Rule: Income Taxes, Etc.: Section 482 Treatment of Controlled Services Transactions and Allocation of Income and Deductions From Intangibles

Friday,
August 4, 2006
Part V
Department of the
Treasury
Internal Revenue Service
26 CFR Parts 1 and 31

Treatment of Services Under Section 482;
Allocation of Income and Deductions
From Intangibles; Stewardship Expense;
Final Rule
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44466 Federal Register / Vol. 71, No. 150 / Friday, August 4, 2006 / Rules and Regulations
DEPARTMENT OF THE TREASURY transfers of tangible and intangible brought more in line with the arm’s
property and the provision of services. length standard, and various
Internal Revenue Service Revised and updated transfer pricing problematic features of those rules
regulations were published in the would be eliminated. The goal was to
26 CFR Parts 1 and 31 Federal Register (59 FR 34971, 60 FR provide certainty concerning the pricing
[TD 9278] 65553 and 61 FR 21955) on July 8, 1994, of low margin services, thus allowing
December 20, 1995, and May 13, 1996. the compliance efforts of both taxpayers
RIN 1545–BB31, 1545–AY38, 1545–BC52 A notice of proposed rulemaking and and the IRS to concentrate on those
notice of public hearing were published services for which a robust transfer
Treatment of Services Under Section in the Federal Register (68 FR 53448) on pricing analysis is particularly
482; Allocation of Income and September 10, 2003. A correction to the appropriate. The preamble to the 2003
Deductions From Intangibles; notice of proposed rulemaking and proposed regulations also indicated that
Stewardship Expense notice of public hearing was published in certain cases, the allocation or
AGENCY: Internal Revenue Service (IRS), in the Federal Register (68 FR 70214) on sharing among group members of
Treasury. December 17, 2003. A public hearing expenses or charges relating to corporate
ACTION: Final and temporary was held on January 14, 2004. headquarters or other centralized
regulations. The Treasury Department and the IRS service activities may be consistent with
received a substantial volume of the proposed regulations, but no further
SUMMARY: This document contains final comments on a wide range of issues guidance was provided on such service
and temporary regulations that provide addressed in the 2003 proposed sharing arrangements.
guidance regarding the treatment of regulations. These comments were very A number of commentators argued
controlled services transactions under helpful and substantial changes have that the SCBM was actually
section 482 and the allocation of income been incorporated in response. In order counterproductive to its stated goals.
from intangibles, in particular with to achieve the goal of updating the 1968 These commentators contended that to
respect to contributions by a controlled regulations, while facilitating apply the SCBM, taxpayers would
party to the value of an intangible consideration of further public input in potentially need to expend substantial
owned by another controlled party. This refining final rules, these regulations are sums to prepare comparability studies,
document also contains final and issued in temporary form with a delayed perhaps separately for each of the
temporary regulations that modify the effective date for taxable years numerous categories of back office
regulations under section 861 beginning after December 31, 2006. services. They contended that, although
concerning stewardship expenses to be These regulations are issued a taxpayers have in-depth knowledge
consistent with the changes made to the significant amount of time after concerning their businesses and the
regulations under section 482. These proposed revisions to the regulations relative value added by their back
final and temporary regulations pertaining to cost sharing arrangements offices, the SCBM called for quantitative
potentially affect controlled taxpayers were issued. Commentators suggested judgments that business people are not
within the meaning of section 482. They that this type of timing sequence was qualified to make by themselves,
provide updated guidance necessary to important so that each regulation could especially in the prevailing compliance
reflect economic and legal be assessed properly. Commentators environment. As a matter of proper
developments since the issuance of the also suggested, among other things, that accountability, taxpayers would be
current guidance. the services regulations be reissued in required as a practical matter to devote
temporary and proposed form. By significant compliance resources to
DATES: Effective Date: These regulations
issuing these regulations in temporary enlist outside consultants or otherwise
are effective on January 1, 2007. to develop support for those judgments.
Applicability Dates: These regulations and proposed form, the Treasury
Commentators suggested a range of
apply to taxable years beginning after Department and the IRS provide
proposed alternatives to the SCBM
December 31, 2006. taxpayers an opportunity to submit
regime. One such proposal was simply
FOR FURTHER INFORMATION CONTACT: additional comments prior to the time
to return to the approach in the existing
Thomas A. Vidano, (202) 435–5265, or these regulations become effective,
regulations under § 1.482–2(b). The
Carol B. Tan, (202) 435–5265 for matters allowing commentators to consider the
1968 regulations are fairly rudimentary
relating to section 482, or David potential interaction between these in nature, particularly, in today’s tax
Bergkuist (202) 622–3850 for matters regulations and the cost sharing compliance environment. In addition,
relating to stewardship expenses (not regulations. those regulations were open to
toll-free numbers). Explanation of Provisions substantial manipulation by taxpayers
SUPPLEMENTARY INFORMATION: (both inbound and outbound).
A. Controlled Services Moreover, there have been extensive
Background
1. Services Cost Method—Temp. Treas. and far-reaching developments in the
Section 482 of the Internal Revenue Reg. § 1.482–9T(b) services economy since the existing
Code generally provides that the regulations were published in 1968,
Secretary may allocate gross income, a. The Simplified Cost Based Method with real prospects that many
deductions and credits between or and Public Comments intragroup services have values
among two or more taxpayers owned or The 2003 proposed regulations set significantly in excess of their cost. As
controlled by the same interests in order forth a simplified cost based method a result, in the course of considering
to prevent evasion of taxes or to clearly (SCBM). The SCBM was intended to comments on the 2003 proposed
reflect income of a controlled taxpayer. preserve the salutary aspects of the regulations, the Treasury Department
Regulations under section 482 current § 1.482–2(b) cost safe harbor that and the IRS have concluded that it
published in the Federal Register (33 provide appropriately reduced would not be appropriate simply to
FR 5849) on April 16, 1968, provided administrative and compliance burdens readopt the standard in the 1968
guidance with respect to a wide range for low margin services. At the same regulations. Additional proposals by
of controlled transactions, including time, the existing rules would be commentators included development of
Federal Register / Vol. 71, No. 150 / Friday, August 4, 2006 / Rules and Regulations 44467
a list of activities that would qualify to An initial proposed list of specified success or failure in one or more trades
be priced at cost or detailed provisions covered services is contained in an or businesses of the renderer, the
regarding cost sharing arrangements for Announcement being published recipient, or both. Unlike the
low value services performed on a contemporaneously with these quantitative judgment called for under
centralized basis, and other options. temporary regulations. This the SCBM, this is a business judgment
The Treasury Department and the IRS Announcement will be published in the preeminently within the business
may have decided not to return to the Internal Revenue Bulletin. For copies of person’s own expertise. Exact precision
1968 regulations, but have nonetheless the Internal Revenue Bulletin, see is not needed and it is expected that the
taken the full range of comments on the § 601.601(d)(2)(ii)(b). The Treasury taxpayer’s judgment will be accepted in
2003 proposed regulations seriously. Department and the IRS solicit public most cases. This condition is intended
Therefore, in light of the extensive input on whether the list of services to focus transfer pricing compliance
comments on these issues, the Treasury sufficiently covers the full range of back resources of both taxpayers and the IRS
Department and the IRS have office services typical within principally on significant valuation
substantially redesigned the relevant multinational groups, on the issues. Thus, it is anticipated that in
provisions. The Treasury Department descriptions provided for these covered most cases the examination of relevant
and the IRS recognize that the section services, and on other matters related to services will focus only on verification
482 services regulations potentially the Announcement. It is contemplated of total services costs and their
affect a large volume of intragroup back that a final revenue procedure, appropriate allocation. These are issues
office services that are common across reflecting appropriate comments, will be even under the 1968 regulations. There
many industries. It is in the interest of issued to coincide with the effective will be little need in all but the most
good tax administration to minimize the date of the temporary regulations for unusual cases to challenge the
compliance burdens applicable to such taxable years beginning after December taxpayer’s reasonable business judgment
services, especially to the extent that the 31, 2006. In the future, particular in concluding that such typical back
arm’s length markups are low and the services may be added to, clarified in, office services do not contribute
activities do not significantly contribute or deleted from the list, depending on significantly to fundamental risks of
to business success or failure. ongoing developments. success or failure. The condition
Accordingly, based on the comments, The second category of covered effectively is reserved to allow the IRS
these temporary regulations eliminate services is certain low margin covered to reject any attempt to claim that a core
the SCBM and replace it with the services. Taxpayers objected to the competency of the taxpayer’s business
services cost method (SCM), as set forth requirement under the SCBM that all qualifies as a mere back office service.
in § 1.482–9T(b). The SCM evaluates services qualify for that method based For illustrations of the role performed
whether the price for covered services, on a quantitative analysis, but based on by this condition, see the contrasting
as defined, is arm’s length by reference comments the Treasury Department and pairs of Example 1 and Example 2,
to the total services costs with no the IRS believe that controlled taxpayers Example 3 and Example 4, Example 5
markup. Where the conditions on might nonetheless want the discretion and Example 6, Example 8 and Example
application of the method are met, the to show that particular services—not 9, Example 10 and Example 11, and
SCM will be considered the best method otherwise covered by the revenue Example 12 and Example 13 in § 1.482–
for purposes of § 1.482–1(c). procedure—qualify for the SCM, using a 9T(b)(6).
b. Services Cost Method: Identification modified quantitative approach. Low As indicated in this preamble, it is
of Covered Services and Other margin covered services consist of expected that in all but unusual cases,
Eligibility Criteria services for which the median the taxpayer’s business judgment will be
comparable arm’s length markup on respected. In evaluating the
Section 1.482–9T(b)(4) provides for total services costs is less than or equal reasonableness of the taxpayer’s
two categories of covered services that to seven percent. As under the SCBM, conclusion, the Commissioner will
are eligible for the SCM if the other the median comparable arm’s length consider all the relevant facts and
conditions on application of the method markup on total services costs means circumstances. This provision avoids
are met. If the conditions are satisfied, the excess of the arm’s length price of the need to exclude from the SCM
covered services in each category may the controlled services transaction over certain back office services that as a
be charged at cost with no markup. The total services costs, expressed as a general matter and across a range of
first category consists of specified percentage of total services costs. For industry sectors are low margin, but that
covered services identified in a revenue this purpose, the arm’s length price is in the context of a particular business
procedure published by the IRS. This determined under the general transfer nonetheless constitute high margin
revenue procedure approach is pricing rules without regard to the SCM, services. That is, it permits the Treasury
consistent with taxpayer comments. using the interquartile range (including Department and the IRS to include a
Services will be identified in such any adjustment to the median in the greater range of service categories under
revenue procedure based upon the case of results outside such range). the SCM, even though in specific
determination of the Treasury Again, if the markup on costs for circumstances an otherwise covered
Department and the IRS that they eligible services is seven percent or less, service of a particular taxpayer will be
constitute support services of a type this category of services can be charged ineligible.
common across industry sectors and out at cost with no markup. In addition, under § 1.482–9T(b)(3)(i),
generally do not involve a significant Under § 1.482–9T(b)(2), specified a single procedural requirement applies
arm’s length markup on total services covered services or low margin covered under the SCM. The taxpayer must
costs. Because the government performs services otherwise eligible for the SCM maintain documentation of covered
the analysis necessary to determine the will qualify for the method if the services costs and their allocation. The
eligibility of specified covered services, taxpayer reasonably concludes in its documentation must include a
the compliance burden that was business judgment that the services do statement evidencing the taxpayer’s
previously imposed by the SCBM is not contribute significantly to key intention to apply the SCM.
eliminated for a broad class of competitive advantages, core In § 1.482–9T(b)(3)(ii), the SCM
commonly provided services. capabilities, or fundamental chances of preserves the same list of categories of
controlled transactions that are not In addition, as a procedural matter, under the CUSP method emphasize the
eligible to be priced under the method the taxpayer must maintain relative similarity of the controlled
as under the SCBM. The Treasury documentation concerning the SSA, services to the uncontrolled transaction
Department and the IRS continue to including a statement that it intends to and the presence or absence of
believe that these transactions tend to be apply the SCM under the SSA and nonroutine intangibles. Section 1.482–
high margin transactions, transactions information on the participants, the 9T(c)(2)(ii) of the temporary regulations
for which total services costs constitute allocation basis, and grouping of also provides, consistent with the best
an inappropriate reference point, or services for purposes of the SSA. method rule, that the CUSP method
other types of transactions that should Guidance is also provided on the generally provides the most direct and
be subject to a more robust arm’s length coordination of cost allocations under reliable measure of an arm’s length
analysis under the general section 482 an SSA and cost allocations under a result if the uncontrolled transaction
rules. Comments are requested in this qualified cost sharing arrangement. either has no differences from the
regard in light of the other substantial controlled services transaction or has
d. Deleted Provisions
changes made in the regulations. only minor differences that have a
Consistent with the purpose of The SCM is considerably streamlined definite and reasonably ascertainable
providing for appropriately reduced as compared to the SCBM. Upon further effect on price, and appropriate
compliance burdens for services subject consideration, and in light of public adjustments may be made for such
to the SCM, the temporary regulations comments, many of the conditions, differences. If such adjustments cannot
contractual requirements, quantitative be made, or if there are more than minor
retain provisions in § 1.6662–6T(d)(2)
screens, and other technicalities differences between the controlled and
similar to those associated with the
associated with the SCBM have been uncontrolled transactions, the
SCBM.
eliminated. The Treasury Department comparable uncontrolled services price
c. Shared Services Arrangements and the IRS believe this streamlined method may be used, but the reliability
approach serves the interests of both the of the results as a measure of the arm’s
Section 1.482–9T(b)(5) of the
government and taxpayers by reducing length price will be reduced. Further, if
temporary regulations provides explicit
complexity and administrative burden. there are material differences for which
guidance on shared services
arrangements (SSAs). In general, an SSA 2. Comparable Uncontrolled Services reliable adjustments cannot be made,
must include two or more participants; Price Method—Temp. Treas. Reg. this method ordinarily will not provide
must include as participants all § 1.482–9T(c) a reliable measure of an arm’s length
controlled taxpayers that benefit from result.
