Ebook Transfer pricing methods - An applications guide: Part 2
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Ebook Transfer pricing methods - An applications guide: Part 2
www.downloadslide.com8Transfer Pricing for ServicesBy Kenneth Klein and Philip KarterOVERVIEWUnder Section 482 of rhe Internal Revenue Code (IRC),1 rh Ebook Transfer pricing methods - An applications guide: Part 2he Internal Revenue Service (IRS) has authority to allocate income among members of a controlled group to reflect an arm’s-length charge for marketing, managerial, administrative, technical, and other services.2 Given the increasing importance of services in the world economy, and the volume of inte Ebook Transfer pricing methods - An applications guide: Part 2rcompany services performed within multinational groups, it is perhaps surprising that rhe body of law applicable to rhe transfer pricing of servicesEbook Transfer pricing methods - An applications guide: Part 2
is quire small. The transfer pricing of services has received far less attention by the IRS than transfer pricing for sales of tangible property or liwww.downloadslide.com8Transfer Pricing for ServicesBy Kenneth Klein and Philip KarterOVERVIEWUnder Section 482 of rhe Internal Revenue Code (IRC),1 rh Ebook Transfer pricing methods - An applications guide: Part 2g.3 Applying the arm’s-* All section references are to the Internal Revenue Code or to the regulations promulgated thereunder.2 Trcas. Reg. § 1.482-2(b)(l).' As this book was going to press, Treasury and the IRS released proposed regulations under section 482 addressing the treatments of controlled Ebook Transfer pricing methods - An applications guide: Part 2services transactions (the "Proposed Regulations"). 68 Fed. Reg. 53448 (Sept. 10, 2003). The Proposed Regulations also amend existing regulations addrEbook Transfer pricing methods - An applications guide: Part 2
essing the allocation of income from intangibles when a controlled party contributes to the value of an intangible owned by another controlled party. www.downloadslide.com8Transfer Pricing for ServicesBy Kenneth Klein and Philip KarterOVERVIEWUnder Section 482 of rhe Internal Revenue Code (IRC),1 rh Ebook Transfer pricing methods - An applications guide: Part 2regulations are published in the Federal Register. Prop. Treas. Reg. § 1.4Ebook Transfer pricing methods - An applications guide: Part 2
ctions that meet certain quantitative and qualitative conditions and requirements, including the following: (1) the transaction must not be an excludewww.downloadslide.com8Transfer Pricing for ServicesBy Kenneth Klein and Philip KarterOVERVIEWUnder Section 482 of rhe Internal Revenue Code (IRC),1 rh Ebook Transfer pricing methods - An applications guide: Part 2g under a commission or similar arrangement), (2) the arm’s-length mark-up of costs must not exceed 10 percent, (3) the taxpayer must maintain adequate books and records, (4) the tenderer and the recipient must not render, or have rendered, similar services to138www.downloadslide.comTransfer Pricing Ebook Transfer pricing methods - An applications guide: Part 2 for Services139length standard to services can be difficult because of the typical absence of third-party comparable transactions. When comparables eEbook Transfer pricing methods - An applications guide: Part 2
xist, adjustments for differing circumstances typically must be made.In many cases, the performance of a service may simultaneously involve rhe utilizwww.downloadslide.com8Transfer Pricing for ServicesBy Kenneth Klein and Philip KarterOVERVIEWUnder Section 482 of rhe Internal Revenue Code (IRC),1 rh Ebook Transfer pricing methods - An applications guide: Part 2the case may be. For example, a research service may utilize substantial laboratory equipment, a transportation or construction service may utilize heavy equipment, a commission service may utilize know-how or software, or a sale of goods may be accompanied by related services.In many cases, rhe arm Ebook Transfer pricing methods - An applications guide: Part 2’s-length value of services need nor be determined at all. Rather, rhe primary question is simply to which corporate entity in the controlled group rhEbook Transfer pricing methods - An applications guide: Part 2
e particular expense should be allocated. In some cases, the value of a service performed by a related corporation may be little more than a small marwww.downloadslide.com8Transfer Pricing for ServicesBy Kenneth Klein and Philip KarterOVERVIEWUnder Section 482 of rhe Internal Revenue Code (IRC),1 rh Ebook Transfer pricing methods - An applications guide: Part 2ses, because of the absence of close comparables, the appropriate arm’s-length price may be the same markup on costs as that generated by companies performing services that are quire different from those performed by the taxpayer.uncontrolled parties, (5) a detailed written contract covering the ser Ebook Transfer pricing methods - An applications guide: Part 2vices must be in place (subject to a de minimis exception), (6) the aggregate amount paid by the recipient to the tenderer must nor exceed 50 percentEbook Transfer pricing methods - An applications guide: Part 2
