Would New Jersey accept an IRS advance pricing agreement or third-party transfer-pricing study for Corporation Business Tax purposes?

Plain-English summary

New Jersey accepted IRS advance pricing agreements and third-party transfer-pricing studies as proper documentation, but did not treat them as immune from state review.

The TAM described New Jersey at that time as a separate-entity reporting state for Corporation Business Tax purposes. Related corporations generally reported their own income and deductions rather than filing one combined report, making arm's-length pricing important when intercompany transactions could distort New Jersey income.

N.J.S.A. 54:10A-10 and N.J.A.C. 18:7-5.10 authorized the Director to determine a fair and reasonable tax and adjust reported income even without tax evasion when the return did not reflect the taxpayer's true New Jersey earnings.

APAs and studies as documentation

The Division could request an IRS APA, supporting independent transfer-pricing studies, books, papers, and other information. Because its arm's-length analysis incorporated I.R.C. § 482 concepts, the Division would accept an IRS APA or third-party pricing study as proper documentation and evidence.

In most cases, if the taxpayer demonstrated compliance with I.R.C. § 482 standards, the Division said no above-line adjustment was likely. It generally expected to respect the APA's pricing methods, economic assumptions, analysis, and market valuations.

State review remained possible

The Director could still examine the agreement and challenge its assumptions or interpretations when the APA or study did not reflect the taxpayer's true New Jersey earnings. Acceptance as documentation therefore was not automatic acceptance of every state-tax consequence.

What this means for you

Multistate and multinational groups

An IRS APA was strong documentation under this TAM, but New Jersey-specific income and facts still mattered.

Tax departments

Retain the APA, supporting study, methodology selection, economic analysis, assumptions, and valuations in a form that can be supplied during a state examination.

Advisors

Do not equate federal acceptance with a binding state safe harbor. The TAM expressly preserved the Director's adjustment authority.

Common questions

Q: Would New Jersey accept an IRS APA as documentation?
A: Yes. The TAM called it proper documentation and evidence.

Q: Would the Division usually respect the APA?
A: Yes, in most circumstances when the taxpayer met I.R.C. § 482 standards.

Q: Could the Director still challenge it?
A: Yes, if its terms did not reflect true New Jersey earnings or a fair and reasonable tax.

Q: Did an adjustment require proof of tax evasion?
A: No. The TAM said the authority also applied when true earnings were not accurately reported.

Citations and references

• N.J.S.A. 54:10A-10 and 54:10A-10(c) — adjustment and filing authority
• N.J.A.C. 18:7-11.15(a) — consolidated-return limitations described in the TAM
• N.J.A.C. 18:7-5.10 — fair-and-reasonable-tax and arm's-length analysis
• I.R.C. § 482 — controlled-party allocations
• Revenue Procedure 2006-9, as modified by Revenue Procedure 2008-31 — APA procedures cited by the TAM
• N.J.S.A. 52:14B-1 et seq. — Administrative Procedure Act

Source

• Landing page: https://www.nj.gov/treasury/taxation/tam-pubs.shtml
• Original PDF: https://www.nj.gov/treasury/taxation/pdf/pubs/tams/tam2012-1.pdf

