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The Louisiana Department of Revenue (LDR) announced¹ a voluntary initiative allowing eligible corporate income taxpayers to resolve intercompany transfer pricing issues through the LDR's transfer pricing managed audit program (program). Benefits of participating in the program include wavier of penalties and interest and resolution of prior, current and up to four future periods.

The program begins on November 1, 2021. Taxpayers must submit to LDR requests to participate in the program by April 30, 2022. All managed audits under the program must be closed by June 30, 2022.

Program eligibility and scope

To be eligible to participate in the program, a taxpayer must have: (1) an established history of voluntary tax compliance with the LDR (if it previously registered with the LDR), (2) suitable records concerning intercompany transactions, and (3) a reasonable expectation that it can pay an expected liability. In addition, the taxpayer must certify that it has the time and resources available to participate in the program. An eligible taxpayer can appoint a representative, such as a tax advisory firm, to assist with the managed audit.

Once an agreement is reached, the periods available for resolution are the current tax period (i.e., the taxpayer's 2021 tax year), any open tax periods² under the statute of limitations and up to four future tax periods. The applicability to open and future tax periods depends on the taxpayer's facts, circumstances, ownership and intercompany transactions.

Newly incorporated and currently registered taxpayers may participate in the program. Taxpayers currently under audit may participate in the program, but only transfer pricing issues may be resolved under the program's managed audit process. Non-transfer pricing issues may be resolved through standard audit procedures.

Anonymous participation through a representative is not allowed under the program.

Program procedures

An eligible taxpayer (or its representative) seeking to participate in the program may notify the LDR via email at TPManagedAudit@la.gov. The email should include the following (or substantially similar) statement:

"I request consideration on behalf of [Taxpayer Legal Name and LDR Account Number, if previously registered with LDR] to participate in the Louisiana Transfer Pricing Managed Audit Program. I certify that [Taxpayer Legal Name] meets the eligibility requirements contained in LDR RIB 21-029 and, if approved, will engage in a managed audit under the supervision of LDR with respect to Intercompany Transactions."

The email also should include the contact information of the designated representative who will be primarily responsible for conducting the managed audit.

In deciding whether to approve or deny a request to participate in the program, the LDR will consider:

• The complexity of the taxpayer's business
• The taxpayer's reporting and payment history
• The taxpayer's accounting system and internal controls
• Time and resources available to the taxpayer to perform the audit
• Cost and benefit analysis of using LDR resources

Taxpayers accepted into the program will have 30 days from the receipt of a fully executed managed audit agreement to provide the following to the LDR's Field Audit Income Tax (FAIT) representative:

• Complete federal income tax returns for the last three years
• List of all intercompany transactions by type, amount and entity (including journal entries)
• Transfer pricing studies (including comparable methods used and any agreements with the IRS)
• Organization chart showing relationships between subsidiaries and parent entities
• Financial statements using GAAP for each party to an intercompany transaction
• Other invoices, checks, accounting records or other documents or information requested by the LDR to determine the correct amount of tax due

After the LDR's FAIT representative issues a written determination as to whether the LDR agrees or disagrees with the taxpayer's transfer pricing studies and methods used, the taxpayer will have 30 days to accept the determination or offer modifications or adjustments. The LDR may use external consultants in making its determination. The LDR will then have 30 days to review the taxpayer's comments.

When the managed audit process concludes, the LDR will collect the tax due. The LDR will not impose penalties on tax due related to the findings of the managed audit. Interest accruing during the managed audit period³ will be abated for up to 180 days.

Modified program procedures apply to taxpayers previously audited by the LDR where transfer pricing matters were at issue.

Implications

In light of the recent focus on transfer pricing by state taxing authorities, including the outsourcing of transfer pricing audits to third parties by several state taxing authorities, taxpayers should review their transfer pricing agreements to confirm they are current and if not, update accordingly. Regarding Louisiana's initiative, taxpayers should closely examine their individual facts to determine if this initiative applies and participation would ultimately be beneficial.

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ENDNOTES

¹ La. Dept. of Rev., Revenue Information Bulletin No. 21-029 (Oct. 26, 2021).

² Open tax periods include tax year 2020 and any periods subject to assessment by the LDR, including periods for which the taxpayer and LDR have entered into an agreement to suspend the statute of limitations.

³ The managed audit period is the date of the LDR's notice of acceptance into the program through the date of the LDR's notice of the correct amount of tax due.