
This technical advisory memorandum (TAM) concerns transactions between affiliate corporations involving
charges and claimed deductions for intangible expenses and costs in which the recipient or payee affiliate
is not a U.S. income taxpayer. Nothing herein shall constitute or be construed as a waiver of, or limitation
upon, the Director's authority under N.J.S.A. 54:10A-8, N.J.S.A. 54:10A-10 or any other provision of the laws
of the State of New Jersey. For privilege periods ending on and after July 31, 2023, N.J.S.A. 54:10A-4(k)(2)(I)
and N.J.S.A. 54:10A-4.4 have been repealed. Thus, the sections of this TAM related to those provisions are
only applicable for privilege periods ending before July 31, 2023.
DEFINITIONS: FOR PURPOSES OF THIS TAM
“Affiliate” means a person who directly or indirectly owns or controls, is owned or controlled by, or is
under common ownership or control with, another person. Solely for purposes of this definition, the
term “owns,” “is owned” and “ownership” mean ownership of an equity interest, or the equivalent
thereof, and the term “person” means an individual, partnership, committee, association, corporation or
any other organization or group of persons.
“Domestic affiliate” means a company or business entity that is: located in New Jersey or subject to New
Jersey’s tax laws; incorporated or organized under the laws of any state or commonwealth of the United
States; and an “affiliate” of a “foreign parent company” or “foreign affiliate” as provided in these
definitions.
“Domestic taxpayer” means “Domestic affiliate.”
“Foreign affiliate” means a company or business entity that is:
• Located outside of the United States;
• Organized or incorporated under the laws of a foreign nation;
• Meets the definition of “affiliate” provided in these definitions; and
• Not a United States income taxpayer.
This definition also includes parent, subsidiary or brother-sister stock ownership and control
relationships.
“Foreign parent company” means a “foreign affiliate” that is the parent company of a “domestic
affiliate,” in terms of stock ownership and control.
“Related entity,” pursuant to N.J.S.A. 54:10A-4.4(a), means:
• A stockholder who is an individual, or a member of the stockholder's family enumerated in
section 318 of the federal Internal Revenue Code of 1986, 26 U.S.C. §318, if the stockholder and
the members of the stockholder's family own, directly, indirectly, beneficially or constructively, in
the aggregate, at least 50% of the value of the taxpayer's outstanding stock; or
• A stockholder, or a stockholder's partnership, limited liability company, estate, trust or
corporation, if the stockholder and the stockholder's partnerships, limited liability companies,
estates, trusts and corporations own directly, indirectly, beneficially or constructively, in the
aggregate, at least 50% of the value of the taxpayer's outstanding stock; or
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• A corporation, or a party related to the corporation in a manner that would require an attribution
of stock from the corporation to the party or from the party to the corporation under the
attribution rules of the federal Internal Revenue Code of 1986, 26 U.S.C. §318, if the taxpayer
owns, directly, indirectly, beneficially or constructively, at least 50% of the value of the
corporation's outstanding stock. The attribution rules of the federal Internal Revenue Code of
1986, 26 U.S.C. §318, shall apply for purposes of determining whether the ownership
requirements of this definition have been met.
“Related member,” pursuant to N.J.S.A. 54:10A-4.4 (a), means a person that, with respect to the taxpayer
during all or any portion of the privilege period, is:
• A related entity; or
• A component member as defined in subsection (b) of section 1563 of the federal Internal
Revenue Code of 1986, 26 U.S.C. §1563; or
• A person to or from whom there is attribution of stock ownership in accordance with subsection
(e) of section 1563 of the federal Internal Revenue Code of 1986, 26 U.S.C. §1563; or
• A person that, notwithstanding its form of organization, bears the same relationship to the
taxpayer as a person described in any of the above definitions.
ADD-BACK RULE AND RELEVANT EXCEPTION(S)
Pursuant to N.J.S.A. 54:10A-4.4, in computing entire net income for the Corporation Business Tax (CBT),
corporate taxpayers are required to add back intangible expenses paid to related members or entities.
However, N.J.S.A. 54:10A-4.4 provides several exceptions to this add-back requirement including
intangible expenses paid to a related member in a foreign nation that has in force a comprehensive
income tax treaty with the United States. Further exceptions to the add-back requirement may be found
in N.J.A.C. 18:7-5.18 and also are addressed in TAM-13.
ARM’S LENGTH PRICING IN RELEVANT CONTEXT
In circumstances in which a domestic affiliate pays royalties or expenses to a foreign affiliate or foreign
parent company for the use of intangibles in New Jersey, the Division of Taxation intends to use existing
authority afforded in N.J.S.A. 54:10A-4(k)(3)1, N.J.S.A. 54:10A-82, N.J.S.A. 54: 10A-103, and N.J.A.C. 18:75.104 to examine transactions between these affiliated companies or taxpayers to ensure that the
domestic taxpayer “doing business” or “exercising its corporate franchise”5 in New Jersey reports the
appropriate amount of expenses and deductions arising from these transactions.