The 2003 proposed regulations set The CUSP provisions in these
one or more covered services subject to forth the comparable uncontrolled temporary regulations are substantially
the SSA; and must be structured such services price (CUSP) method. This similar to the corresponding provisions
that each covered service (or group of method evaluated whether the in the 2003 proposed regulations.
covered services) confers a benefit on at consideration in a controlled services
least one participant. A participant is a transaction is arm’s length by 3. Gross Services Margin Method—
controlled taxpayer that reasonably comparison to the price charged in a Temp. Treas. Reg. § 1.482–9T(d)
anticipates benefits from covered comparable uncontrolled services The 2003 proposed regulations
services subject to the SSA and that transaction. This method was closely provided for a gross services margin
substantially complies with the SSA analogous to the comparable method, which evaluated the amount
requirements. uncontrolled price (CUP) method in charged in a controlled services
Under an SSA, the arm’s length existing § 1.482–3(b). transaction by reference to the gross
charge to each participant is the portion One commentator objected to the services profit margin in uncontrolled
of the total costs of the services statement in § 1.482–9(b)(1) of the 2003 transactions that involve similar
otherwise determined under the SCM proposed regulations that, to be services. The method was analogous to
that is properly allocated to such evaluated under the CUSP method, a the resale price method for transfers of
participant under the arrangement. For controlled service ordinarily needed to tangible property in existing § 1.482–
purposes of an SSA, two or more be ‘‘identical to or have a high degree 3(c).
covered services may be aggregated, of similarity’’ to the uncontrolled Under the 2003 proposed regulations,
provided that the aggregation is comparable transactions. The this method would ordinarily be used
reasonable based on the facts and commentator viewed the comparability where a controlled taxpayer performs
circumstances, including whether it analysis in the examples in proposed activities in connection with a ‘‘related
reasonably reflects the relative § 1.482–9(b)(4) as more consistent with uncontrolled transaction’’ between a
magnitude of the benefits that the the standard in existing § 1.482– member of the controlled group and an
participants reasonably anticipate from 3(b)(2)(ii)(A). The Treasury Department uncontrolled taxpayer. For example, the
the services in question. Such and the IRS agree that the comparability method may be used where a controlled
aggregation may, but need not, standards under the CUSP method for taxpayer renders services to another
correspond to the aggregation used in services should run parallel to those member of the controlled group in
applying other provisions of the SCM. If under the CUP method for sales of connection with a transaction between
the taxpayer reasonably concludes that tangible property. Indeed, the that other member and an uncontrolled
the SSA (including any aggregation for provisions are parallel. The party (agent services), or where a
purposes of the SSA) results in an commentator misconstrues the purpose controlled taxpayer contracts to provide
allocation of the costs of covered of the quoted provision. services to an uncontrolled taxpayer and
services that provides the most reliable Although the provision contains another member of the controlled group
measure of the participants’ respective general guidance on situations in which actually performs the services
shares of the reasonably anticipated the method ordinarily applies, it is not (intermediary function).
benefits from those services, then the intended to and does not alter the The 2003 proposed regulations
Commissioner may not adjust such substantive comparability standards. defined the terms ‘‘related uncontrolled
allocation basis. Just like the CUP method, the standards transaction,’’ ‘‘applicable uncontrolled
price,’’ and ‘‘appropriate gross services accounting standards applicable to viewed as a specified method in its own
profit’’. A ‘‘related uncontrolled services have not developed to the same right.
transaction’’ is a transaction between a degree as the standards applicable to The Treasury Department and the IRS
member of the controlled group and an other categories of transactions, such as agree and clarify that the intent of the
uncontrolled taxpayer for which a manufacturing or distribution of rules is not to require confirmation of
controlled taxpayer performs either tangible property. For that reason, the the results under the cost of services
agent services or an intermediary method adopted the concept of plus method. In response to public
function. The ‘‘applicable uncontrolled ‘‘comparable transactional costs,’’ which comments, § 1.482–9T(e)(3)(ii)(A) of
price’’ is the sales price paid by the the 2003 proposed regulations defined these temporary regulations
uncontrolled party in the related as all costs of providing the services incorporates several changes. First,
uncontrolled transaction. The taken into account in determining the restatement of the price under this
‘‘appropriate gross services profit’’ is the gross services profit markup in method in the form of a markup on total
product of the applicable uncontrolled comparable uncontrolled services costs of the controlled taxpayer is
price and the gross services profit transactions. In this context, comparable necessary only if the cost of services
margin in comparable uncontrolled uncontrolled transactions could be plus method utilizes external
services transactions. The gross services either services transactions between the comparables. If internal comparables are
profit margin takes into account all controlled taxpayer and uncontrolled used, this calculation need not be
functions performed by other members parties (internal comparables), or performed. Second, in situations where
of the controlled group and any other services transactions between two the price is restated, the sole purpose is
relevant factors. uncontrolled parties (external to determine whether it is necessary to
One commentator mistakenly comparables). perform additional evaluation of
interpreted the term ‘‘related The 2003 proposed regulations also functional comparability.
uncontrolled transaction’’ to suggest recognized that comparable For example, if the price under the
that the comparable transaction under transactional costs could be a subset of cost of services plus method, when
this method is one that takes place total services costs. Generally accepted restated, indicates a markup on the
between controlled parties. While this accounting principles (GAAP) or renderer’s total services costs that is
was not intended, the Treasury Federal income tax accounting rules (if either low or negative, this may indicate
Department and the IRS agree that the income tax data for comparable differences in functions that have not
nomenclature is potentially confusing, uncontrolled transactions are available) been accounted for under the traditional
and as a result, these regulations could provide an appropriate platform comparability factors. A low or negative
substitute the term ‘‘relevant for analysis under this provision, but markup suggests the need for additional
uncontrolled transaction’’ in lieu of neither is necessarily conclusive. inquiry, the outcome of which may
‘‘related uncontrolled transaction’’ Commentators objected that the suggest that the cost of services plus
wherever that appeared. In other concept of comparable transactional method is not the most reliable measure
respects, the gross services margin costs was imprecise, and they suggested of an arm’s length result under the best
provisions in these temporary that such costs should in any event method rule. Conforming changes have
regulations are substantially similar to include only the direct costs associated been made in § 1.482–9T(e)(4) Example
the provisions in the 2003 proposed with providing a particular service, as 3 of these temporary regulations.
regulations. determined under GAAP or Federal
5. Comparable Profits Method for
income tax accounting rules. As noted
4. Cost of Services Plus Method—Temp. Services—Temp. Treas. Reg. § 1.482–
above, the financial accounting
Treas. Reg. § 1.482–9T(e) 9T(f)
standards for services transactions are
The 2003 proposed regulations set not as precise as the standards The 2003 proposed regulations
forth the cost of services plus method. applicable to other types of transactions. provided for a Comparable Profits
This method evaluated the amount The relative lack of uniformity in turn Method (CPM) for services, which was
charged in a controlled services makes it impractical to derive a single similar to the CPM in existing § 1.482–
transaction by reference to the gross definition of cost that would apply 5. In general, the CPM for services
services profit markup in comparable generally to controlled services evaluated whether the amount charged
uncontrolled services transactions. The transactions. in a controlled services transaction is
gross services profit is determined by Comparable transactional costs may arm’s length by reference to objective
reference to the markup as a percentage potentially include direct and indirect measures of profitability (profit level
of comparable transactional costs in costs, if such costs are included in the indicators or PLIs) derived from
comparable uncontrolled transactions. internal or external uncontrolled financial information regarding
This method would ordinarily apply transactions that form the basis for uncontrolled taxpayers that engage in
where the renderer of controlled comparison. Section 1.482–9T(e)(4) similar services transactions under
services provides the same or similar Example 1 has been modified to clarify similar circumstances. The CPM for
services to both controlled and this concept. services applied only where the
uncontrolled parties. In general, those Several commentators objected to renderer of controlled services is the
are the only circumstances in which a § 1.482–9(d)(3)(ii)(A) of the 2003 tested party.
controlled taxpayer would likely have proposed regulations. In their view, this Section 1.482–9(e) of the 2003
the detailed information concerning provision required the results obtained proposed regulations provided that the
comparable transactional costs under the cost of services plus method profit level indicators (PLIs) provided
necessary to apply this method reliably. to be confirmed by means of a separate for in existing § 1.482–5(b)(4)(ii) may
The cost of services plus method in analysis under the comparable profits also be used under the CPM for services.
the 2003 proposed regulations was method (CPM) for services. If a The relative lack of uniformity in
generally analogous to the cost plus confirming analysis under the CPM for financial accounting standards for
method for transfers of tangible property services were required in all cases, services, combined with potentially
in existing § 1.482–3(d). The method commentators reasoned, the cost of incomplete information regarding the
implicitly recognized that financial services plus method could not be cost accounting practices of the
uncontrolled comparables, strongly general, such PLIs are subject to the the market return for the function is
suggest that PLIs that require accurate general reservation in existing § 1.482– equivalent to the total compensation
segmentation of costs may have limited 5(b)(4)(i) to the effect that the reliability paid to the employees. Commentators
reliability. of such PLIs increases as operating also raised several objections to the
The 2003 proposed regulations stated assets play a greater role in general factual assumptions in the proposed
that the degree of consistency in operating profits. analysis concerning § 1.482–9(g)(2)
accounting practices between the Aside from the addition of the Example 2 of the 2003 proposed
controlled services transaction and the examples described above, the CPM for regulations.
uncontrolled services transaction might services provisions in these temporary The Treasury Department and the IRS
affect the reliability of the results under regulations are substantially similar to agreed with a number of comments and,
the CPM for services. If appropriate the provisions in the 2003 proposed as a result, have made substantial
adjustments to account for such regulations. changes to these provisions. Under
differences are not possible, the these temporary regulations, all
6. Profit Split Method—Temp. Treas.
reliability of the results under this references to ‘‘interrelated’’ transactions
Reg. §§ 1.482–9T(g) and 1.482–
method will be reduced. in § 1.482–6(c)(3)(i)(B)(1), as well as
Section 1.482–9(e)(2)(ii) of the 2003 6T(c)(3)(i)(B)
references to ‘‘high-value services’’ and
proposed regulations provided for a new The 2003 proposed regulations ‘‘highly integrated transactions’’ in
profit level indicator that may be provided additional guidance § 1.482–9(g)(1) have been eliminated.
particularly useful for controlled concerning application of the Section 1.482–9T(g)(1) now states that
services transactions: the ratio of comparable profit split and the residual the profit split method is ‘‘ordinarily
operating profits to total services costs, profit split methods to controlled used in controlled services transactions
or the markup on total costs (also services transactions. Generally, these involving a combination of nonroutine
referred to as the ‘‘net cost plus’’). methods evaluated whether the contributions by multiple controlled
Because this profit level indicator allocation of the combined operating taxpayers.’’ This change from the 2003
evaluates operating profits by reference profit or loss attributable to one or more proposed regulations (which referred to
to the markup on all costs related to the controlled transactions is arm’s length ‘‘high-value’’ or ‘‘highly-integrated’’
provision of services, it is more likely to by reference to the relative value of each transactions), conforms to the changes
use a cost base of the tested party that controlled taxpayer’s contributions to to § 1.482–6T(c)(3)(i)(B)(1), as described
is comparable to the cost base used by the combined operating profit or loss. below.
uncontrolled parties in performing The 2003 proposed regulations Section 1.482–6T(c)(3)(i)(B)(1) of
similar business activities. provided that the guidance regarding these temporary regulations defines a
The Treasury Department and the IRS the profit split methods in existing nonroutine contribution as ‘‘a
received a number of comments § 1.482–6, as amended by proposed contribution that is not accounted for as
concerning the CPM for services. § 1.482–6(c)(3)(i)(B) and by other a routine contribution.’’ In other words,
Commentators questioned whether the changes, applied to controlled services a nonroutine contribution is one for
definition of ‘‘total services costs,’’ transactions. Section 1.482–9(g) of the which the return cannot be determined
which provides the net cost plus cost 2003 proposed regulations also by reference to market benchmarks.