of the total costs, without materials, included in rhe cost of sales of the recipient, and (7) the tenderer’s valuable or unique intangible property owww.downloadslide.com8Transfer Pricing for ServicesBy Kenneth Klein and Philip KarterOVERVIEWUnder Section 482 of rhe Internal Revenue Code (IRC),1 rh Ebook Transfer pricing methods - An applications guide: Part 2ike the current regulations, the Proposed Regulations specifically permit the use of five other transfer pricing methods (subject to the best method rule), which are analogous to methods applicable to tangible and intangible property under the current regulations. Prop. Treas. Reg. § 1.482-9(a). The Ebook Transfer pricing methods - An applications guide: Part 2 comparable uncontrolled services price method is analogous to the comparable uncontrolled price method and compares the price of a controlled serviceEbook Transfer pricing methods - An applications guide: Part 2
s transaction with rhe price charged in a comparable uncontrolled services transaction. Prop. Treas. Reg. § 1.482-9(b). The gross services margin methwww.downloadslide.com8Transfer Pricing for ServicesBy Kenneth Klein and Philip KarterOVERVIEWUnder Section 482 of rhe Internal Revenue Code (IRC),1 rh Ebook Transfer pricing methods - An applications guide: Part 2 margin realized in uncontrolled transactions involving similar services. Prop. Treas. Reg. § 1.482-9(c). The cost of services plus method is similar to rhe cost plus method and evaluates whether the amount charged in a controlled services transaction is arm’s length by reference to the gross servic Ebook Transfer pricing methods - An applications guide: Part 2es profit markup in comparable uncontrolled transactions. Prop. Treas. Reg. § I.482-9(d). The comparable profits method applies the rules of TreasuryEbook Transfer pricing methods - An applications guide: Part 2
regulations section 1.482-5 (with certain modifications) to evaluate whether the amount charged is arm’s length based on an analysis of objective measwww.downloadslide.com8Transfer Pricing for ServicesBy Kenneth Klein and Philip KarterOVERVIEWUnder Section 482 of rhe Internal Revenue Code (IRC),1 rh Ebook Transfer pricing methods - An applications guide: Part 2tivities under similar circumstances. Prop. Treas. Reg. § 1.482-9(e). The profit split method applies the rule of Treasury regulations section 1.482-6 and evaluate whether the allocation of the combined operating profit or loss attributable to one or more controlled transactions is arm’s length by r Ebook Transfer pricing methods - An applications guide: Part 2eference to the relative value of each controlled taxpayer’s contribution to that combined operating profit or loss. Treas. Reg.§ 1.482-9(g).www.downlEbook Transfer pricing methods - An applications guide: Part 2
oadslide.corn140APPLYING SPECIFIC TRANSFER PRICING TECHNIQUESCHARACTERIZATION CONSIDERATIONSAs with most tax issues, it is extremely important in detewww.downloadslide.com8Transfer Pricing for ServicesBy Kenneth Klein and Philip KarterOVERVIEWUnder Section 482 of rhe Internal Revenue Code (IRC),1 rh Ebook Transfer pricing methods - An applications guide: Part 2y the relevant regulations and ease law. All aspects of a transaction and related transactions must be analyzed. Basic questions must be asked, such as the following:■Who is doing what lor whom?■Where are they doing it?■Why arc they doing it?■How arc they doing it?■What property is being used or tra Ebook Transfer pricing methods - An applications guide: Part 2nsferred in connection therewith?Such an analysis typically provides key information about what services arc being performed and the pricing thereof.Ebook Transfer pricing methods - An applications guide: Part 2
Taxpayers and the IRS oltcn disagree regarding whether a service is being performed and, if so, what an arm’s-length price for the service should be.Iwww.downloadslide.com8Transfer Pricing for ServicesBy Kenneth Klein and Philip KarterOVERVIEWUnder Section 482 of rhe Internal Revenue Code (IRC),1 rh Ebook Transfer pricing methods - An applications guide: Part 2le to prove that Harrison’s domestic affiliate was entitled to a profit for various services, including purchasing materials, negotiating change orders, and assuming contract risks.Similarly, in Hospital Corporation of America V. Commissioner,' the taxpayer was able to show that a foreign affiliate Ebook Transfer pricing methods - An applications guide: Part 2deserved a profit for what it did. The court held that the domestic parent had earned a profit for a variety of services it performed on the foreign aEbook Transfer pricing methods - An applications guide: Part 2
ffiliate’s behalf, including negotiating a contract, providing a guarantee,6 7 formulating a staffing plan, ordering supplies and equipment, and perfowww.downloadslide.com8Transfer Pricing for ServicesBy Kenneth Klein and Philip KarterOVERVIEWUnder Section 482 of rhe Internal Revenue Code (IRC),1 rh Ebook Transfer pricing methods - An applications guide: Part 2 risk when it time-chartered vessels in and voyage-chartered vessels out. At the same lime, the company minimized the value of ancillary services performed by its domestic affiliate.442 r.c. 601 (1964).581 T.c. 520(1983).6While the court in HCA appeared to treat a guarantee as a service, as has the Ebook Transfer pricing methods - An applications guide: Part 2Service (see, e.g., G.C.M. .38499 (Sept. 19, 1980), P.I..R. 7822005 (leh. 22, 1978), and TAM 7/ I2289960A (Dec. 28, 1977)), in Bank of America V. UnitEbook Transfer pricing methods - An applications guide: Part 2
ed States, 680 r.2d 142 (Ct. cl. 1982), the Court of Claims sourced income from a guarantee-like transaction by analogy to the sourcing of interest inGọi ngay
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