1.

Provides the authority to determine the period or year in which any item of income or deduction should be included in calculating a corporation’s entire
net income under the CBT.

2. Provides the authority to adjust the allocation factor used in calculating a taxpayer’s CBT liabilities if it appears that the allocation factor employed by the

taxpayer does not accurately “reflect the activity, business, receipts, capital, entire net worth or entire net income” of the taxpayer “reasonably attributable
to the State.”

3. Provides the authority to adjust items of income, expenses, allocation factors, and tax returns or reports to accurately reflect “a fair and reasonable

determination of the amount of tax payable” in accordance with CBT laws and regulations. The section also affords the Director the ability to examine
payments and compensation between affiliates (as defined in this TAM) and members of an affiliated group or a controlled group pursuant to section
1504 or 1563 of the IRC, in addition to compelling these entities to file a consolidated return.

4. Provides further explanations and guidance relating to the authority described in N.J.S.A. 54:10A-10.
5. These terms are included in the state’s CBT nexus standard as found in N.J.S.A. 54:10A-2 and N.J.A.C. 18:7-1.8. “Doing business” in the state is further

defined in N.J.A.C. 18:7-1.9

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This analysis is similar to that with respect to arm’s length pricing requirements provided in the Internal
Revenue Code (IRC) §482 and also is consistent with N.J.A.C. 18:7-5.10. Subsequently, the Director may
make appropriate adjustments to the domestic taxpayer’s entire net income that reflect true income
earned and expenses incurred in the State to reach “a fair and reasonable determination” of tax
liabilities. A “fair and reasonable tax” is defined as one “that would have been payable by a taxpayer
reporting the same transaction(s) on a separate entity basis where the parties to the transaction(s) had
independent economic interests.” N.J.A.C. 18:7-5.10(a)(3).
DOCUMENTATION
To determine whether the domestic affiliate’s intangible expense deductions meet the arm’s length
standards of IRC §482 and N.J.A.C. 18:7-5.10, the Division may request certain documentation from the
domestic taxpayer pursuant to N.J.A.C. 18:7-5.10(g). This may include the following: an overview of the
domestic taxpayer’s business; description of its organizational structure; identification of the transfer
pricing methodology selected and why such methodology was determined to be the most appropriate
for transfer pricing purposes; and an explanation of the economic analysis relied upon in making the
determination. Documentation satisfying the requirements of Internal Revenue Code §6662, a third
party transfer pricing study, or an advanced pricing agreement (APA) approved by the Internal Revenue
Service will be deemed to satisfy the documentation requirements associated with this analysis.
However, pursuant to N.J.A.C. 18:7-5.10 and TAM-2012-1 approved APAs may be reviewed by the
Division to examine the payments made between the domestic affiliate and foreign affiliate under arm’s
length standards referenced earlier in this TAM.
DIRECTOR’S AUTHORITY
Under authority provided in N.J.S.A. 54:10A-10, the Director may use the requested information to
adjust the intangible expense deductions of the domestic taxpayer relating to payments made to a
foreign affiliate or foreign parent company if a determination is made that the items as reported do not
accurately reflect true income or expenses, and the economic realities of the transaction(s) in question.
Once the Division has received the requested documentation from the domestic taxpayer, it may
undertake its own arm’s length analysis of the transactions at issue as provided in IRC § 482 and N.J.A.C.
18:7-5.10. If the Division determines that a subsequent adjustment must be made to reach “a fair and
reasonable determination” of tax liabilities in New Jersey pursuant to N.J.S.A. 54:10A-10, it shall do so
by making said adjustments to the entire net income of the domestic taxpayer, including potential
disallowance of up to 100 percent of the deduction arising from the payment of royalties to the foreign
affiliate or foreign parent company.
POTENTIAL DISALLOWANCE UPON FAILURE TO PROVIDE DOCUMENTATION
In the event that the domestic affiliate fails to provide the documentation referenced above to support its
intangible expense deductions relating to payments made to a foreign affiliate or foreign parent
company, the Director may, in determining the entire net income of the domestic taxpayer, choose to
disallow up to 100 percent of the deduction. In determining the entire net income of the domestic taxpayer that has failed to provide the requested documentation, the Division may contact and commence
an audit of the foreign affiliate or foreign parent company to arrive at a “fair and reasonable tax.”
The domestic taxpayer has 90 days from the time of request from the Division to provide documentation
to substantiate its intangible expense deduction, which can be extended for good cause or agreement
between the domestic taxpayer and the Division. The Division intends to codify the contents of this TAM
in a regulation, pursuant to the Administrative Procedure Act, N.J.S.A. 52:14B-1 et seq.
Note: A Technical Advisory Memorandum (“TAM”) is an informational statement of the law, regulations, or Division policies. It
is accurate on the date issued. Subsequent changes in the law or regulations, judicial decisions or changes in Division policies
could affect the validity of the information presented in a TAM.

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