base under the CPM for services, provided specific additional guidance Importantly, in this context, the term
included stock-based compensation. In concerning application of existing ‘‘routine’’ does not necessarily signify
response to these comments, the § 1.482–6, as amended, to controlled that a contribution is low value. In fact,
Treasury Department and the IRS clarify services transactions. comparable uncontrolled transactions
their intent that § 1.482–5(c)(2)(iv) of the The Treasury Department and the IRS may indicate that the returns to a
existing regulations apply to the CPM received numerous comments on the routine contribution are very significant.
for services. Accordingly, new Example profit split method. Commentators In response to the comments and in
3, Example 4, Example 5, and Example objected in particular to references in accordance with the revised definition
6 are included in § 1.482–9T(f)(3) of the 2003 proposed regulations to of nonroutine contribution in these
these temporary regulations. These ‘‘interrelated’’ transactions in § 1.482– temporary regulations, the following
examples show the application of 6(c)(3)(i)(B)(1), and to ‘‘high-value references were eliminated as
existing § 1.482–5(c)(2)(iv) to fact services’’ and ‘‘highly integrated unnecessary: (1) Contributions not fully
patterns that involve differences in the transactions’’ in § 1.482–9(g)(1). accounted for by market returns; and (2)
utilization of or accounting for stock- Commentators viewed these terms as contributions so interrelated with other
based compensation in the context of vague and subjective. Commentators transactions that they cannot be reliably
controlled services transactions. also sought more specific guidance evaluated on a separate basis. These
One commentator expressed concerning the circumstances in which changes will bring added clarity to the
reservations concerning a statement in the residual profit split method would temporary regulations.
the preamble to the 2003 proposed constitute the best method under the The Treasury Department and the IRS
regulations, which indicated that PLIs principles of existing § 1.482–1(c). In believe that these revised provisions
based on return on capital or assets addition, some commentators suggested respond to the public comments and
might be unreliable for controlled that one hallmark of a nonroutine offer more specific guidance concerning
services because the reliability of these contribution in the context of controlled the circumstances in which the profit
PLIs decreases as operating assets play services is that the renderer bears split method would likely constitute the
a less prominent role in generating substantial risks. Another commentator best method under existing § 1.482–1(c).
operating profits. This commentator suggested that the arm’s length In particular, the term ‘‘high-value’’ is
contended that such PLIs are reliable for compensation for a function performed not included in temporary § 1.482–
all firms, including service providers. by an employee or group of employees 9T(g)(1), thus eliminating any
The Treasury Department and the IRS should not in any event be evaluated implication that the profit split method
clarify that, although return on capital under a profit split method. In this is a ‘‘default’’ method for controlled
PLIs may produce reliable results in the commentator’s view, such an activity services that have value significantly in
case of certain service providers, in should be classified as routine because excess of cost. This shift in emphasis is
also reflected in section B.2 of this Public comments are requested arm’s length pricing of activities such as
preamble, which describes the deletion regarding the advisability of such marketing or research and development.
of language from several examples that changes and the form they should take. The temporary regulations respond to
some believed suggested that the Aside from this change, the unspecified each of these concerns. First, under
residual profit split is a default method. method provisions in these temporary § 1.482–9(i)(1) of the 2003 proposed
The clear intent is that no method, regulations are substantially similar to regulations, one factor that needed to be
including the profit split, is a default the provisions in the 2003 proposed considered was whether an
method for purposes of the best method regulations. uncontrolled taxpayer would have paid
rule. Rather, the profit split method a contingent fee if it engaged in a similar
8. Contingent-Payment Contractual transaction under comparable
applies if a controlled services
Terms—Temp. Treas. Reg. § 1.482–9T(i) circumstances. In response to
transaction has one or more material
elements for which it is not possible to The contingent-payment contractual comments, the temporary regulations
determine a market-based return. The term provisions in the 2003 proposed eliminate this requirement and instead
Treasury Department and the IRS regulations built on the fundamental emphasize the importance of the
believe that the above changes address principle that, in structuring controlled economic substance principles under
the comments made and so do not transactions, taxpayers are free to § 1.482–1(d)(3) of the existing
believe that it is necessary for the choose from among a wide range of risk regulations. That is, whether a
regulations to adopt alternative allocations. This provision in the 2003 particular arrangement entered into by
definitions of nonroutine contribution proposed regulations also acknowledged controlled parties has economic
put forward by commentators, such as that contingent-payment terms—terms substance is not determined by
definitions based on the degree of risk requiring compensation to be paid only reference to whether it corresponds to
borne by the renderer of services or the if specified results are obtained—may be arrangements adopted by uncontrolled
extent to which an activity is performed particularly relevant in the context of parties.
solely by employees of the taxpayer. controlled services transactions. The Second, in response to comments, the
Finally, based on the public 2003 proposed regulations provided temporary regulations eliminate
comments, and in light of the changes detailed guidance concerning duplicative or unnecessary references to
described in this preamble, § 1.482– contingent-payment contractual terms, the economic substance rules. For
9(g)(2) Example 2 of the 2003 proposed including economic substance example, § 1.482–9T(i)(2)(ii) has been
regulations has been withdrawn and considerations as well as documentation modified to provide that the contingent-
replaced by a new example that more requirements. payment arrangement as a whole,
effectively illustrates application of the Under § 1.482–9(i)(2) of the 2003 including both the contingency and the
profit split method to nonroutine proposed regulations, a contingent- basis of payment, must be consistent
contributions by multiple controlled payment arrangement was given effect if with economic substance, as evaluated
parties. it met three basic requirements: (1) The under existing § 1.482–1(d)(3)(ii)(B).
arrangement is contained in a written This section eliminates the additional
7. Unspecified Methods—§ 1.482–9T(h) contract executed prior to the start of requirement under the 2003 proposed
The 2003 proposed regulations the activity; (2) the contract makes regulations, that the arm’s length charge
provided that an unspecified method payment contingent on a future benefit under a contingent-payment
may provide the most reliable measure directly related to the outcome of the arrangement must be evaluated by
of an arm’s length result under the best controlled services transaction; and (3) reference to economic substance
method rule. Such an unspecified the contract provides for payment on a principles.
method must take into account that basis that reflects the recipient’s benefit Third, the temporary regulations
uncontrolled taxpayers compare the from the services rendered and the risks respond to the concern identified by
terms of a particular transaction to the borne by the renderer. commentators that the IRS might apply
realistic alternatives to that transaction. Commentators generally supported the contingent-payment provisions in an
No significant comments were the contingent-payment terms provision inappropriate manner, for example, to
received concerning the unspecified as providing guidance concerning a correct erroneous transfer pricing in
method provisions. Consistent with the contractual structure with particular prior taxable years that are not under
general aim to coordinate the analyses relevance to controlled services examination. As discussed in more
under the various sections of the transactions. However, they also raised detail in section C of this preamble, the
regulations under section 482 so that three fundamental concerns regarding temporary regulations include an
economically similar transactions will the scope and operation of this example to illustrate factual
be evaluated similarly, however, provision. First, the commentators circumstances in which contractual
§ 1.482–9T(h) has been modified to questioned whether controlled terms pertaining to risk allocations
provide that in applying an unspecified taxpayers would need to identify (provided they are otherwise consistent
method to services, the realistic uncontrolled comparables for any with taxpayers’ conduct and
alternatives to be considered include contingent-payment terms that they seek arrangements) are fully respected,
‘‘economically similar transactions to adopt. Second, they pointed out that notwithstanding that on examination
structured as other than services certain references to economic the activities were determined to have
transactions.’’ This provision allows substance provisions and been priced on a non-arm’s length basis.
flexibility to consider non-services documentation requirements were Other concerns, relating to interaction of
alternatives to a services transaction, for either unclear or duplicative of the contingent-payment terms provision
example, a transfer or license of provisions in existing § 1.482–1(d)(3). with the commensurate with income
intangible property, if such an approach Third, commentators expressed concern standard, are also addressed in section
provides the most reliable measure of an that the IRS might improperly impute C of this preamble.
arm’s length result. The Treasury contingent-payment terms as a means of New § 1.482–9T(i)(5) Example 3
Department and the IRS are considering addressing erroneous transfer pricing in illustrates the application of these rules
similar changes to §§ 1.482–3(e)(1) and situations that do not involve lack of to a situation in which the contingency
1.482–4(d)(1) of the existing regulations. economic substance, for example, non- identified in a contingent-payment
provision is not satisfied. The example addition, the third sentence of § 1.482– In the case of administrative or
responds to a request by commentators 9T(j) states that ‘‘costs for this purpose support services, commentators
for additional guidance to address such should comprise provision for all suggested that the Commissioner should
a factual scenario. resources expended, used, or made accept any reasonable allocation used
available to achieve the specific by the taxpayer, for example, revenue,
9. Total Services Costs—Temp. Treas.
objective for which the service is sales, or employee headcount. In
Reg. § 1.482–9T(j)
rendered.’’ To better reflect, for general, the cost of a service that
Section 1.482–9(j) of the 2003 example, the inclusion of stock-based provides benefits to multiple parties
proposed regulations defined ‘‘total compensation in total services costs, the must be allocated in a manner that
services costs’’ for purposes of the term ‘‘provision’’ is adopted in place of reliably reflects the proportional benefit
SCBM, the CPM for services, and the the term ‘‘consideration’’ as used in the received by each of those parties. This
cost of services plus method where the 2003 proposed regulations. standard is intended to be substantially
gross services profit was restated in the Commentators also observed that the equivalent to the standard in § 1.482–
form of a markup on total services costs. definition of total services costs in the 2(b)(2)(i) and 1.482–2(b)(6) of the
Under the 2003 proposed regulations, 2003 proposed regulations did not existing regulations. In response to
total services costs included all costs address situations in which the costs of comments, § 1.482–9T(b)(5)(i)(B) of
directly identified with provision of the a controlled service provider include these temporary regulations also
controlled services, as well as all other significant charges from uncontrolled provides rules whereby the costs of
costs reasonably allocable to such parties. Commentators posited that such covered services subject to a shared
services under § 1.482–9(k). The third-party costs should be permitted to services arrangement are allocated to
Treasury Department and the IRS ‘‘pass through,’’ rather than being participants in a manner that the
intended that, in this context, ‘‘costs’’ subject to a markup under the transfer taxpayer reasonably concludes will
must comprise provision for all pricing method used to analyze the most reliably reflect each participant’s
resources expended, used, or made controlled services transaction. The reasonably anticipated benefits from the
available to render the service. Treasury Department and the IRS agree services. See section A.1.c of this
Generally accepted accounting that these comments raised an issue that preamble.
principles (GAAP) or Federal income needs to be addressed, but decided to do
tax accounting rules may provide an so in a manner different from that 11. Controlled Services Transactions—
appropriate analytic platform, but suggested by the commentators. In Temp. Treas. Reg. § 1.482–9T(l)
neither would necessarily be conclusive response to this comment, the a. Definition of Activity—Temp. Treas.
in evaluating whether an item must be temporary regulations add § 1.482– Reg. § 1.482–9T(l)(2)
included in total services costs. The 9T(l)(4), which under certain
issue of determining total services costs circumstances allows a controlled Section 1.482–9(l) of the 2003
is not a new one; it is relevant under the services transaction that involves third- proposed regulations set forth a
current 1968 regulations as well. party costs to be evaluated on a threshold test for determining whether
Commentators objected that § 1.482– disaggregated basis. See section A.11.e an activity constituted a controlled
9(j) of the 2003 proposed regulations of this preamble. services transaction subject to the
failed to list the specific items that were general framework of § 1.482–9. The
included in total services costs. Some 10. Allocation of Costs—Temp. Treas. 2003 proposed regulations broadly
commentators suggested that, absent Reg. § 1.482–9T(k) defined a controlled services transaction
more precise guidance in this regard, Section 1.482–9(k) of the 2003 as any activity by a controlled taxpayer
controlled taxpayers should be proposed regulations retained the that resulted in a benefit to one or more
permitted to rely on the definition of flexible approach of existing § 1.482– other controlled taxpayers. An
costs applicable under GAAP or Federal 2(b)(3) through (6), which permitted ‘‘activity’’ was in turn defined as the use
income tax principles. Commentators taxpayers to use any reasonable by the renderer, or the making available
also requested clarification whether allocation and apportionment of costs in to the recipient, of any property or other
total services costs included stock-based determining an arm’s length charge for resources of the renderer.
compensation. services. In evaluating whether the One commentator interpreted this
The Treasury Department and the IRS allocation used by the taxpayer is provision as indicating that any activity
view the definition of total services appropriate, the 2003 proposed properly analyzed under one or more
costs in the 2003 proposed regulations regulations required that consideration other provisions of the transfer pricing
as having struck the correct balance be given to all bases and factors, regulations should not be subject to
between specificity and flexibility. In including practices used by the taxpayer §1.482–9 of the 2003 proposed
general, the accounting standards to apportion costs for other (non-tax) regulations. Other commentators
applicable to services do not provide a purposes. Such practices, although suggested that the ‘‘predominant
uniform means of determining all costs relevant, need not be given conclusive character’’ of a transaction should
that relate to the provision of services. weight by the Commissioner in control whether it is analyzed as a
Consequently, the Treasury Department evaluating the arms length charge for controlled service under §1.482–9 of the
and the IRS conclude that total services controlled services. 2003 proposed regulations or under
costs for purposes of section 482 cannot Commentators urged that any other provisions of the section 482
be determined solely by reference to technique that a taxpayer uses to regulations.
