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How Do Intercompany Changes Affect Taxation?
Typically, corporate tax departments get involved in analysing various structuring alternatives to suggest structures that, all other things being equal, result in the most efficient federal and state tax results.
Specifically, with respect to state taxes, intercompany changes can have a dramatic effect on the resulting overall state income tax. For example, intercompany transactions are recognised and have state income tax effects in separate filing states (ie, states that do not allow or require combined or consolidated reporting).
Even in combined or consolidated states, depending on the type of entity involved, intercompany changes and transactions can affect the group's tax liability. For example, captive insurance companies and real estate investment trusts may not be allowed to file together with the rest of the combined or consolidated group in certain states. Accordingly, transactions between these types of entities and the rest of the group may have profound state income tax effects in both separate filing and combined or consolidated filing states.
While the design and implementation of an intercompany structure are undoubtedly important, the post-implementation maintenance of the structure is equally, if not more, important. Even the most well-designed structures can result in unfavourable audit adjustments if the structure and resulting agreements are not followed. Unfortunately, it is more common for the maintenance of structures to receive less emphasis than the implementation of the structures (and even less emphasis as time passes). It is essential that any intercompany structure be periodically revisited to ensure that it will best withstand scrutiny from state taxing authorities.