The Louisiana Department of Revenue (“Department”) recently filed suit1 to collect unpaid income taxes from ConocoPhillips Company (“Conoco”) for years between 2008 and 2011, alleging distortion in income based on intercompany transactions.
Conoco, a Texas-based oil company, was audited by the Department in 2016, with emphasis on the company’s transfer pricing policy, which involved the valuation of assets between commonly controlled related businesses. Louisiana’s law mirrors Section 482 of the Internal Revenue Code, which states related-party transactions should be priced as if occurring between unrelated parties, under the “arm’s-length standard.”
Auditors reviewed related-party purchases and sales of oil, natural gas and other products, and pricing on engineering, information technology, and cash management services. The lawsuit alleges that Conoco’s conduct distorted its profitability, suggesting the company worked on a profit margin of between negative 4 and 1% for the years under audit, while Conoco’s global consolidated group reported a profit margin of between 5 and 11%. An industry average estimated a margin of 7% for the years at issue.
During the course of the audit, Conoco was accepted into Louisiana’s Transfer Pricing Managed Audit program, which offered an expedited resolution to qualified taxpayers resulting in no penalties or interest. A conflict subsequently emerged, with the Department claiming that Conoco was unresponsive to document requests regarding intercompany transactions. Conoco was ultimately dropped from the Managed Audit program and, therefore, subject to penalties and interest on the proposed understatement of income taxes issued by the Department. The Department determined that Conoco significantly understated its Louisiana taxable income for the audit period and that “an adjustment was necessary to prevent the evasion of taxes and/or to clearly reflect the income of ConocoPhillips.”
In addition to this $390 million tax bill before interest and penalties, the Department has agreed to postpone filing suit for an additional $81 million in taxes due for years between 2012 and 2015 until February 1, 2024. If the current suit is not resolved by that time, the Department may revise its suit to include the additional assessment.
The developments in the Conoco case highlight the importance of maintaining detailed records of intercompany relationships and background documents that clearly define the pricing policies used to establish the arm’s-length nature of all types of intercompany transactions. Ryan’s Transfer Pricing practice has a strong track record of facilitating successful resolutions of transfer pricing audits in the settings of both voluntary disclosure programs, such as the aforementioned Managed Audit program, and at all other levels of dispute resolution at the state and federal levels, and in numerous foreign jurisdictions.
Our transfer pricing practitioners support clients in developing robust and multifaceted audit defense strategies to help minimize the impact of potential understatement adjustments. Contact us today for assistance.
1 Richard v. ConocoPhillips Co., La. Dist. Ct., No. C-740344, complaint November 7, 2023.
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