From time to time, we'll be using this space to discuss
recurring Massachusetts state tax issues were seeing at audit and
on appeal. In the first in this series, we'll focus on transfer
pricing adjustments.
Over the past few years, the Department's auditors have
aggressively attacked intercompany payments between affiliated
entities—especially for tax years prior to mandatory combined
reporting.
In our experience, auditors are typically applying these
adjustments in two ways. First, the auditor asserts that the
intercompany pricing is not at arm's length (referred to in the
statute as "fair value"); and either increases an
intercompany receipt item or decreases an intercompany expense item
based on the auditor's own determination of an arm's length
price under M.G.L. ch. 63, § 39A. Second, in
situation where the auditor is applying a downward adjustment to an
expense item, the auditor often recharacterizes the balance of the
intercompany payment as an "embedded
