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2004 SPECIAL SESSION I

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(HB5018)

AMENDMENT(S) PROPOSED BY THE HOUSE

DEL. NIXON

    1. Line 27, substitute

      insert

        “Arms length rates and terms” means that (i) two or more related members enter into a written agreement for the transaction, (ii) such agreement is of a duration and contains rates and payment terms substantially similar to those which the related member would be able to obtain from an unrelated entity, and (iii) the borrower or payor substantially adheres to the payment terms of the agreement governing the transaction or any amendments thereto. There is a presumption that an interest rate is an arm’s length rate if it conforms to 482 and 1274 of the Internal Revenue Code.

DEL. NIXON

    2. Line 38, substitute

      insert

        "Economic substance," for purposes of subparagraph B(8)(a) of 58.1-402, means that a related member was formed for a valid business purpose, has substantial business operations, and bears the full expenses for a sufficient number of employees to adequately maintain, manage, defend or otherwise be responsible for the day-to-day operations or administration relating to its intangible property. The existence of valid economic substance shall be determined by the Commissioner based upon the totality of the facts and circumstances, taking into consideration the following criteria and any other criteria that may be published by the Department in regulations promulgated pursuant to the Administrative Process Act.

        1. The related member has substantial business operations, including active engagement in the management, maintenance, or defense of the related member's intangible property assets. Active engagement in such business operations includes the utilization of individuals experienced and engaged in such work, the maintenance of bank accounts and investments, leased or owned office space or other real property, and personal property. The related member must maintain books and records reflecting the substantial business operations.

        2. To the extent that any business functions (accounting, tax, legal, etc.) are outsourced by the related member to a third-party or another related member, the taxpayer directly bears all such expenses. To the extent any business activities are outsourced to another related member, the pricing of such services must be determined based on an independent valuation or transfer pricing study conducted by a qualified independent third party.

        3. The related member has established the rate of any license or similar fees charged for the use of its intangible property by other related members through a valuation or transfer pricing study conducted by a qualified independent third party and such valuation or transfer pricing study is periodically updated at appropriate intervals based on taxpayer's economic position, not exceeding four years. The Department may order appropriate reductions in the rate of license or other fees that will be permissible for the use of the related member's intangible property if the related member fails to maintain an appropriate and accurate study or if the Department establishes by reasonable evidence that the study incorrectly determines the value of the intangible property.

        4. The related member licenses intangible property to independent third parties, or engages in significant licensing transactions with affiliates outside the United States, or both, that pay license fees determined through a transfer pricing study conducted by a qualified independent third party. To the extent that the related member engages in comparable licensing transactions with unrelated members or with related members outside the United States, the rate of the license fees charged to a related member within the United States shall be equivalent to the rate charged to the unrelated member or the related member located outside the United States, as the case may be.

        5. The related member directly maintains an active program of pursuing potential infringements against its intangible property rights by related or unrelated members and bears the full expense of such infringement actions.

        6. The related member bears the full expense of intellectual property counsel or other specialists to assist in the negotiation of license agreements and the pursuit of actions in the event of infringements of its intangible property by related or unrelated members.

        7. The related member consistently adheres to a policy of utilizing or investing any revenues derived from its intangible property for the benefit of the stockholders of the related member, except as permitted in subdivisions 8 and 9 below, when the related member can demonstrate that a transfer of funds through a loan or dividend serves a specific and bona fide business purpose.

        8. Revenues of the related member directly or indirectly for, related to or in connection with the use, maintenance, or management of intangible property are not subsequently loaned back to the same related member who incurred the intangible expenses and costs or to other related members that incurred similar intangible expenses and costs from the related member, except where the related member can demonstrate by clear and convincing evidence that a loan to another related member serves a specific and bona fide business purpose such as financing investments in tangible, real, or intangible property, financing the expansion of the business operations, the provision of needed working capital, or the restructuring of the debt of or the push-down of acquisition-related indebtedness to the other related member.

        9. The related member does not issue a dividend to another related member that represents a distribution of revenue received by the related member from such other related member directly or indirectly for, related to or in connection with the use, maintenance, or management of intangible property in a transaction that would be subject to an addition to Virginia taxable income pursuant to subparagraph B(8)(a) of 58.1-402 or subject to such addition in the absence of the safe harbors established in that same subparagraph, except where the related member can demonstrate by clear and convincing evidence that the issuance of the dividend serves a specific and bona fide business purpose such as financing investments in tangible, real, or intangible property, financing the expansion of the business operations, the provision of needed working capital, or the restructuring of the debt of or the push-down of acquisition-related indebtedness to the other related member.