GAAP or other accounting standards or allocate costs should be entitled to Controlled taxpayers have a great deal
practices. deference, provided it is consistent with of flexibility to structure transactions in
In response to comments, however, GAAP. For the reasons expressed above various ways that are economically
§ 1.482–9T(j) of the temporary concerning § 1.482–9T(j), GAAP may equivalent. In some cases, an overall
regulations clarifies that all provide an appropriate analytic transaction may include separate
contributions in cash or in kind platform but is not necessarily elements of differing characters, for
(including stock-based compensation) controlling in evaluating the arm’s example, a transfer of tangible property
are included in total services costs. In length charge for controlled services. bundled together with the provision of
a service. The structure adopted may charges, in particular with respect to not give rise to a benefit within the
sometimes be more reliably analyzed on centralized services performed on a meaning of the regulations concerning
either a disaggregated or an aggregated centralized basis for multiple affiliates. controlled services. Passive association
basis under the relevant section of the In response to these comments, the was defined as an increment of value
section 482 regulations, for example, temporary regulations authorize the use that a controlled party obtains on
either as a separate transfer of tangible of shared services arrangements for account of its membership in the
property under the existing section 482 centralized services that qualify for the controlled group. Section 1.482–
regulations in § 1.482–3 and a separate SCM in § 1.482–9T(b). By entering into 9(l)(3)(v) of the 2003 proposed
controlled services transaction under such arrangements, taxpayers can, regulations provided, however, that
these temporary regulations in § 1.482– among other things, reduce the burden membership in a controlled group may
9T, or as an overall controlled services associated with analysis of centralized be considered in evaluating
transaction under these temporary services, which would presumably comparability between controlled and
regulations. To the extent that a include activities that provide benefits uncontrolled transactions.
controlled transaction is structured so on only an occasional or intermittent Concerning indirect or remote effects,
that it is most reliably evaluated as a basis. See section A.1.c of this preamble, one commentator suggested that if a
controlled services transaction, it will concerning shared services centralized activity by a parent confers
be analyzed as such. To the extent that arrangements. only occasional or intermittent benefits
multiple elements of a single overall One commentator suggested that, on a subsidiary, such benefits should be
transaction potentially create an overlap because the benefit test in the 2003 classified as indirect or remote. As to
between the section 482 regulations proposed regulations focused on the the shareholder provisions,
applicable to other types of transactions recipient, the arm’s length charge commentators noted that the 2003
and these temporary regulations should also be analyzed from the proposed regulations failed to address
concerning controlled services perspective of the recipient and the potential that an activity that confers
transactions, the Treasury Department economic conditions in the recipient’s a reasonably identifiable increment of
and the IRS believe that the appropriate geographic market. The commentator value on a controlled party might also
coordination is achieved by applying misunderstands the application of the
be appropriately classified as a
the rules in § 1.482–9T(m). See section benefit test. Although the benefit test
shareholder activity. As to the passive
A.12.a of this preamble. focuses on the recipient, evaluation of
association provisions, commentators
the arm’s length charge under the best
b. Benefit Test—Temp. Treas. Reg. questioned whether membership in a
method rule in a particular case (for
§ 1.482–9T(l)(3) controlled group is relevant to
example, under a profit split method)
evaluation of comparability.
Section 1.482–9(l)(3) of the 2003 may require analysis of the recipient,
proposed regulations provided rules for Commentators raised the concern that
the renderer, or both (depending, for
determining whether an activity virtually any uncontrolled transaction
example, on which party performs the
provides a benefit. Under § 1.482– could potentially be considered
simplest, most easily measurable
9(l)(3)(i), a benefit is present if the functions). unreliable, because it generally would
activity directly results in a reasonably not reflect the same efficiencies and
c. Specific Applications of the Benefit synergies as the controlled services
identifiable increment of economic or
Test—Temp Treas. Reg. § 1.482– transaction.
commercial value that enhances the
9T(l)(3)(ii) through (v) Regarding the comments concerning
recipient’s commercial position, or is
reasonably anticipated to do so. Another The 2003 proposed regulations indirect or remote effects, the Treasury
requirement is that an uncontrolled provided additional rules concerning Department and the IRS believe that to
taxpayer in circumstances comparable application of the benefit test to equate occasional or intermittent
to those of the recipient would be particular circumstances, such as benefits in all cases with indirect or
willing to pay an uncontrolled party to application to activities with indirect or remote effects would conflict with the
perform the same or a similar activity, remote effects, duplicative activities, specific-benefit rule. That rule requires
or be willing to perform for itself the shareholder activities, and passive that any service that produces an
same or similar activity. The 2003 association. These rules in the 2003 identifiable and direct benefit warrants
proposed regulations thus made proposed regulations were substantially an arm’s length charge, even if the
significant changes to the benefit test similar to the rules in existing § 1.482– service is provided only occasionally or
under the existing regulations, which is 2(b)(2). For example, § 1.482–9(l)(3)(ii) intermittently. Accordingly, the
based on whether an uncontrolled party and (l)(3)(iii) provided that no benefit is temporary regulations retain this
in the position of the renderer would present if an activity has only indirect provision without change.
expect payment for a particular activity. or remote effects or merely duplicates In response to comments relating to
The 2003 proposed regulations adopted an activity that the recipient has already shareholder activities, § 1.482–
the so-called ‘‘specific benefit’’ performed on its own behalf. Section 9T(l)(3)(iv) of the temporary regulations
approach, which mandates an arm’s 1.482–9(l)(3)(iv) provided that refers to the ‘‘sole effect’’ rather than the
length charge only if a particular shareholder activities do not confer a ‘‘primary effect’’ of an activity. This
activity provides an identifiable benefit benefit on controlled parties and change clarifies that a shareholder
to a particular taxpayer. In addition, therefore do not give rise to an arm’s activity is one of which the sole effect
§ 1.482–9(l)(3)(ii) of the 2003 proposed length charge. Shareholder activities is either to protect the renderer’s capital
regulations provided that no benefit is were defined as activities that primarily investment in one or more members of
present if an activity has only indirect benefit the owner-member of a the controlled group, or to facilitate
or remote effects. controlled group in its capacity as compliance by the renderer with
Commentators viewed the 2003 owner, rather than other controlled reporting, legal, or regulatory
proposed regulations as providing parties. requirements specifically applicable to
insufficient guidance concerning In addition, § 1.482–9(l)(3)(v) of the the renderer, or both. As modified, the
methods that controlled taxpayers might 2003 proposed regulations provided that definition in temporary § 1.482–
use to allocate or share expenses or certain ‘‘passive association’’ effects do 9T(l)(3)(iv) now conforms to the general
definition of benefit in § 1.482– e. Third-Party Costs—Temp. Treas. Reg. 12. Coordination With Other Transfer
9T(l)(3)(i). § 1.482–9T(l)(4) Pricing Rules—Temp. Treas. Reg.
In response to commentators’ request Commentators observed that the § 1.482–9T(m)
for clarification regarding the passive definition of ‘‘total services costs’’ in Section 1.482–9(m) of the 2003
association rules, new § 1.482–9T(l)(5) § 1.482–9(j) of the 2003 proposed proposed regulations provided
Example 19 illustrates a situation in regulations did not address situations in coordination rules applicable to a
which group membership would be which the costs of a controlled service controlled services transaction that is
taken into account in evaluating provider included significant charges combined with, or includes elements of,
comparability. from uncontrolled parties. a non-services transaction. These
Commentators claimed that such third- coordination rules relied on the best
The Treasury Department and the IRS
party costs should be treated as ‘‘pass method rule in existing § 1.482–1(c)(1)
have inserted the word ‘‘generally’’ in
through’’ items that, in most cases, to determine which method or methods
the description of duplicative activities
should not be subject to the markup (if would provide the most reliable
in § 1.482–9T(l)(3)(iii). This change
any) applicable to costs incurred by the measure of an arm’s length result for a
clarifies that although a duplicative renderer in its capacity as service particular controlled transaction.
activity does not generally give rise to provider. This comment was potentially
a benefit, under certain circumstances, a. Services Transactions That Include
relevant to all cost-based methods in
such an activity may provide an Other Types of Transactions—Temp.
§ 1.482–9 of the 2003 proposed
increment of value to the recipient by Treas. Reg. § 1.482–9T(m)(1)
regulations. The Treasury Department
reference to the general rule in § 1.482– and the IRS agreed that these comments A transaction structured as a
9T(l)(3)(i). In such cases, the activity raised an issue that needed to be controlled services transaction may
would be appropriately classified as a addressed, but decided to do so in a include material elements that do not
controlled services transaction. manner different from that suggested by constitute controlled services. Section
d. Guarantees, Including Financial the commentators. 1.482–9(m)(1) of the 2003 proposed
Guarantees In response to this comment, these regulations provided that, the decision
temporary regulations include a new whether to evaluate such a transaction
The proposed regulations appear to § 1.482–9T(l)(4). Under this provision, if in an integrated manner under the
have created confusion on the part of total services costs include material transfer pricing methods in § 1.482–9 or
some taxpayers regarding the third-party costs, the controlled services to evaluate one or more elements
appropriate characterization of financial transaction may be analyzed either as a separately under services and non-
guarantees for tax purposes. The single transaction or as two separate services methods depends on which of
provision of a financial guarantee does transactions, depending on which these approaches would provide the
not constitute a service for purposes of approach provides the most reliable most reliable measure of an arm’s length
determining the source of the guarantee measure of the arm’s length result under result. If the non-services component(s)
fees. See Centel Communications, Inc. v. the best method rule in existing § 1.482– of an integrated transaction could be
Commissioner, 920 F.2d 1335 (7th Cir. 1(c). Consistent with the best method adequately accounted for in evaluating
1990); Bank of America v. United rule, in determining which approach the comparability of the controlled
States, 680 F.2d 142 (Ct. Cl. 1980). provides the most reliable indication of transaction to the uncontrolled
Nevertheless, some taxpayers have the arm’s length result, the primary comparables, then the transaction could
suggested that guarantees are services factors are the degree of comparability generally be evaluated solely as a
that could qualify for the cost safe between the controlled services controlled service under § 1.482–9.
transaction and the uncontrolled One commentator criticized this
harbor and that the provision of a
comparables and the quality of the data coordination rule as inherently
guarantee has no cost. This position
and assumptions used. New § 1.482– subjective and proposed that a
would mean that in effect guarantees are
9T(l)(5) Example 20 and Example 21 ‘‘predominant character’’ test be
uniformly non-compensatory. The
provide illustrations of this rule. adopted instead. Another commentator
Treasury Department and the IRS do not interpreted certain statements in the
The rule in § 1.482–9T(l)(4) of the
agree with this uniform no charge rule preamble as indicating that any
temporary regulations applies to all
for guarantees. As a result, financial controlled transaction that was reliably
specified methods that use cost to
transactions, including guarantees, are analyzed under one of the transfer
evaluate the arm’s length charge for
explicitly excluded from eligibility for pricing methods applicable to tangible
controlled services, including the SCM
the SCM by § 1.482–9T(b)(3)(ii)(H). in § 1.482–9T(b). A determination that a or intangible property would necessarily
However, no inference is intended by controlled services transaction is more be outside the scope of the regulations
this exclusion that financial transactions reliably evaluated on a disaggregated regarding controlled services.
