Ga. Comp. R. & Regs. R. 560-7-3-.05 - Related Member Interest Expenses and Costs; and Intangible Expenses and Costs
(1)
Purpose. The purpose of this regulation is to provide guidance
with regard to the administration of O.C.G.A. §
48-7-28.3, which requires the
taxpayer to add back certain related member interest expenses and costs, and
intangible expenses and costs. For purposes of this regulation, such expenses
shall be referred to as related member costs.
(2)
General Guidelines. The
Department requires all direct and indirect related member costs to be added
back to income prior to claiming an exception to the addback adjustment. Any
person that paid, accrued, or incurred such related member costs must complete
Form IT-Addback.
(3)
Direct
and
Indirect Expenses. If an expense that is paid, accrued,
or incurred by one related member is related, directly or indirectly, to a
related member cost paid, accrued, or incurred, directly or indirectly, by or
for any other related member, it is an indirect related member cost and as such
is required to be added back as provided in O.C.G.A. §
48-7-28.3. For example:
(a) Corporations B and C are related members
with respect to Corporation A. Corporation A is a Georgia taxpayer that
purchases products from Corporation B. Corporation B licenses intangible
property from Corporation C and as such makes related member cost payments to
Corporation C. To the extent the related member costs which Corporation B pays
to Corporation C are directly or indirectly included in the costs of the
products or services Corporation A purchases from Corporation B, the direct
related member costs of Corporation B are considered to be indirect related
member costs of Corporation A. As such, for purposes of O.C.G.A. §
48-7-28.3, Corporation A is deemed
to indirectly pay related member costs to Corporation C that are subject to the
addback adjustment.
(b)
Corporations B and C are related members with respect to Corporation A.
Corporation A is a Georgia taxpayer that pays a management fee to Corporation
B. Corporation B licenses intangible property from Corporation C and as such
makes related member cost payments to Corporation C. To the extent the related
member costs which Corporation B pays to Corporation C are directly or
indirectly included in the costs of the management services Corporation A
purchases from Corporation B, the direct related member costs of Corporation B
are considered to be indirect related member costs of Corporation A. As such,
for purposes of O.C.G.A. §
48-7-28.3, Corporation A is deemed
to indirectly pay related member costs to Corporation C that are subject to the
addback adjustment.
(c) Corporation
B is a related member with respect to Corporation A. Corporation A acquires
intangible property from Corporation B, thus giving Corporation A a cost basis
in the intangible property. The related amortization amount that may be
permitted as a deduction pursuant to Internal Revenue Code §
197 would constitute a recovery of "costs
directly or indirectly for, related to, or in connection with the direct or
indirect acquisition [or]. ownership. of intangible property," as defined in
O.C.G.A. §
48-7-28.3(a)(4).
Such amortization expense would therefore be considered an indirect related
member cost of Corporation A subject to the addback adjustment.
(4)
Authority to Reverse
Adjustment. Subsection (c) of O.C.G.A. §
48-7-28.3 provides that the
Commissioner shall have the authority to reverse in whole or in part the
adjustments required by subsection (b) of O.C.G.A. §
48-7-28.3 when the taxpayer and
the Commissioner agree in writing to the application or use of an alternative
method of apportionment under subparagraph (d)(2)(C) of O.C.G.A. §
48-7-31(this subparagraph was
redesignated from (E) to (C) effective January 1, 2008), O.C.G.A. §
48-7-35, or O.C.G.A. §
48-7-31.1. Except with respect to
O.C.G.A. §
48-7-31.1, taxpayers that wish to
request such permission from the Commissioner shall file an application,
petition, or request with the Commissioner at least ninety (90) days prior to
the due date of the Georgia return (including extensions) or at least ninety
(90) days prior to the filing of the return, whichever occurs first, for the
tax year for which such application or use of an alternative method of
apportionment is requested. Failure to request permission by such time will
result in the filing of income tax returns subject to the regular apportionment
methods for the applicable tax year. Except with respect to O.C.G.A. §
48-7-31.1, the reversal of the
adjustment shall be applied:
(a) Only in
those cases where unusual fact patterns occur that are unique and which will
produce incongruous results based upon standard allocation and apportionment
provisions; and
(b) Only when the
taxpayer establishes by clear and convincing evidence that the taxpayer's
proposed allocation and apportionment method would more clearly reflect the
income attributable to the trade or business within Georgia.
