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Multistate Tax Alert: Proposed Changes to California's Regulation on Intercompany Transactions


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The Franchise Tax Board (“FTB”) has issued a notice that a public hearing has been scheduled on July 25, 2013, to receive comments on proposed amendments to California Code of Regulations (“CCR”), title 18, section 25106.5-1 (hereinafter the “Intercompany Regulation”).1

According to the FTB, the proposed amendments are necessary to update the Intercompany Regulation’s conformity date to Treasury Regulation § 1.1502-13, reflect additional guidance with respect to the treatment of deferred intercompany stock accounts (“DISAs”) and to provide further guidance regarding the proper apportionment treatment of intercompany transactions that are reported utilizing the simplifying rules of CCR 25106.5-1(e).2 Also, according to the FTB, the proposed amendments to the Intercompany Regulation would be retroactive in application.3

If the FTB does not receive any comments at this public hearing or written comments before the 5pm deadline on July 25, 2013 that it believes support the need for additional amendments to this regulation, it will forward the regulation package as currently amended to the Office of Administrative Law (“OAL”). Assuming this scenario, the OAL could approve the proposed amendments in their current form in August 2013 and the amended regulation could become effective on October 1, 2013, and be retroactive in application.4

This tax alert summarizes key provisions of the Proposed Amendments to the Intercompany Regulation.

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1 Notice of Hearing. (https://www.ftb.ca.gov/law/hearings/NOH_07252013_25106_5_1.pdf).
2 Initial Statement of Reasons for the Amendment of California Code of Regulations, Title 18, Section 25106.5-1. (https://www.ftb.ca.gov/law/hearings/ISR_07252013_25106_5_1.pdf).
3 See Notice of Hearing at pg. 1.
4 Effective January 1, 2013, regulations required to be filed with the California Secretary of State become effective on a quarterly basis such that a regulation filed between June 1 and August 31 would become effective on October 1. Cal. Gov’t Code § 11343.4 (2013). Nevertheless, if the underlying regulation relates to a statute that was enacted prior to January 1, 1998, the FTB’s position is that it may, at its discretion, prescribe that a regulation applies retroactively. See Cal. Gov’t Code § 11343.4(b)(1) and Cal. Rev. & Tax. Code § 19503. The FTB has stated in the Notice of Public Hearing for the July 25, 2013, meeting (available at https://www.ftb.ca.gov/law/hearings/NOH_07252013_25106_5_1.pdf) that the amendments to CCR 25106.5-1 will be retroactive in application. The amendments would therefore apply

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