(including guarantees) would otherwise basis may have an effect on the analysis Upon further consideration, the
be considered the provision of services of that transaction under other Treasury Department and the IRS
for transfer pricing purposes. The provisions of these regulations. believe that no changes are necessary to
Treasury Department and the IRS the coordination rule in § 1.482–
subsequently intend to issue transfer f. Examples, Temp. Treas. Reg. § 1.482– 9T(m)(1) because these commentators
pricing guidance regarding financial 9T(l)(5) have misconstrued the application of
guarantees, in particular, along with Section 1.482–9T(l)(5) of the this rule to integrated transactions. The
other guidance concerning the treatment temporary regulations provides coordination rule in § 1.482–9T(m)(1)
of global dealing operations. See Section numerous examples that illustrate focuses on the underlying economics of
A.12.e of this preamble for a discussion applications of the rules in § 1.482– such transactions and the most reliable
of coordination with global dealing 9T(l). Changes have been made to means of evaluating those economics
operations. Such guidance will also certain of these examples to conform to under the best method rule. The
include rules to determine the source of the modifications described under the Treasury Department and the IRS
income from financial guarantees. previous headings in this section. recognize that controlled taxpayers have
substantial flexibility to structure this clear, the temporary regulations regulations applicable to cost sharing. In
transactions in a variety of economically omit this phrase. the interim, and pending issuance of
equivalent ways. Provided that the Other concerns raised by final regulations that coordinate these
structure adopted has economic commentators misinterpret the two provisions, the rule § 1.482–
substance, the coordination rule is interaction between this coordination 9T(m)(3) retains this coordination rule.
designed to respect that structure and to rule and the definition of intangibles in
§ 1.482–4(b). Section 1.482–4(b) of the d. Other Types of Transaction That
seek the most reliable means of Include a Services Transaction—Temp.
evaluating the arm’s length price. existing regulations contains a list of
specified intangibles and a residual Treas. Reg. § 1.482–9T(m)(4)
Consequently, if a taxpayer structures a
transaction so that it constitutes a category of other similar items, all of Section 1.482–9T(m)(4) is adopted in
controlled service, the transaction will which must have ‘‘substantial value substantially the same form as in the
generally be analyzed under the independent of the services of any 2003 proposed regulations. A
principles of § 1.482–9T, without regard individual.’’ In contrast, the transaction structured other than as a
to other provisions of the section 482 coordination rule in § 1.482–9T(m)(2) controlled services transaction may
regulations. applies after it is determined that an include material elements that
integrated transaction includes an constitute controlled services. Section
b. Services Transactions That Effect a intangible component that is material. 1.482–9T(m)(4) of these temporary
Transfer of Intangible Property—Temp. Because the coordination rule in regulations provides rules for evaluating
Treas. Reg. § 1.482–9T(m)(2) § 1.482–9T(m)(2) applies only to such integrated transactions. As with
Section 1.482–9(m)(2) of the 2003 transactions that incorporate a material the corresponding rules in the 2003
proposed regulations provided that a intangible component, it is not proposed regulations, these rules
transaction structured as a controlled inconsistent with existing § 1.482–4(b), complement the more general rule in
service may result in the transfer of nor does it apply the commensurate § 1.482–9(m)(1), which relates to
intangible property, may include an with income standard of existing integrated transactions structured as
element that constitutes the transfer of § 1.482–4(f)(2) to transactions that do controlled services transactions.
intangible property, or may have an not have a material element that e. Global Dealing Operations
effect similar to the transfer of constitutes an intangible transfer.
Section 1.482–9(m)(6) Example 4 of In § 1.482–9(m)(5) of the 2003
intangible property. In such cases, if the proposed regulations, the section for
element of the transaction that related to the 2003 proposed regulations
illustrated the application of this rule to coordination with the global dealing
intangible property was material, the regulations was ‘‘reserved.’’ In response
arm’s length result for that element a controlled services transaction that
included an element constituting the to comments, this provision is omitted
would be determined or corroborated in these temporary regulations, based on
transfer of an intangible. Several
under a method provided for in the the view that reserved treatment is not
commentators questioned the factual
regulations applicable to transfers of appropriate. The Treasury Department
assumptions in Example 4.
intangible property. See existing and the IRS are presently working on
Commentators contended that a
§ 1.482–4. new global dealing regulations. The
controlled party performing R&D for
Commentators viewed this rule as another controlled party generally intent of the Treasury Department and
potentially authorizing the would not have rights in any know-how the IRS is that when final regulations
Commissioner to recharacterize a or technical data arising out of the R&D are issued, those regulations, not
controlled services transaction as a activity; instead the contract would § 1.482–9T, will govern the evaluation
transaction that involved a transfer of specify that the party that paid for the of the activities performed by a global
intangible property. Such authority, research would obtain such rights. dealing operation within the scope of
commentators claimed, was inconsistent The Treasury Department and the IRS those regulations. Pending finalization
with existing § 1.482–4(b), which agree with these comments and have of the global dealing regulations,
defines an intangible as an item that has concluded that the factual assumptions taxpayers may rely on the proposed
‘‘substantial value independent of the in this example are unclear. global dealing regulations, not the
services of any individual.’’ Consequently, Example 4 has been temporary services regulations, to
Commentators also contended that the redrafted to illustrate a situation in govern financial transactions entered
coordination rules impermissibly which the controlled party performing into in connection with a global dealing
extended the commensurate with the R&D is the owner of know-how or operation as defined in proposed
income standard to controlled services technical data that resulted from that § 1.482–8. Therefore, proposed
transactions. Commentators suggested R&D activity. The controlled party then regulations under § 1.482–9(m)(5)
that, assuming each component of a transfers its rights to another controlled issued elsewhere in the Federal Register
controlled services transaction may be party. As revised, this example more clarify that a controlled services
reliably accounted for under a specified clearly illustrates application of the rule transaction does not include a financial
transfer pricing method, no additional in § 1.482–9T(m)(2). transaction entered into in connection
analysis is necessary concerning with a global dealing operation.
elements that arguably pertain to c. Services Subject to a Qualified Cost
intangible property. Sharing Arrangement—Temp. Treas. B. Income Attributable to Intangibles—
The Treasury Department and the IRS Reg. § 1.482–9T(m)(3) Temp. Treas. Reg. § 1.482–4T(f)(3) and
agree with the commentators that the Section 1.482–9(m)(3) of the 2003 (4)
phrase ‘‘may have an effect similar to proposed regulations provided that The 2003 proposed regulations
the transfer of intangible property’’ services provided by a controlled substantially replaced § 1.482–4(f)(3) of
could be interpreted as improperly participant under a qualified cost the existing regulations, which dealt
expanding § 1.482–4 of the existing sharing arrangement are subject to with issues relating to the allocation of
regulations to non-intangible existing § 1.482–7. The Treasury income from intangibles. The 2003
transactions. This is not the intent of Department and the IRS are in the proposed regulations adopted new
this provision. Consequently, to make process of comprehensively revising the § 1.482–4(f)(3) and (f)(4), which
provided modified rules for determining ownership of an intangible to the practical and administrable framework
the owner of an intangible for purposes controlled taxpayer that bore the largest for determining ownership of
of section 482 and also provided rules portion of the costs of development. intangibles for purposes of section 482.
for determining the arm’s length The 2003 proposed regulations did The suggestions that the ownership
compensation in situations where a not adopt the developer-assister rule, so rules under section 482 should in effect
controlled party other than the owner they also eliminated related provisions incorporate by reference the substantive
makes contributions to the value of an pertaining to assistance to the owner of intellectual property rules have not been
intangible. intangible property. In place of those adopted. In the view of the Treasury
rules, the 2003 proposed regulations Department and the IRS, it would be
1. Ownership of Intangible Property— contained new provisions relating to counterproductive to require an in-
Temp. Treas. Reg. § 1.482–4T(f)(3) contributions to the value of intangible depth application of intellectual
Section 1.482–4(f)(3)(i)(A) of the 2003 property owned by another controlled property law in determining which
proposed regulations contained party. See Proposed § 1.482–4(f)(4)(i). controlled party is treated as the owner
modified rules for determining the These rules are discussed in greater under section 482. The primary function
owner of intangible property for detail in section B.2 of this preamble. of intellectual property law is to define
purposes of section 482. In general, Section 1.482–4(f)(3)(i)(B) of the 2003 the rights of a legal entity, which in
under these rules, the controlled party proposed regulations excluded certain some cases might be a controlled group,
that was identified as the owner of a intangibles that are subject to the cost as compared with one or more
legally protected intangible under the sharing provisions of § 1.482–7. The uncontrolled parties that have
intellectual property laws of the Treasury Department and the IRS are competing claims to the same item of
relevant jurisdiction or other legal currently revising the existing intangible property. For this reason,
provision was treated as the owner of regulations related to cost sharing. application of the substantive
that intangible for purposes of section When final cost sharing regulations are provisions of intellectual property law
482. issued, § 1.482–4(f)(3) and (4) will take would not be useful, and might in fact
The 2003 proposed regulations also into account the changes made to the produce inappropriate results, given
clarified that a license or other right to cost sharing provisions. that under section 482 the relevant
use an intangible may constitute an item Extensive comments were received determination is which of several
of intangible property for purposes of concerning the revised approach to controlled parties should be classified
section 482. This provision, which determining ownership of intangibles as the owner of an intangible.
contemplated the identification of a under section 482. To varying degrees, The Treasury Department and the IRS
single owner for each discrete set of many commentators supported the new anticipate that ownership of an
rights that constitutes an intangible, ownership standard, noting that it intangible as determined under the legal
replaced provisions in the existing should be easier to apply and should owner standard will not conflict with
regulations that could be interpreted as produce more certainty of results in this the simultaneous requirement that
providing for multiple owners of an area. Other commentators, however, ownership under section 482 be
intangible. See Proposed § 1.482– took issue with the proposed rules. determined in accordance with the
4(f)(3)(i) and (f)(3)(iv), Example 4. Some of these commentators took the economic substance. For example, if the
The 2003 proposed regulations also position that legal ownership does not economic substance of the controlled
adopted a provision that parallels the provide an appropriate basis for parties’ dealings conflicts with
requirement in the existing regulations, determining ownership under section treatment of the legal owner as the
to the effect that ownership for purposes 482, while others believed that the owner under section 482, the
of section 482 must be consistent with determination of ownership under Commissioner may determine
the economic substance of the section 482 should include a full-scale ownership by reference to the economic
controlled transaction. Intellectual application of substantive intellectual substance of the transaction. In other
property law generally places relatively property law, including relevant cases, ownership for purposes of section
few limitations on the ability of statutory provisions as well as judicial 482 should be consistent with the
members of a controlled group to assign doctrines and common law principles ownership determined by reference to
or transfer legal ownership among that may bear on the issue of ownership. either legal ownership or practical
themselves. As a result, this rule is a After considering the public control.
safeguard against purely formal comments, the Treasury Department The Treasury Department and the IRS
assignments of ownership that, if given and the IRS conclude that legal also believe that the 2003 proposed
effect for purposes of section 482, could ownership provides the appropriate regulations properly adopted a practical
produce results that are inconsistent framework for determining ownership control standard for ‘‘non-legally
with the arm’s length standard. of intangibles under section 482. In this protected’’ intangibles. The control
Under § 1.482–4(f)(3)(i)(A) of the 2003 specific context, the Treasury standard should not displace valid
proposed regulations, in situations Department and the IRS intend that the contractual terms intended to specify
where it was not possible to identify the ‘‘legal owner’’ under these rules will be that a particular controlled party is the
owner of an intangible under the the controlled party that possesses title owner of an existing intangible or an
intellectual property law of the relevant to the intangible, based on consideration intangible under development. Because
jurisdiction, contractual term, or other of the facts and circumstances. This a contractual term constitutes a ‘‘legal
legal provision, the controlled taxpayer analysis would take into account provision,’’ the intangible would be
with practical control over the applications filed with a central analyzed as a legally protected
intangible would be treated as the government registry (such as the U.S. intangible, as opposed to a non-legally
owner for purposes of section 482. This Patent and Trademark Office or the protected intangible subject to the
provision replaced the so-called Copyright Office in the United States), practical control rule.
‘‘developer-assister’’ rule in existing any contractual provisions in effect Commentators suggested that certain
§ 1.482–4(f)(3)(ii)(B). In the case of non- between the controlled parties, and statements in the 2003 proposed
legally protected intangibles, the other legal provisions. Legal ownership, regulations incorrectly equated a
developer-assister rule assigned understood in this manner, provides a licensee of intangible property with a
distributor of tangible property. In transaction to the uncontrolled clarify that, subject to the best method
response to these comments, the comparables and in determining the rule and satisfaction of economic
Treasury Department and the IRS have arm’s length consideration for the substance requirements, controlled
revised the examples in § 1.482– controlled transaction that includes the parties may adopt contractual terms that
4T(f)(4)(ii) to avoid any implication that embedded contribution. provide for marketing, research and
these regulations equate or distinguish This rule potentially interacted with development, or other intangible
these business relationships. § 1.482–3(f) of the existing regulations, development activities to be
concerning transfers of tangible property compensated based on reimbursement
2. Contributions to the Value of an together with an embedded intangible. of specified costs plus a profit element.
Intangible—Temp. Treas. Reg. § 1.482– For example, assume that a reseller of The underlying contractual
4T(f)(4) trademarked goods performs activities compensation terms will be given effect
Under § 1.482–4(f)(4)(i) of the 2003 that are classified as contributions for purposes of section 482 as long as
proposed regulations, the rules of within the meaning of § 1.482–4(f)(4). If they have economic substance.
section 482 were applied to determine no separate compensation for these Commentators sought clarification
the arm’s length compensation for any activities is provided for by a regarding the term ‘‘incremental
activity that was reasonably anticipated contractual term, then ordinarily no marketing activities,’’ which was used
to increase the value of an intangible allocation would be appropriate either in several examples in § 1.482–4(f)(4)(ii)
owned by another controlled party. for the embedded trademark or for the of the 2003 proposed regulations.