(5)
Exception for Income
Allocated or Apportioned to and Taxed by Georgia or Another State. The
various factors of the exception for income allocated or apportioned to and
taxed by Georgia or another state are set forth below:
(a) Subsection (d) of O.C.G.A. §
48-7-28.3 provides that the
adjustment required by subsection (b) of O.C.G.A. §
48-7-28.3 shall be reduced, but
not below zero, to the extent the corresponding related member costs are
received as income in an arm's length transaction, as defined below in
subparagraph (5)(d)5.i., by the related member and the amount to be included in
the income base is allocated or apportioned, or both, to and taxed by Georgia
or another state that imposes a tax on or measured by the income of the related
member. For example:
1. A taxpayer doing
business in Georgia expenses $5,000,000 in related member costs. The related
member files a return in State A. The related member's apportionment ratio in
State A is 75%. Applying the apportionment ratio to the income of the related
member results in $3,750,000 of the related member's income being apportioned
to and taxed in State A. Subtracting the $3,750,000 from the $5,000,000 results
in the taxpayer making an addback adjustment for Georgia purposes of
$1,250,000.
2. A taxpayer doing
business in Georgia expenses $5,000,000 in related member costs. The related
member files a return in State B. The related member's apportionment ratio in
State B is 75%. However, the related member has expenses of $500,000 that
reduce the income to $4,500,000. The taxpayer is not required to subtract the
$500,000 expense from the $5,000,000 to determine the Georgia addback
adjustment. Applying the apportionment ratio to the income of $5,000,000
results in $3,750,000 of the related member's income being apportioned to and
taxed in State B. Subtracting the $3,750,000 from the $5,000,000 results in the
taxpayer making an addback adjustment for Georgia purposes of
$1,250,000.
3. A taxpayer doing
business in Georgia expenses $5,000,000 in related member costs. The related
member does not file returns in any state. However, the taxpayer is required by
State C to adjust their income for such related member costs. Assume this
results in the taxpayer decreasing their expense in State C by $2,500,000.
Since it is the taxpayer itself and not the related member that is being taxed
by State C, the addback adjustment for Georgia purposes is not reduced and is
equal to $5,000,000.
(b)
If the related member's net income is eliminated or reduced or its tax
liability is offset by a credit or similar adjustment that is dependent upon
the related member either maintaining or managing intangible property or
collecting interest income in that jurisdiction, such income shall not be
considered to be taxed to the extent of such reduction of income or to the
extent of the income corresponding to the reduction in tax liability. For
example:
1. A taxpayer doing business in
Georgia expenses $5,000,000 in related member costs. The related member files a
return in State D. The related member's apportionment ratio in State D is 75%.
However, the related member's income is reduced by State D because the related
member manages intangible property in State D and state D confers a credit or
similar adjustment upon corporations that own or manage intangible property in
that state. This credit or adjustment reduces the income of the related member
that is actually taxed by $2,000,000 to $3,000,000. Applying the apportionment
ratio (75%) to the reduced income of $3,000,000, results in $2,250,000 of the
related member's income being apportioned to and taxed in State D. Subtracting
the $2,250,000 from the $5,000,000 results in the taxpayer making an addback
adjustment for Georgia purposes of $2,750,000.
(c) To the extent a taxpayer is deemed to
indirectly pay related member costs as provided in paragraph (3), the taxpayer
shall be eligible for this exception only to the extent such related member
costs received by any other related member(s) meets the requirements of this
exception. For example: Assume the same facts as those in the example in
subparagraph (3)(a). The exception would only be available if the related
member costs deemed to be paid by Corporation A to Corporation C are received
as income in an arm's length transaction by Corporation C and such income is
allocated or apportioned, or both, to and taxed by Georgia or another state
that imposes a tax on or measured by the income of Corporation C.
