6143-S.E AMH SANT PETE 123

ESSB 6143 - H AMD TO H AMD  (H-5614.2/10) 1562

By Representative Santos

NOT ADOPTED 3/08/2010

    On page 1, beginning on line 20, strike all of section 201 and section 202 and insert the following:

     "NEW SECTION.  Sec. 201.  A new section is added to chapter 82.32 RCW to read as follow:

     (1)  It is the intent of the legislature to require all taxpayers to pay their fair share of taxes.  To accomplish this purpose, it is the legislature’s intent to identify and prohibit transactions, plans, and arrangements that are designed to deceptively avoid taxes.

     (2)  The legislature directs the department to prepare a report that identifies transactions, plans, and arrangements that are primarily designed to deceptively avoid the payment of taxes.  These include a transaction, plan, or arrangement that:

     (a) Disguises income received, or otherwise avoids tax on income, from a person that is not affiliated with the taxpayer;

     (b)  Disguises the purchase or sale of property or services from or to a person that is not affiliated with the taxpayer;

     (c) Avoids the tax imposed by RCW 82.12.020 on the use of property in the state that is owned by an entity organized outside of the state;

     (d)  Is a sham transaction in fact or in substance;

is intended solely for tax avoidance purposes and lacks economic substance;

     (e)  Elevates form over substance;

     (f)  Is completed in multiple steps, rather than a single transaction, where the intent in using multiple steps is to avoid taxation; or

     (g)  Assigns or transfers a taxpayer’s earned income to another person where the intent is to avoid tax.

     (3)  Beginning December 1, 2010, and by December 1 of each subsequent year, the department must submit its report to the house of representatives finance committee and the senate ways and means committee, or their successors.  The department may include draft legislation to address the deceptive tax avoidance transactions, plan, or arrangements identified in the report.

     (4)  The definitions in this subsection apply to this section.

     (a) “Affiliated” means under common control;

     (b)  “Control” means the possession, directly or indirectly, of more than fifty percent of the power to direct or cause the direction of the management and policies of a person, whether through ownership or voting shares, by contract, or otherwise;

     (c) “Lacks economic substance” means having no purpose other than to obtain a tax benefit where a participant’s risk of profit or loss is insignificant when compared to the tax benefit; and

     (d) “Sham” means fictitious, deceptive, and fraudulent.

       (5)  The legislature specifies the following as transactions, plans, or arrangements that may be primarily designed to deceptively    avoid the payment of taxes:

       (a)  A joint venture arrangement between a contractor required     to register under RCW 18.27.020 and an owner or developer of a      construction project when the arrangement: (i) provides for    guaranteed payments to the contractor for construction services; and         (ii) does not entitle the contractor to share in substantial profits and bear significant risk from the project.

     (b) (i) A parent/subsidiary organizational structure or arrangement wherein the parent: (A) creates a subsidiary outside of Washington; (B) provides services to customers outside of Washington; (C) assigns out-of-state customer contracts to the out-of-state subsidiary; (D) requires out-of-state customers to pay for services to the out-of-state subsidiary; and (E) receives income that represents payment for these out-of-state customer contracts through a dividend or transfer from the out-of-state subsidiary.

     (ii)  A parent/subsidiary organizational structure or arrangement described in this subsection (5) (b) will not be considered primarily designed to deceptively avoid the payment of taxes if the services provided to the customers outside Washington are primarily performed by employees of the out-of-state subsidiary.

  (6)  The department may disregard any transaction, plan, or arrangement that is specified in subsection (5) of this section, except if:

(a)  The taxpayer initiated the transaction, plan, or arrangement before April 1, 2010; and (b) the taxpayer had reported its tax liability in conformance with: (i) specific written instructions provided by the department to the taxpayer; or (ii) a published determination or any other document published by the department.

  (7)(a)  For purposes of subsection (6) of this section, "specific written instructions" means tax reporting instructions provided to a taxpayer which specifically identify the taxpayer to whom the instructions apply.  Specific written instructions may be provided as part of an audit, tax assessment, determination, closing agreement, or in response to a binding ruling request.

  (b)  Subsection (6) of this section applies to tax periods beginning January 1, 2006, but does not apply to any tax periods ending before April 1, 2010, that were included in a completed field audit conducted by the department.

(c) Subsection (6) of this section must be construed narrowly to ensure that only transactions, plans, or arrangements where there is clear and convincing evidence of deceptive tax avoidance are subject to tax liability."

On page 23, at the beginning of line 1, after "(6)" strike all of the material through "department" on line 14 and insert the following:

      "If the department finds that all or any part of a deficiency resulted from engaging in a disregarded transaction, as described in section 201(2)(a), (b), (c), (d), (e), (f), and (g) of this act, the department must assess a penalty of thirty-five percent of the additional tax found to be due as a result of engaging in a transaction disregarded by the department under section 201(2)(a), (b), (c), (d), (e), (f), and (g)  of this act. The penalty provided in this subsection may be assessed together with any other applicable penalties provided in this section on the same tax found to be due, except for the evasion penalty provided in subsection (7) of this section. The department may not assess the penalty under this subsection if, before the department discovers the taxpayer's use of a transaction described under section 201(2)(a), (b), (c), (d), (e), (f), and (g)  of this act, the taxpayer discloses its participation in the transaction to the department"

On page 23, on line 23, after "impose" strike "both" and insert ((both))

On page 23, on line 24 after "penalty" strike "and" and insert "((and)),"

On page 23, on line 25 after "instructions" insert ","

On page 23, beginning on line 32 of the amendment, strike all of section 204 and insert the following:

  "Sec. 204.  A new section is added to chapter 82.32 RCW to read as follow: 

  (1) The legislature finds that this state's tax policy with respect to the taxation of transactions between affiliated entities and the income derived from such transactions (intercompany transactions) has motivated some taxpayers to engage in transactions designed solely or primarily to minimize the tax effects of intercompany transactions.  The legislature further finds that some intercompany transactions result from taxpayers that are required to establish affiliated entities to comply with regulatory mandates and that transactions between such affiliates effectively increases the tax burden in this state on the affiliated group of entities.

  (2)(a) The department of revenue is directed to conduct a review of the state's tax policy with respect to the taxation of intercompany transactions.  The review must:

  (i) Include the impacts of such transactions under the state's business and occupation tax and state and local sales and use taxes;

  (ii) Examine how this state's tax policy compares to the tax policy of other states with respect to the taxation of intercompany transactions; and

  (iii) Analyze potential alternatives to the current policy of taxing intercompany transactions, including their estimated revenue impacts if practicable.

  (b)  In conducting this review, the department must seek input from members of the business community and others as it deems appropriate.

     (c)  The department must report its findings to the fiscal committees of the house of representatives and senate by December 1, 2010. However, if the department has not completed its review by December 1, 2010, the department must provide the fiscal committees of the legislature with a brief status report by December 1, 2010, and the final report by December 1, 2011."

Renumber the remaining sections consecutively and correct the internal references accordingly

EFFECT:  Requires the Department of Revenue (DOR) to prepare a report each year that identifies transactions, plans and arrangements that are designed to deceptively avoid the payment of tax. Allows DOR to disregard transactions, plans and arrangements that are designed to avoid tax in two cases - joint ventures related to construction and parent/out-of-state subsidiaries. Provides safe harbor for transactions, plans and arrangements that initiated before April 1, 2010, or are in conformance with written instructions, published determinations, or other DOR documents.  Directs DOR to study the taxation of intercompany transactions.

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