Such an activity was defined as a underlying activities. Both elements In the examples, the term
‘‘contribution’’ under this provision. would, however, be taken into account ‘‘incremental marketing activities’’
This provision replaced certain rules in in evaluating the comparability of the referred to activities by a controlled
the existing regulations that required controlled transfer to the uncontrolled party that are quantitatively greater (in
arm’s length compensation to be comparables and in determining the terms of volume, expense, etc.) than the
provided for any assistance by a arm’s length consideration for the activities undertaken by comparable
controlled party to the owner of the controlled transfer of the trademarked uncontrolled parties in the transactions
intangible. goods. See § 1.482–4T(f)(4)(ii) Example used to analyze the controlled
This new guidance concerning 2. transaction. Such activities must be
contributions to the value of an Commentators objected to certain taken into account by either evaluating
intangible was intended to provide a aspects of Example 2, Example 3, a separate transaction that accounts for
more refined framework than the rules Example 5, and Example 6 in § 1.482– such incremental activities or analyzing
in existing § 1.482–4(f)(3), in particular 4(f)(4)(ii) of the 2003 proposed the underlying transaction and making
by reducing the potential for regulations. Those examples stated that, necessary adjustments to the
inappropriate, all-or-nothing results. if it is not possible to identify uncontrolled transactions to incorporate
Moreover, because the revised rules uncontrolled transactions that such activities into the comparability
afforded heightened deference to incorporated a similar range of analysis. Discrete changes were made to
contractual arrangements, they were interrelated elements as the nonroutine the examples to clarify these principles.
intended to give controlled taxpayers contributions by the controlled parties, As a result, apart from this additional
incentives to document transactions on it may be appropriate to apply a residual clarification, these comments are not
a contemporaneous basis and to adhere profit split analysis. In the opinion of adopted.
to the contractual terms agreed upon at commentators, these statements implied Commentators proposed that the
the outset of the arrangement. that profit split methods were preferred Treasury Department and the IRS adopt
Section 1.482–4(f)(4)(i) of the 2003 methods in any case that involved a discounted cash-flow analysis (DCF) as
proposed regulations provided that contribution to the value of an a specified method for analysis of
compensation for a contribution may be intangible. contributions. The Treasury Department
embedded within the terms of another The Treasury Department and the IRS and the IRS find it unnecessary to do so
transaction, may be stated separately as agree with these comments. There was because they already recognize DCF as
a fee for services, or may be provided for no intention to imply any such one of several approaches that may be
as a reduction in the royalty or the treatment of the residual profit split reliably applied to evaluate intangible
transfer price of tangible property. The method. As a result, these statements in property. This method may be
regulations also recognized that if a the examples have been eliminated. In particularly useful, either as an
controlled party’s activities are addition, the examples in the temporary unspecified method or in conjunction
reasonably anticipated to enhance only regulations specifically refer to the best with one of the specified methods, in
the value of its own rights under a method rule and cross-reference new evaluating contributions within the
license or exclusive distribution Example 10, Example 11, and Example meaning of § 1.482–4T(f)(4)(i). Further
arrangement, no compensation is due 12 in § 1.482–8, which show application consideration is being given to the
under the arm’s length standard. The of the best method rule to intangible suggestion to adopt DCF as a specified
rules addressed the most commonly development activities. See also section method in its own right.
encountered factual scenarios that A.6 of this preamble, concerning
potentially give rise to contributions on definition of nonroutine contribution for C. Contractual Terms Imputed From
the part of a controlled party. purposes of the profit split methods. Economic Substance—§ 1.482–
Section 1.482–4(f)(4)(i) of the 2003 In addition, and in response to 1(d)(3)(ii)(C), Examples 3, 4, 5, and 6
proposed regulations provided that in comments, a new Example 5 in § 1.482– Central to the approach taken in the
general a separate allocation is not 1T(d)(3)(ii)(C) illustrates factual 2003 proposed regulations were the
appropriate if the compensation for a circumstances in which contractual concepts that controlled taxpayers have
contribution was embedded within the terms pertaining to intangible substantial freedom to adopt contractual
terms of a related controlled transaction. development activities are respected, terms, and that such contractual terms
In such cases, the contribution is taken although on examination the activities are given effect under section 482,
into account in evaluating the are found to be priced on a non-arm’s provided they are in accord with the
comparability of the controlled length basis. Together, these changes economic substance of the controlled
parties’ dealings. An important corollary costs plus a markup or profit Commentators also suggested that
of these principles, however, applies component. On examination, the under the 2003 proposed regulations,
where controlled parties fail to specify Commissioner determines that the the Commissioner’s authority to impute
contractual terms, or specify terms that specified compensation falls outside the contingent-payment contractual terms
are not consistent with economic arm’s length range, as determined by was unnecessarily broad. In the
substance. In such cases, the comparison to uncontrolled commentators’ view, this authority
Commissioner may impute contractual transactions. The example illustrates would lead the Commissioner to apply
terms to accord with the economic that this determination, without more, commensurate with income principles
substance of the controlled parties’ does not support a conclusion that the to controlled transactions that have no
activities. See § 1.482–1(d)(3) of the contractual terms lacked economic significant intangible property
existing regulations. substance. If, however, the component. The Commissioner’s
Commentators raised several concerns compensation paid is outside the arm’s authority to impute contingent-payment
regarding the potential interaction length range by a substantial amount, contractual terms was appropriately
between the economic substance rules the Commissioner may take that fact tailored to result in application of
in existing § 1.482–1(d)(3) and certain into account in determining whether the economic substance principles in those
provisions in the 2003 proposed contractual arrangement as a whole situations where it was warranted. The
regulations, including those relating to possessed economic substance. Treasury Department and the IRS
contributions to the value of intangibles The examples in § 1.482–1(d)(3)(ii)(C) believe that the commensurate with
and contingent-payment contractual of the 2003 proposed regulations income principle of the statute is
terms. Some commentators suggested described alternative constructions that consistent with the arm’s length
that application of these provisions the Commissioner might adopt if the principle and fundamentally relates to
together with the existing economic contractual terms for the controlled the underlying economic substance and
substance rules could create incentives transaction were not in accordance with true risk allocations inherent in the
for the Commissioner to make economic substance: These alternatives relevant controlled transactions. Related
inappropriate adjustments, e.g., to included: (1) Imputation of a separate parties may, with economic substance,
impute contingent-payment terms or services arrangement, with contingent- agree to compensate one another for
transfers of intangibles in any situation payment terms; (2) imputation of a long- services with compensation payable
in which non-arm’s length pricing was term, exclusive distribution only in future periods contingent on the
identified. arrangement; or (3) requiring success or failure of the services to
It bears emphasis that the compensation for termination of an produce the contemplated results.
Commissioner may invoke his authority imputed long-term license arrangement. Related parties may expressly enter into
under § 1.482–1(d)(3)(ii) in only two The Treasury Department and the IRS those contractual terms and, in the
situations: (1) Controlled taxpayers fail believe that one or more of these absence of express terms or where the
to specify contractual terms for the arrangements may be appropriate, related parties’ conduct and
transaction; or (2) controlled taxpayers depending on the facts of the specific arrangements are inconsistent with their
specify contractual terms that are not in case. contractual terms, the IRS may in
accordance with economic substance. Commentators expressed concerns appropriate facts and circumstances
Clearly, if contributions within the regarding the scope of the impute contingent-payment contractual
meaning of § 1.482–4T(f)(4)(i) are Commissioner’s authority to impute terms.
present, the contractual terms of the arrangements based on economic
controlled transaction should address substance. Some commentators D. Stewardship Expenses—§ 1.861–8T
those contributions in a manner that suggested that a single set of contractual The temporary regulations would
accords with economic substance. If this terms should apply in any situation modify the present regulations under
is not the case, the Commissioner must where the Commissioner determines § 1.861–8(e)(4) to conform to, and to be
impute an arrangement that best that the controlled parties’ contractual consistent with, the revised language
conforms to the economic substance of terms lack economic substance. Another relating to controlled services
the transaction. In given facts and commentator recommended that the transactions as set forth in § 1.482–9T(l).
circumstances, it may be possible to rely Commissioner should impute only
E. Effective Date—§ 1.482–9T(n)
on evidence that the taxpayer brings contractual terms similar to those
forward. In other circumstances, the observed in comparable uncontrolled In order to achieve the goal of
Commissioner will impute an transactions. After much consideration, updating the 1968 regulations, while
arrangement based on economic the Treasury Department and the IRS facilitating consideration of further
substance, taking into account the facts have not adopted these comments. The public input in refining final rules,
and circumstances, the parties’ conduct, determination of the economic these regulations are issued in
and other relevant evidence, including substance of a transaction between temporary form with a delayed effective
any that the taxpayer brings forward on related parties necessarily turns on an date for taxable years beginning after
examination. See Example 3, Example examination of all the facts and December 31, 2006. Controlled
4, and Example 6 in § 1.482– circumstances. Under the regulations, taxpayers may also elect to apply these
1T(d)(3)(ii)(C). the taxpayer is in control of this issue temporary regulations to any taxable
In response to comments, § 1.482– in the first instance to the extent it year beginning after September 10,
1T(d)(3)(ii)(C) includes a new Example expressly sets forth the economic 2003, the date of publication of the 2003
5, which illustrates the interaction of substance in contractual terms and its proposed regulations. Where such an
the economic substance rule with conduct and arrangements are election is made, the temporary
general transfer pricing rules in the consistent with these terms. Otherwise, regulations will apply in full to such
context of intangible development the IRS is forced to try and impute the taxable year and all subsequent taxable
activities. In the example, the economic substance based on whatever years of the taxpayer making the
contractual terms specify that intangible facts and circumstances are available, election. Such an election must be made
development activities are priced by including any information the taxpayer by attaching a statement to the
reference to reimbursement of specified brings forward on examination. taxpayer’s timely filed U.S. tax return
(including extensions) for its first 26 CFR Part 31 (iii) * * *

taxable year after December 31, 2006. (B) [Reserved]. For further guidance, see
Employment taxes, Income taxes, § 1.482–0T, the entry for § 1.482–
These regulations are issued after Penalties, Pensions, Railroad retirement, 1T(f)(2)(iii)(B).
proposed revisions to the regulations Reporting and recordkeeping
pertaining to cost sharing arrangements. * * * * *
requirements, Social Security and (g) * * *
By issuing regulations in temporary and Unemployment compensation. (4) * * *
proposed form concerning controlled (iii) [Reserved]. For further guidance, see
services and the allocation of income Amendment to the Regulations § 1.482–0T, the entry for § 1.482–1T(g)(4)(iii).
from intangibles, the Treasury ■ Accordingly, 26 CFR parts 1 and 31 * * * * *
Department and the IRS also provide are amended as follows: (i) [Reserved]. For further guidance, see
taxpayers an opportunity to submit § 1.482–0T, the entry for § 1.482–1T(i).
comments that take into account the PART 1—INCOME TAXES * * * * *
potential interaction between these two (j) [Reserved]. For further guidance, see
sets of regulations. ■ Paragraph 1. The authority citation § 1.482–0T, the entry for § 1.482–1T(j).
The initial list of specified covered for part 1 is amended by adding an entry
services for purposes of the SCM is in numerical order to read in part as § 1.482–2 Determination of taxable income
being issued for public input in the form follows: in specific situations.
of an Announcement in tandem with Authority: 26 U.S.C. 7805 * * * * * * * *
these temporary regulations. This Section 1.482–9 also issued under 26 (b) [Reserved]. For further guidance, see
U.S.C. 482. * * * § 1.482–0T, the entry for § 1.482–2T(b).
Announcement will be published in the
Internal Revenue Bulletin. For copies of * * * * *
■ Par. 2. Section 1.482–0 is amended as
the Internal Revenue Bulletin, see follows: § 1.482–4 Methods to determine taxable
§ 601.601(d)(2)(ii)(b). The Treasury ■ 1. The section heading is revised. income in connection with a transfer of
Department and the IRS intend to take ■ 2. The entries for 1.482–1(a)(1), intangible property.
all public comments into account and (b)(2)(i), (d)(3)(ii)(C), (d)(3)(v), * * * * *
issue a final revenue procedure that will (f)(2)(ii)(A), (f)(2)(ii)(B), (g)(4)(iii), (i) and (f) * * *
be effective coincident with the delayed (j) are revised. (3) [Reserved]. For further guidance, see
effective date of these temporary ■ 3. The entries for § 1.482–2(b) are § 1.482–0T, the entry for § 1.482–4T(f)(3).
regulations. (4) [Reserved]. For further guidance, see
revised.
§ 1.482–0T, the entry for § 1.482–4T(f)(4).
Special Analyses ■ 4. The entries for § 1.482–4(f)(3), (f)(4)
(5) Consideration not artificially limited.
and (f)(5) are revised and new entries for (6) Lump sum payments
It has been determined that this § 1.482–4(f)(6) and (f)(7) are added. (i) In general.