(d) When a taxpayer seeks to claim the
exception provided by subsection (d) of O.C.G.A. §
48-7-28.3, the taxpayer must
attach a copy of Form IT-Addback and any applicable schedules to its tax return
and provide the following information on the Form IT-Addback (with all
supporting documentation to be made available upon request):
1. The name and federal identification number
of the related member(s);
2. The
name of each state and type of tax paid;
3. The amount of the related member
costs;
4. The amount of related
member costs subject to apportionment and/or allocation, the apportionment
ratio, and the amount of income apportioned after applying the ratio for each
state for such related member;
5. A
brief description of the arm's length status of the transactions between the
taxpayer and the related member. However, a more detailed description needs to
be made available upon request or upon audit. The following shall apply with
respect to such detailed description:
(i) The
taxpayer must establish and substantiate by a preponderance of evidence that
the amount of the cost or expense in question was substantially identical to
what would be expended in an arm's length transaction under substantially
similar circumstances. "Arm's length" is the amount of consideration that would
be paid or received in a transaction between unrelated persons, whereby neither
person is under any compulsion to enter into the transaction and each person
has reasonable knowledge of all relevant facts. This arm's length standard is
also met if the results of a transaction are consistent with the results
unrelated taxpayers would have had if they had engaged in the same transaction
under the same circumstances;
(ii)
For purposes of substantiating that the amount of such expense(s) was at arm's
length, a taxpayer who is relying upon an appraisal or a study must identify
and make available upon request such appraisal or study and provide the name of
the preparer thereof, and state the date on which such appraisal or study was
issued and the general conclusions thereof;
(iii) In general, the Commissioner will be
more likely to allow an exception when the two related members are not
controlled or managed on a day-to-day basis by the same person(s) and the same
person(s) did not occupy both sides of the bargaining table. This will be
particularly so when the two related members were previously independent
entities or, if not previously independent, function like independent entities
without interconnected activities or overlapping interests. The taxpayer must
note whether the taxpayer believes that the transaction was in fact negotiated
by related members who were dealing with each other on an arm's length basis.
At the same time, the Commissioner recognizes that in many controlled-group
contexts, related members will not in fact conduct arm's length negotiations.
If the terms of an agreement between related members are substantially the same
as those that unrelated parties would have entered into, the fact that the
overall organization of which the related members form a part is centrally
managed will not, by itself, preclude relief from the addback
provisions;
(iv) The taxpayer must
explain and clarify in detail how the related member obtained the intangibles
in question, such as whether the intangibles were either developed by the
related member that receives the payment or were purchased by the related
member in a bona fide arm's length sales transaction; and
(v) Where a taxpayer cannot show by a
preponderance of evidence that the amount of the deduction was at arm's length,
the Commissioner may adjust the cost or expense to reflect arm's length pricing
or, alternatively, may deny the taxpayer's exception claim in its entirety;
and
6. Such other
information as the Commissioner may prescribe.
(6)
Exception for Expenses Paid,
Accrued, or Incurred to a Related Member Domiciled in a Foreign Country.
The following provides for the exception for expenses paid, accrued, or
incurred to a related member domiciled in a foreign country:
(a) Subsection (e) of O.C.G.A. §
48-7-28.3 provides that the
adjustment required by subsection (b) of O.C.G.A. §
48-7-28.3 shall be reduced, but
not below zero, if and to the extent:
1. The
related member costs are paid, accrued, or incurred to a related member
domiciled in a foreign nation which has in force a comprehensive income tax
treaty with the United States;
2.
The transaction giving rise to the related member costs has a valid business
purpose; and
3. The amounts of such
related member costs were determined at arm's length rates.
(b) When a taxpayer seeks to claim
the exception provided by subsection (e) of O.C.G.A. §
48-7-28.3, the taxpayer must
provide the following information on the Form IT-Addback (with all supporting
documentation to be made available upon request or upon audit):
1. The name and federal identification number
of the related member;
2. The
amount of the related member costs;
3. The country of domicile of the related
member;
4. A description of the
comprehensive income tax treaty;
5.
A description of the business purpose of the transactions between the taxpayer
and the related member. The following shall apply with respect to such
description:
(i) The taxpayer's business
purpose or purposes for its transaction must be stated in specific terms and
not in the abstract. Also, the purpose or purposes stated should relate to the
particular transaction(s) for which the deduction is being claimed and not, for
example, to the formation of the related member entity that takes part in the
transaction. Further, the taxpayer's business purpose or purposes should be
related to business activity that is conducted by the taxpayer or business
activity that the taxpayer is planning to conduct;
(ii) The taxpayer must identify each of the
elements of the transaction(s) that it relies upon to support a finding that
the activity or transaction changes in a meaningful way, apart from the tax
effects, the economic position of the taxpayer. If the taxpayer entered into
the transaction on the advice of a tax advisor, or the terms of the engagement
with a tax advisor determined the fee paid directly or indirectly to the
advisor by reference to the actual or anticipated tax savings derived from the
transaction, the taxpayer must disclose such fact(s); and
(iii) A statement as to whether the payments
in either case were made pursuant to one or more written agreements and if so
must briefly describe each agreement. Further, the taxpayer must state how the
taxpayer actually used the intangible property in question;
6. A description of the arm's
length status of the transactions between the taxpayer and the related member.