Original ruling text

Intercompany Transfer Pricing and Advanced Pricing Agreements
TAM 2012-1 – Issued February 16, 2012
Tax: Corporation Business Tax
This technical advisory memorandum (TAM) concerns the use of intercompany transfer pricing
and advanced pricing agreements in the context of intercompany and related party transactions.
INTERCOMPANY AND RELATED PARTY TRANSACTIONS IN CONTEXT
New Jersey is a separate-entity reporting state for Corporation Business Tax (CBT) purposes.
Consequently, corporations or business entities, even those that are related or affiliated, report
income and deductions on a separate-entity basis and not in a group or combined report.
Pursuant to N.J.A.C. 18:7-11.15(a), corporations are not permitted to file consolidated returns
except for those companies that hold a license pursuant to the Casino Control Act; operate as
air carriers; or are compelled to report income in a consolidated filing to reflect the “true
earnings of the taxpayer on its business carried on in this state” as provided in N.J.S.A. 54:10A10(c). At times, separate-entity reporting may not accurately reflect income earned within the
state’s borders in the context of intercompany and related party transactions when arm’s length
terms and rates are not utilized by the parties.
DIRECTOR’S AUTHORITY TO ENFORCE ARM’S LENGTH STANDARDS
To help ensure that CBT taxpayers accurately report income and deductions arising from
intercompany and related party transactions, N.J.S.A. 54:10A-10 grants the Director a number of
discretionary tools to examine and potentially adjust the entire net income of taxpayers. These
tools are available to the Director even when there is no tax evasion or avoidance at issue; but
rather, when the “true earnings of the taxpayer on its business carried on in this state” are not
accurately reported to the Division. The statute provides in pertinent part that the Director may
make “adjustments in any tax report or tax returns as may be necessary to make a fair and
reasonable determination of the amount of tax payable under this act.” N.J.S.A. 54:10A-10(a).
Based on this section, the Division adopted regulations in 1992 defining the term “fair and
reasonable tax” as “the tax 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. This analysis of determining a “fair and reasonable
tax” is similar to that with respect to arm’s length pricing requirements of the Internal Revenue
Code (IRC) section 482. The arm’s length analysis provided in N.J.A.C. 18:7-5.10 does indeed
incorporate certain standards of IRC 482, such as the “Comparable uncontrolled price method,”
the “Resale Price method,” and the “Cost plus method.” N.J.A.C. 18:7-5.10(a) 8. In addition, the
Division has outlined methods for calculating interest charges between related entities. N.J.A.C.
18:7-5.10(a) 5. Several examples are provided in the regulation.

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ADVANCE PRICING AGREEMENTS
Under IRC section 482, the Internal Revenue Service (IRS) has the authority to “distribute,
apportion, or allocate gross income, deductions, credits, or allowances” between businesses and
organizations that are “owned or controlled directly or indirectly by the same interests.” In order
to reduce administrative burdens and help provide some level of certainty to taxpayers, the IRS
has an advance pricing agreement program. This is a voluntary process whereby the IRS and
taxpayers may resolve transfer pricing issues under section 482 of the IRC in a cooperative
manner on a prospective basis. An “Advance Pricing Agreement” (APA) is defined in the IRS
“APA Study Guide” as “an agreement between the Service and a taxpayer on transfer pricing
methods to allocate income between related parties under Internal Revenue Code (IRC) section
482 and the associated regulations.” Revenue Procedure 2006-9 as modified by Revenue
Procedure 2008-31 sets forth the current procedures for negotiating and administering APAs.
ADVANCE PRICING AGREEMENTS ACCEPTED AS PROPER DOCUMENTATION
As part of an arm’s length analysis in determining a “fair and reasonable tax,” the Division has
the authority to request information and documentation supporting the reported transactions at
issue. As provided in the pertinent regulation:
The Director may require any person or corporation to submit whatever information
under oath or affirmation, or to permit whatever examination of its books, papers and
documents, as may be necessary to enable him or her to determine the existence, nature
or extent of an agreement, understanding or arrangement to which this section relates,
whether or not the person or corporation is subject to the tax imposed by the Act.
The information required by the Director may include an APA with the IRS or other competent
authority, and any transfer pricing studies performed by independent parties and used as a basis
for the APA. Since many IRC section 482 standards are incorporated into the Division’s arm’s
length analysis as provided in N.J.A.C. 18:7-5.10, the Division will accept an APA or third-party
pricing study between a taxpayer and the Internal Revenue Service as proper documentation
and evidence in the evaluation of intercompany transfer pricing and the determination of a “fair
and reasonable tax.”
APPLICATION OF ADVANCE PRICING AGREEMENTS IN AN ARM’S-LENGTH ANALYSIS
In most cases, when arriving at a “fair and reasonable tax,” the Division will use IRC 482
standards in auditing and adjusting items above line 28 of Schedule A of the CBT return. If a
taxpayer can demonstrate that it has met the standards of IRC 482, no adjustments are likely to
be made above Line 28 of Schedule A. Consequently, in most circumstances, APAs and their
content, including pricing methodologies, economic assumptions and analysis and market
valuations, will be respected by the Division. However, pursuant to N.J.S.A. 54:10A-10 and
N.J.A.C. 18:7-5.10, the Director has the authority to examine these agreements and challenge
their underlying assumptions and interpretations in determining a taxpayer’s entire net income
if the “true earnings of the taxpayer on its business carried on in this state” are not reflected by
the terms of the APA or advance pricing study at issue.
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.

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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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