Treasury decision is not a significant ■ 5. The entries for 1.482– (ii) Exceptions.
regulatory action as defined in 6(c)(2)(ii)(B)(1), (c)(2)(ii)(D), (c)(3)(i)(A), (iii) Example.
Executive Order 12866. Therefore, a (c)(3)(i)(B) and (c)(3)(ii)(D) are revised (7) [Reserved]. For further guidance, see
regulatory assessment is not required. It and the entry for 1.482–6(d) is added. § 1.482–0T, the entry for § 1.482–4T(f)(7).
also has been determined that section ■ 6. The entry for 1.482–8(a) is revised.
553(b) of the Administrative Procedure § 1.482–6 Profit split method.
■ 7. The entries for 1.482–9 are added.
Act (5 U.S.C. chapter 5) does not apply The additions and revisions read as * * * * *
to these regulations. For the (c) * * *
follows: (2) * * *
applicability of the Regulatory
§ 1.482–0 Outline of regulations under (ii) * * *
Flexibility Act (5 U.S.C. chapter 6) refer (B) * * *
to the Special Analyses section of the section 482.
(1) [Reserved]. For further guidance, see
preamble to the cross-reference notice of * * * * * § 1.482–0T, the entry for § 1.482–
proposed rulemaking published in the 6T(c)(2)(ii)(B)(1).
§ 1.482–1 Allocation of income and
Proposed Rules section in this issue of deductions among taxpayers. * * * * *
the Federal Register. Pursuant to (D) [Reserved]. For further guidance, see
section 7805(f) of the Internal Revenue (a)(1) [Reserved]. For further guidance, see § 1.482–0T, the entry for § 1.482–
§ 1.482–0T, the entry for § 1.482–1T(a)(1). 6T(c)(2)(ii)(D).
Code, these temporary regulations will
be submitted to the Chief Counsel for * * * * * (3) * * *
Advocacy of the Small Business (b) * * * (i) * * *
(2) * * * (A) [Reserved]. For further guidance, see
Administration for comment on their (i) [Reserved]. For further guidance, see § 1.482–0T, the entry for § 1.482–
impact on small business. § 1.482–0T, the entry for § 1.482–1T(b)(2)(i). 6T(c)(3)(i)(A).
Drafting Information * * * * * (B) [Reserved]. For further guidance, see
(d) * * * § 1.482–0T, the entry for § 1.482–
The principal authors of these (3) * * * 6T(c)(3)(i)(B).
regulations are Thomas A. Vidano and (ii) * * * (ii) * * *
Carol B. Tan, Office of Associate Chief (C) [Reserved]. For further guidance, see (D) [Reserved]. For further guidance, see
Counsel (International) for matters § 1.482–0T, the entry for § 1.482– § 1.482–0T, the entry for § 1.482–
relating to section 482, and David 1T(d)(3)(ii)(C). 6T(c)(3)(ii)(D).
Bergkuist, Office of Associate Chief (v) [Reserved]. For further guidance, see * * * * *
Counsel (International) for matters § 1.482–0T, the entry for § 1.482–1T(d)(3)(v). (d) Effective date. [Reserved]. For further
relating to stewardship. * * * * * guidance, see § 1.482–0T, the entry for
(f) * * * § 1.482–6T(d).
List of Subjects (2) * * * § 1.482–8 Examples of the best method

26 CFR Part 1 (ii) * * * rule.
(A) [Reserved]. For further guidance, see
Income taxes, Reporting and § 1.482–0T, the entry for § 1.482– (a) Introduction.
recordkeeping requirements. 1T(f)(2)(ii)(A). * * * * *
§ 1.482–9 Methods to determine taxable (3) Expiration date. (2) Not services that contribute
income in connection with a controlled significantly to fundamental risks of business
services transaction. [Reserved]. § 1.482–4T Methods to determine taxable success or failure.
income in connection with a transfer of (3) Other conditions on application of
For further guidance, see § 1.482–0T, the
intangible property. services cost method.
entries for § 1.482–9T.
(a) through (f)(2) [Reserved]. For further (i) Adequate books and records.
■ Par. 3. Section 1.482–0T is added to (ii) Excluded transactions.
guidance, see § 1.482–0, the entry for
read as follows: (4) Covered services.
§ 1.482–4(a) through (f)(2).
(3) Ownership of intangible property. (i) Specified covered services.
§ 1.482–0T Outline of regulations under (ii) Low margin covered services.
section 482. (i) Identification of owner.
(A) In general. (5) Shared services arrangement.
This section contains major captions (i) In general.
(B) Cost sharing arrangements.
for §§ 1.482–1T, 1.482–2T, 1.482–4T, (ii) Examples.
(ii) Requirements for shared services
1.482–6T, 1.482–8T, and § 1.482–9T. arrangement.
(4) Contribution to the value of an
(A) Eligibility.
§ 1.482–1T Allocation of income and intangible owned by another. (B) Allocation.
deductions among taxpayers. (i) In general. (C) Documentation.
(ii) Examples. (iii) Definition and special rules.
(a) In general. (f)(5) and (f)(6) [Reserved]. For further
(1) Purpose and scope. (A) Participant.
guidance, see § 1.482–0, the entry for (B) Aggregation.
(2) through (b)(1) [Reserved]. For further § 1.482–4(f)(5) and (f)(6).
guidance, see § 1.482–0, the entry for (C) Coordination with cost sharing
(7) Effective date. arrangements.
§ 1.482–1(a)(2) through (b)(1).
(i) In general. (6) Examples.
(b)(2) Arm’s length methods.
(ii) Election to apply regulation to earlier (c) Comparable uncontrolled services price
(i) Methods.
(b)(2)(ii) through (d)(3)(ii)(B) [Reserved]. years. method.
For further guidance, see § 1.482–0, the entry (iii) Expiration date. (1) In general.
for § 1.482–1(b)(2)(ii) through (c)(3)(ii)(B). (2) Comparability and reliability
§ 1.482–6T Profit split method. considerations.
(C) Examples.
(d)(3)(iii) and (iv) [Reserved]. For further (a) through (c)(2)(ii)(A) [Reserved]. For (i) In general.
guidance, see § 1.482–0, the entry for further guidance, see § 1.482–0, the entry for (ii) Comparability.
§ 1.482–1(d)(3)(iii) and (iv). § 1.482–6(a) through (c)(2)(ii)(A). (A) In general.
(v) Property or services. (B) Comparability. (B) Adjustments for differences between
(d)(4) through (f)(2)(i) [Reserved]. For (1) In general. controlled and uncontrolled transactions.
further guidance, see § 1.482–0, the entry for (c)(2)(ii)(B)(2) through (C) [Reserved]. For (iii) Data and assumptions.
§ 1.482–1(d)(4) through (f)(2)(i). further guidance, see § 1.482–0, the entry for (3) Arm’s length range.
(ii) Allocation based on taxpayer’s actual § 1.482–6(c)(2)(ii)(B)(2) through (C). (4) Examples.
transactions. (D) Other factors affecting reliability. (5) Indirect evidence of the price of a
(A) In general. (c)(3)(i) [Reserved]. For further guidance, comparable uncontrolled services
(f)(2)(ii)(B) through (f)(2)(iii)(A) [Reserved]. see § 1.482–0, the entry for § 1.482–6(c)(3)(i). transaction.
For further guidance, see § 1.482–0, the entry (A) Allocate income to routine (i) In general.
for § 1.482–1(f)(2)(ii)(B) through (f)(2)(iii)(A). contributions. (ii) Example.
(B) Circumstances warranting (B) Allocate residual profit. (d) Gross services margin method.
consideration of multiple year data. (1) Nonroutine contributions generally. (1) In general.
(f)(2)(iii)(C) through (g)(3) [Reserved]. For (2) Nonroutine contributions of intangible (2) Determination of arm’s length price.
further guidance, see § 1.482–0, the entry for property. (i) In general.
§ 1.482–1(f)(2)(iii)(C) through (g)(3). (c)(3)(ii)(A) through (C) [Reserved]. For (ii) Relevant uncontrolled transaction.
(4) Setoffs. further guidance, see § 1.482–0, the entry for (iii) Applicable uncontrolled price.
(i) In general. (iv) Appropriate gross services profit.
§ 1.482–6(c)(3)(ii)(A) through (C).
(g)(4)(ii) [Reserved]. For further guidance, (v) Arm’s length range.
(D) Other factors affecting reliability.
see § 1.482–0, the entry for § 1.482–1(g)(4)(ii). (3) Comparability and reliability
(c)(3)(iii) [Reserved]. For further guidance,
(iii) Examples. considerations.
see § 1.482–0, the entry for § 1.482–
(g)(4)(iii) Example 2 through (h) [Reserved]. (i) In general.
6(c)(3)(iii).
For further guidance, see § 1.482–0, the entry (ii) Comparability.
(d) Effective date.
for § 1.482–1(g)(4)(iii) Example 2 through (h). (A) Functional comparability.
(1) In general.
(i) Definitions. (B) Other comparability factors.
(2) Election to apply regulation to earlier
(i)(1) through (10) [Reserved]. For further (C) Adjustments for differences between
taxable years. controlled and uncontrolled transactions.
guidance, see § 1.482–0, the entry for
(3) Expiration date. (D) Buy-sell distributor.
§ 1.482–1(i)(1) through (10).
(j) Effective date. § 1.482–8T Examples of the best method (iii) Data and assumptions.
(1) In general. rule. (A) In general.
(2) Election to apply regulation to earlier (B) Consistency in accounting.
years. (a) [Reserved]. For further guidance, see (4) Examples.
(3) Expiration date. § 1.482–0, the entry for § 1.482–8(a). (e) Cost of services plus method.
(b) [Reserved]. For further guidance, see (1) In general.
§ 1.482–2T Determination of taxable § 1.482–0, the entry for § 1.482–8(b) (2) Determination of arm’s length price.
income in specific situations. (c) Effective date. (i) In general.
(a) [Reserved]. For further guidance, see (1) In general. (ii) Appropriate gross services profit.
§ 1.482–0, the entry for § 1.482–2(a). (2) Election to apply regulation to earlier (iii) Comparable transactional costs.
(b) Rendering of services. taxable years. (iv) Arm’s length range.
(c) [Reserved]. For further guidance, see (3) Expiration date. (3) Comparability and reliability
§ 1.482–0, the entry for § 1.482–2(c). considerations.
§ 1.482–9T Methods to determine taxable (i) In general.
(d) [Reserved]. For further guidance, see
§ 1.482–0, the entry for § 1.482–2(d). income in connection with a controlled (ii) Comparability.
(e) Effective date. services transaction. (A) Functional comparability.
(1) In general. (a) In general. (B) Other comparability factors.
(2) Election to apply regulation to earlier (b) Services cost method (C) Adjustments for differences between
years. (1) In general. the controlled and uncontrolled transactions.
(iii) Data and assumptions. The addition and revisions read as specific situations, including controlled
(A) In general. follows: transactions involving loans or advances
(B) Consistency in accounting. or the use of tangible property. Sections
(4) Examples. § 1.482–1 Allocation of income and 1.482–3 through 1.482–6 provide rules
(f) Comparable profits method. deductions among taxpayers.
(1) In general. for the determination of the true taxable
(a)(1) [Reserved]. For further income of controlled taxpayers in cases
(2) Determination of arm’s length result.
guidance, see § 1.482–1T(a)(1). involving the transfer of property.
(i) Tested party.
(ii) Profit level indicators. * * * * * Section 1.482–7T sets forth the cost
(iii) Comparability and reliability (b) * * * (1) * * * sharing provisions applicable to taxable
considerations—Data and assumptions— (b)(2)(i) [Reserved]. For further years beginning on or after October 6,
Consistency in accounting. guidance, see § 1.482–1T(b)(2)(i). 1994, and before January 1, 1996.
(3) Examples.
* * * * * Section 1.482–7 sets forth the cost
(g) Profit split method.
(1) In general. (d) * * * sharing provisions applicable to taxable
(2) Examples. (3) * * * years beginning on or after January 1,
(h) Unspecified methods. (ii) * * * 1996. Section 1.482–8 provides
(i) Contingent-payment contractual terms (C) * * * examples illustrating the application of
for services. Example 3. [Reserved]. For further the best method rule. Finally, § 1.482–
(1) Contingent-payment contractual terms guidance, see § 1.482–1T(d)(3)(ii)(C), 9T provides rules for the determination
recognized in general. Example 3. of the true taxable income of controlled
(2) Contingent-payment arrangement. Examples 4 through 6. [Reserved]. For taxpayers in cases involving the
(i) General Requirements further guidance, see 1.482–
(A) Written contract. performance of services.
(B) Specified contingency.
1T(d)(3)(ii)(C) Examples 4 through 6. (a)(2) through (b)(1) [Reserved]. For
(C) Basis for payment. * * * * * further guidance, see § 1.482–1(a)(2)
(ii) Economic Substance and Conduct (v) [Reserved]. For further guidance, through (b)(1).
