Drilling into the Details: Oil and Gas Giant ConocoPhillips Faces Transfer Pricing Compliance Lawsuit

Oil and gas giant ConocoPhillips Company (“ConocoPhillips”) is in the headlights of the Louisiana Department of Revenue. On November 7, 2023, the 19th Judicial District Court for the Parish of East Baton Rouge filed a complaint with the Louisiana Department of Revenue seeking to collect taxes and related interests and penalties allegedly owed by ConocoPhillips between 2008 and 2011. The complaint states that ConocoPhillips engaged with its affiliated entities to provide/procure a variety of services, namely sales, engineering, information technology (“IT”), and cash management services. The complaint alleges that ConocoPhillips significantly understated its Louisiana taxable income and considers ConocoPhillips liable for an additional $500 million of tax and penalties plus interest.¹ These charges come after Louisiana suffered a 35% year over year (“YOY”) decrease in corporate income taxes in Q1 2023 relative to Q1 2022.²

As of November 21, ConocoPhillips filed a brief challenging the Louisiana Department of Revenue’s lawsuit stating that the revenue department’s selected transfer pricing methodology in evaluating its related party transactions is not consistent with the IRC Section 482’s “best method” rule.³ Additionally, ConocoPhillips disagrees with the underlying calculations of the revenue department concerning the allocation of income across affiliates. This is an ongoing case with potentially reverberating effects in other reporting states.

In recent years, States have increased scrutiny of transfer pricing compliance to expand tax revenues as inflation erodes the purchasing power of tax dollars.⁴ States are beginning to file interstate transfer pricing compliance charges, ensuring that transfer pricing is not being used for tax avoidance purposes. States are introducing measures to ease the administrative burden that transfer pricing controversy imposes and expedite compliance in line with international transfer pricing rules. Indiana, in particular, is the first state to allow advanced pricing agreements citing tax certainty and opportunity costs as benefits for Indiana taxpayers.⁵

Navigating this complex web of regulations poses significant challenges for multistate enterprises (“MSEs”). Each state has specific guidelines, documentation requirements, and enforcement mechanisms. MSEs must carefully assess the applicability of regulations in each state, considering factors such as sales volume, intercompany transactions, and the presence of economic substance.

Marcum’s Transfer Pricing team can assist in all transfer pricing consulting and compliance matters. Contact your Marcum representative today if you have any questions about your transfer pricing strategy.

Sources

1. https://aboutblaw.com/bbmv, accessed December 4, 2023
2. State and Local Finance Initiative, Research Report: State Tax Revenues Declined in the First Quarter of 2023. August 2023. Accessed December 4, 2023
3. ConocoPhillips filed brief, https://aboutblaw.com/bbD9
4. https://data.bls.gov/timeseries/CUSR0000SA0&output_view=pct_1mth, accessed December 4, 2023
5. https://www.in.gov/dor/files/advanced-pricing-agreement-program.pdf, accessed December 4, 2023