The provisions listed in subparagraph (5)(d)5. shall apply with respect to such
description; and
7. Such other
information as the Commissioner may prescribe.
(c) For example: Corporation A, a foreign
corporation, domiciled in a jurisdiction that has entered into a comprehensive
income tax treaty with the United States of America, owns directly or
indirectly 100 percent of the outstanding shares of three U.S. domestic
subsidiaries (Corporation B, Corporation C, and Corporation D). Corporation B
and Corporation C utilize certain technology developed by Corporation A in
their daily operations of manufacturing products for resale. Corporation D was
formed to hold and does hold the U.S. rights to such technologies developed by
Corporation A. Corporation B and Corporation C pay a royalty to Corporation D
for the ability to use the technology developed by Corporation A in its daily
operations. Corporation D pays an annual royalty to Corporation A based on the
amount of royalties it receives from Corporation B and Corporation C. Amounts
paid to Corporation D by Corporation B and Corporation C would be eligible for
the exception provided they otherwise qualify. Also the amounts paid by
Corporation D to Corporation A would be eligible for the exception provided
they otherwise qualify.
(7)
Exception for Expenses to a Related
Member who Paid, Accrued, or Incurred Expenses to a Person who is not a Related
Member. The following provides for the exception for expenses to a
related member who paid, accrued, or incurred expenses to a person who is not a
related member:
(a) Subsection (f) of
O.C.G.A. §
48-7-28.3 provides that the
adjustment required by subsection (b) of O.C.G.A. §
48-7-28.3 does not apply to the
portion of related member costs that the taxpayer establishes by a
preponderance of the evidence that the related member during the same taxable
year directly or indirectly paid, accrued, or incurred to a person that is not
a related member and the transaction giving rise to the related member costs
has a valid business purpose.
(b)
When a taxpayer seeks to claim the exception provided by subsection (f) of
O.C.G.A. §
48-7-28.3, the taxpayer must
provide the following information on the Form IT-Addback (with all supporting
documentation to be made available upon request or upon audit):
1. The name and federal identification number
of the related member and the name of the unrelated party to whom the related
member paid the related member costs for the same intangible property licensed
to the taxpayer;
2. A description
of the business purpose of the transactions between the taxpayer and the
related member and between the related member and the unrelated party. The
following shall apply with respect to such description:
(i) The taxpayer's and related member's
business purpose or purposes for their transactions must be stated in specific
terms and not in the abstract. Also, the purpose or purposes stated should
relate to the particular transactions for which the deduction is being claimed
and not, for example, to the formation of the related member entity that takes
part in the transaction. Further, the taxpayer's and related member's business
purpose or purposes should be related to business activity that is conducted by
the taxpayer and related member or business activity that the taxpayer and
related member are planning to conduct;
(ii) The taxpayer must identify each of the
elements of the transaction that it relies upon to support a finding that the
activity or transaction changes in a meaningful way, apart from the tax
effects, the economic position of the taxpayer and related member. If the
taxpayer and related member entered into the transaction on the advice of a tax
advisor, or the terms of the engagement with a tax advisor determined the fee
paid directly or indirectly to the advisor by reference to the actual or
anticipated tax savings derived from the transaction, the taxpayer must
disclose such fact(s); and
(iii) A
statement as to whether the payments were made pursuant to one or more written
agreements and if so a brief description of each agreement. Further, the
taxpayer and related member must state how the taxpayer and related member
actually used the intangible property in question;
3. The amount of related member costs paid by
the taxpayer to the related member and the related member costs paid by the
related member to the unrelated party. If the two sets of payments are not
identical in kind or amount or in any other respect the taxpayer must explain
the basis for the discrepancy; and
4. Such other information as the Commissioner
may prescribe.
Notes
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