D.C. transfer pricing analysis invalidated

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A District of Columbia Administrative Law Judge ("ALJ") in Microsoft Corp. v. Office of Tax and Revenue found a "fatal error" in a contract auditor's "comparable profits" transfer pricing audit methodology that included all of the taxpayer's income rather than narrowing its analysis to only controlled transactions among affiliated entities. 

By failing to separate Microsoft's controlled transactions (those between affiliates) from its uncontrolled transactions (those made at arm's length with third parties), the ALJ found the transfer pricing analysis "arbitrary, capricious, and unreasonable." Additionally, the ALJ found fault in the analysis because it failed to separately measure similar types of transactions.



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