DEL. NIXON

    3. Line 69, substitute

      strike

        lines 69 and 70

DEL. NIXON

    4. Line 71, substitute

      strike

        3

      insert

        2

DEL. NIXON

    5. Line 72, substitute

      strike

        4

      insert

        3

DEL. NIXON

    6. Line 73, substitute

      strike

        5

      insert

        4

DEL. NIXON

    7. Line 74, substitute

      insert

        “Subject to a tax based on or measured by net income or capital” for purposes of subdivision B 8 a of 58.1-402 includes, but is not limited to, situations in which a related member is required to file on a separate basis or is included in a combined or consolidated return in the jurisdiction in which the principal office of the related member is located. As used in this paragraph, the term “tax based on or measured by net income or capital” shall be inclusive of taxes that are imposed as the primary methodology by which a state taxes business entities, such as the Michigan Single Business Tax, the Washington Business and Occupation Tax, taxes on insurance premiums imposed by Virginia and other states, and the Virginia Bank Franchise Tax.

DEL. NIXON

    8. Line 119, substitute

      insert

        “Valid business purpose” means one or more business purposes, which alone or in combination, constitutes the motivation for some business activity or transaction, which activity or transaction changes in a meaningful way, apart from tax effects, the economic position of the taxpayer.

DEL. NIXON

    9. Line 537, substitute, after costs

      insert

        or interest expenses and costs

DEL. NIXON

    10. Line 541, substitute, after costs

      insert

        or interest expenses and costs

DEL. NIXON

    11. Line 545, substitute, after The related member derives at least

      strike

        one-third

      insert

        20 percent

DEL. NIXON

    12. Line 546, substitute, after members

      insert

        or related members which utilize the intangible property outside the United States

DEL. NIXON

    13. Line 550, substitute

      strike

      insert

        (3) The related member during the same taxable year directly or indirectly paid, received, accrued or incurred such amount to or from a person or entity that is not a related member, and such transaction with the related member was done for a valid business purpose and the payments are made at arm’s length rates and terms;

        (4) The payments arise pursuant to a pre-existing contract entered into when the parties were not related members provided the payments continue to be made at arm’s length rates and terms;

        (5) The taxpayer demonstrates by clear and convincing evidence that the transaction giving rise to the intangible expenses and costs has a valid business purpose, possesses economic substance, and reflects arm's length rates and terms comparable to a similar arm's-length transaction between unrelated parties; or

        (6) The transaction giving rise to the interest payments between the corporation and a related member was at arm’s length rates and terms and meets any of the following:

        (a) The related member uses funds that are borrowed from a party other than a related member or that are paid, incurred or passed through to a person that is not a related member;

        (b) The debt is part of a regular and systematic funds management or portfolio investment activity conducted by the related member, whereby the funds of two or more related members are aggregated for the purpose of achieving economies of scale, the internal financing of the active business operations of members, or the benefit of centralized management of funds;

        (c) The funds are used for a bona fide business purpose such as investment in tangible, real, or intangible property, financing the expansion of the business operations, or the provision of working capital; or

        (d) The funds are used to restructure the debt of related members, or to pass through acquisition-related indebtedness to related members.

        b. Nothing in this subdivision shall be construed to limit or negate the provisions of 58.1-446.

DEL. NIXON

    14. Line 668, substitute

      insert

        21. For taxable years beginning on and after January 1, 2004, any amount of intangible expenses and costs or interest expenses and costs added to the federal taxable income of a corporation in accordance with the provisions of subdivision B 8 a of this section shall be subtracted from the federal taxable income of the related member that received such amount if such related member is subject to Virginia income tax on the same amount.

DEL. DRAKE

    15. Line 1253, substitute, after 15

      strike

        22¢

      insert

        15¢

DEL. DRAKE

    16. Line 1255, substitute, after 12

      strike

        22¢

      insert

        12¢

DEL. DRAKE

    17. Line 1257, substitute, after 9

      strike

        19¢

      insert

DEL. DRAKE

    18. Line 1259, substitute, after 6

      strike

        16¢

      insert

DEL. DRAKE

    19. Line 1261, substitute, after 3

      strike

        13¢

      insert

DEL. GRIFFITH

    20. Line 1410, substitute, after biennium

      insert

        by midnight April 24, 2004