United States

Louisiana: Proposed Regulations Released on Market-Based Sourcing and Related Party Expense Disallowance Rules

Oct 24, 2016
From KPMG TaxWatch

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Recently, the Louisiana Department of Revenue released proposed regulations addressing certain corporate tax changes enacted earlier this year. During the first special legislative session of 2016, Louisiana lawmakers adopted related party expense disallowance rules effective for tax years beginning on or after January 1, 2016. Under the rules, a corporation is  required to add back otherwise deductible interest expenses and costs, intangible expenses and costs, and management fees directly or indirectly paid, accrued, incurred, or in connection with one or more direct or indirect transactions, with one or more related members. The proposed regulation defines key terms that were not defined in the law, such as “management fees,” “intangible expenses,” and “indirectly paid.” Much of the proposed regulation provides guidance, including examples, on when the statutory exceptions to the addback requirements will be allowed and how they must be documented. Interestingly, the proposed regulation includes an “unreasonable” exception, which was not specified in the statute.

Another proposed regulation addresses sourcing sales other than sales of tangible personal property. Recall, during the second special session, Louisiana lawmakers adopted single-factor apportionment and market-based sourcing. Effective for tax years beginning on or after January 1, 2016, sales other than sales of tangible personal property will be sourced to Louisiana if the taxpayer's market for the sale is in the state. The proposed regulation sets forth rules for determining to what extent a taxpayer’s market for a sale is in Louisiana, rules for reasonably approximating the market state if the state of assignment cannot be determined under the regular rules, and guidance on the when receipts are excluded from the sales factor entirely. The proposed rule provides that taxpayers must retain records explaining how their receipts are assigned and must provide those records to the Department of Revenue upon request. Also, similar to other states, to the extent there is a sale to which a hierarchical rule applies, a taxpayer must make a reasonable effort to apply the primary rule applicable to the sale before moving on to the next rule in the hierarchy. A public hearing on both proposed rules will be held on November 30, 2016. Please stay tuned to TWIST for future updates on these proposed regulations.

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The following information is not intended to be "written advice concerning one or more federal tax matters" subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230.

The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.