(3) Commissioner’s authority to impute see § 1.482–1T(d)(3)(v). (b)(2) Arm’s length methods—(i)
contingent-payment terms. * * * * * Methods. Sections 1.482–2 through
(4) Evaluation of arm’s length charge. 1.482–6 and § 1.482–9T provide specific
(5) Examples.
(f) * * *
(2) * * * methods to be used to evaluate whether
(j) Total services costs. transactions between or among members
(k) Allocation of costs. (ii)(A) [Reserved]. For further
(1) In general. guidance, see § 1.482–1T(f)(2)(ii)(A). of the controlled group satisfy the arm’s
(2) Appropriate method of allocation and length standard and, if they do not, to
* * * * *
apportionment. (iii) * * * determine the arm’s length result.
(i) Reasonable method standard. (B) [Reserved]. For further guidance, Section 1.482–7 provides the specific
(ii) Use of general practices.
see § 1.482–1T(f)(3)(iii)(B). method to be used to evaluate whether
(3) Examples. a qualified cost sharing arrangement
(l) Controlled services transaction. * * * * * produces results consistent with an
(1) In general. (g) * * * arm’s length result.
(2) Activity. (4) * * * (i) * * * [Reserved]. For (b)(2)(ii) through (d)(3)(ii)(C),
(3) Benefit. further guidance, see § 1.482–1T(g)(4)(i).
(i) In general. Examples 1, and 2 [Reserved]. For
(iii) * * * further guidance, see § 1.482–1(b)(2)(ii)
(ii) Indirect or remote benefit. Example 1. [Reserved]. For further
(iii) Duplicative activities. through (d)(3)(ii)(C), Examples 1 and 2.
(iv) Shareholder activities.
guidance, see § 1.482–1T(g)(4)(iii),
Example 1. Example 3. Contractual terms imputed
(v) Passive association. from economic substance. (i) FP, a foreign
(4) Disaggregation of Transactions * * * * * producer of wristwatches, is the registered
(5) Examples. (i) [Reserved]. For further guidance, holder of the YY trademark in the United
(m) Coordination with transfer pricing see § 1.482–1T(i). States and in other countries worldwide. In
rules for other transactions. (j) * * * year 1, FP enters the United States market by
(1) Services transactions that include other (6) [Reserved]. For further guidance, selling YY wristwatches to its newly
types of transactions. organized United States subsidiary, USSub,
see § 1.482–1T(j)(6).
(2) Services transactions that effect a for distribution in the United States market.
transfer of intangible property.
Par. 5. Section 1.482–1T is added to
read as follows: USSub pays FP a fixed price per wristwatch.
(3) Services subject to a qualified cost USSub and FP undertake, without separate
sharing arrangement. § 1.482–1T Allocation of income and compensation, marketing activities to
(4) Other types of transactions that include deductions among taxpayers (temporary). establish the YY trademark in the United
controlled services transactions. States market. Unrelated foreign producers of
(5) Examples. (a) In general—(1) Purpose and scope.
trademarked wristwatches and their
(n) Effective date. The purpose of section 482 is to ensure authorized United States distributors
(1) In general. that taxpayers clearly reflect income respectively undertake similar marketing
(2) Election to apply regulations to earlier attributable to controlled transactions activities in independent arrangements
taxable years. and to prevent the avoidance of taxes involving distribution of trademarked
(3) Expiration date. with respect to such transactions. wristwatches in the United States market. In
■ Par. 4. Section 1.482–1 is amended as Section 482 places a controlled taxpayer years 1 through 6, USSub markets and sells
on a tax parity with an uncontrolled YY wristwatches in the United States.
follows:
taxpayer by determining the true taxable Further, in years 1 through 6, USSub
■ 1. Paragraphs (a)(1), (b)(2)(i),
income of the controlled taxpayer. This undertakes incremental marketing activities
(d)(3)(ii)(C) Example 3, (d)(3)(v), in addition to the activities similar to those
(f)(2)(ii)(A), (f)(2)(iii)(B), (g)(4)(i), section sets forth general principles and observed in the independent distribution
(g)(4)(iii) and paragraph (i) are revised. guidelines to be followed under section transactions in the United States market. FP
■ 2. Paragraph (d)(3)(ii)(C) Examples 4 482. Section 1.482–2 provides rules for does not directly or indirectly compensate
through 6 are added. the determination of the true taxable USSub for performing these incremental
■ 3. Paragraph (j)(6) is added. income of controlled taxpayers in activities during years 1 through 6. Assume
that, aside from these incremental activities, year 1, FP enters into a licensing agreement otherwise had a reasonable anticipation of a
and after any adjustments are made to that affords its newly organized United States future benefit. In this case, USSub’s
improve the reliability of the comparison, the subsidiary, USSub, exclusive rights to certain undertaking the incremental marketing
price paid per wristwatch by the manufacturing and marketing intangibles activities in years 1 through 6 is a course of
independent, authorized distributors of (including the AA trademark) for purposes of conduct that is inconsistent with the parties’
wristwatches would provide the most manufacturing and marketing athletic gear in adoption in year 7 of contractual terms by
reliable measure of the arm’s length price the United States under the AA trademark. which FP compensates USSub on a cost basis
paid per YY wristwatch by USSub. The contractual terms of this agreement for the incremental marketing activities that
(ii) By year 7, the wristwatches with the obligate USSub to pay FP a royalty based on it performed. Therefore, the Commissioner
YY trademark generate a premium return in sales, and also obligate both FP and USSub may impute one or more agreements between
the United States market, as compared to to undertake without separate compensation USSub and FP, consistent with the economic
wristwatches marketed by the independent specified types and levels of marketing substance of their course of conduct, which
distributors. In year 7, substantially all the activities. Unrelated foreign businesses would afford USSub an appropriate portion
premium return from the YY trademark in license independent United States businesses of the premium return from the AA
the United States market is attributed to FP, to manufacture and market athletic gear in trademark athletic gear. For example, the
for example through an increase in the price the United States, using trademarks owned Commissioner may impute a separate
paid per watch by USSub, or by some other by the unrelated foreign businesses. The services agreement that affords USSub
means. contractual terms of these uncontrolled contingent-payment compensation for the
(iii) In determining whether an allocation transactions require the licensees to pay incremental activities it performed during
of income is appropriate in year 7, the royalties based on sales of the merchandise, years 1 through 6, which benefited FP by
Commissioner may consider the economic and obligate the licensors and licensees to contributing to the value of the trademark
substance of the arrangements between undertake without separate compensation owned by FP. In the alternative, the
USSub and FP, and the parties’ course of specified types and levels of marketing Commissioner may impute a long-term,
conduct throughout their relationship. Based activities. In years 1 through 6, USSub exclusive United States license agreement
on this analysis, the Commissioner manufactures and sells athletic gear under that allows USSub to benefit from the
determines that it is unlikely that, ex ante, an the AA trademark in the United States. incremental activities. As another alternative,
uncontrolled taxpayer operating at arm’s Assume that, after adjustments are made to the Commissioner may require FP to
length would engage in the incremental improve the reliability of the comparison for compensate USSub for terminating USSub’s
marketing activities to develop or enhance an any material differences relating to marketing imputed long-term United States license
intangible owned by another party unless it activities, manufacturing or marketing agreement, a license that USSub made more
received contemporaneous compensation or intangibles, and other comparability factors, valuable at its own expense and risk. The
otherwise had a reasonable anticipation of the royalties paid by independent licensees taxpayer may present additional facts that
receiving a future benefit from those would provide the most reliable measure of could indicate which of these or other
activities. In this case, USSub’s undertaking the arm’s length royalty owed by USSub to alternative agreements best reflects the
the incremental marketing activities in years FP, apart from the additional facts in economic substance of the underlying
1 through 6 is a course of conduct that is paragraph (ii) of this example. transactions, consistent with the parties’
inconsistent with the parties’ attribution to (ii) In years 1 through 6, USSub performs course of conduct in this particular case.
FP in year 7 of substantially all the premium incremental marketing activities with respect Example 5. Non-arm’s length
return from the enhanced YY trademark in to the AA trademark athletic gear, in addition compensation. (i) The facts are the same as
the United States market. Therefore, the to the activities required under the terms of in paragraph (i) of Example 4. As in Example
Commissioner may impute one or more the license agreement with FP, that are also 4, assume that, after adjustments are made to
agreements between USSub and FP, incremental as compared to those observed improve the reliability of the comparison for
consistent with the economic substance of in the comparables. FP does not directly or any material differences relating to marketing
their course of conduct, which would afford indirectly compensate USSub for performing activities, manufacturing or marketing
USSub an appropriate portion of the these incremental activities during years 1 intangibles, and other comparability factors,
premium return from the YY trademark through 6. By year 7, AA trademark athletic the royalties paid by independent licensees
wristwatches. For example, the gear generates a premium return in the would provide the most reliable measure of
Commissioner may impute a separate United States, as compared to similar athletic the arm’s length royalty owed by USSub to
services agreement that affords USSub gear marketed by independent licensees. In FP, apart from the additional facts described
contingent-payment compensation for its year 7, USSub and FP enter into a separate in paragraph (ii) of this example.
incremental marketing activities in years 1 services agreement under which FP agrees to (ii) In years 1 through 4, USSub performs
through 6, which benefited FP by compensate USSub on a cost basis for the certain incremental marketing activities with
contributing to the value of the trademark incremental marketing activities that USSub respect to the AA trademark athletic gear, in
owned by FP. In the alternative, the performed during years 1 through 6, and to addition to the activities required under the
Commissioner may impute a long-term, compensate USSub on a cost basis for any terms of the basic license agreement, that are
exclusive agreement to exploit the YY incremental marketing activities it may also incremental as compared with those
trademark in the United States that allows perform in year 7 and subsequent years. In activities observed in the comparables. At the
USSub to benefit from the incremental addition, the parties revise the license start of year 1, FP enters into a separate
marketing activities it performed. As another agreement executed in year 1, and increase services agreement with USSub, which states
alternative, the Commissioner may require the royalty to a level that attributes to FP that FP will compensate USSub quarterly, in
FP to compensate USSub for terminating substantially all the premium return from an amount equal to specified costs plus X%,
USSub’s imputed long-term, exclusive sales of the AA trademark athletic gear in the for these incremental marketing functions.
agreement to exploit the YY trademark in the United States. Further, these written agreements reflect the
United States, an agreement that USSub (iii) In determining whether an allocation intent of the parties that USSub receive such
made more valuable at its own expense and of income is appropriate in year 7, the compensation from FP throughout the term
risk. The taxpayer may present additional Commissioner may consider the economic of the agreement, without regard to the
facts that could indicate which of these or substance of the arrangements between success or failure of the promotional
other alternative agreements best reflects the USSub and FP and the parties’ course of activities. During years 1 though 4, USSub
economic substance of the underlying conduct throughout their relationship. Based performs marketing activities pursuant to the
transactions, consistent with the parties’ on this analysis, the Commissioner separate services agreement and in each year
course of conduct in the particular case. determines that it is unlikely that, ex ante, an USSub receives the specified compensation
Example 4. Contractual terms imputed uncontrolled taxpayer operating at arm’s from FP on a cost of services plus basis.
from economic substance. (i) FP, a foreign length would engage in the incremental (iii) In evaluating year 4, the Commissioner
producer of athletic gear, is the registered marketing activities to develop or enhance an performs an analysis of independent parties
holder of the AA trademark in the United intangible owned by another party unless it that perform promotional activities
States and in other countries worldwide. In received contemporaneous compensation or comparable to those performed by USSub
and that receive separately-stated services that resulted in transfer of valuable general. The Commissioner will
compensation on a current basis without know how to another party unless it received evaluate the results of a transaction as
contingency. The Commissioner determines contemporaneous compensation or otherwise actually structured by the taxpayer
that the magnitude of the specified cost plus had a reasonable anticipation of receiving a
unless its structure lacks economic
X% is outside the arm’s length range in each future benefit from those activities. In this
of years 1 through 4. Based on an evaluation case, Company X’s undertaking the research substance. However, the Commissioner
of all the facts and circumstances, the and development activities and then may consider the alternatives available
Commissioner makes an allocation to require providing technical data and know-how to to the taxpayer in determining whether
payment of compensation to USSub for the Company Y in year 4 is inconsistent with the the terms of the controlled transaction
promotional activities performed in year 4, registration and subsequent exploitation of would be acceptable to an uncontrolled
based on the median of the interquartile the patent by Company Y. Therefore, the taxpayer faced with the same
range of the arm’s length markups charged by Commissioner may impute one or more alternatives and operating under
the uncontrolled comparables described in agreements between Company X and
comparable circumstances. In such
§ 1.482–1(e)(3). Company Y consistent with the economic
substance of their course of conduct, which cases the Commissioner may adjust the
(iv) Given that based on facts and
circumstances, the terms agreed by the would afford Company X an appropriate consideration charged in the controlled
controlled parties were that FP would bear portion of the premium return from the transaction based on the cost or profit of
all risks associated with the promotional patent rights. For example, the Commissioner an alternative as adjusted to account for
activities performed by USSub to promote may impute a separate services agreement material differences between the
the AA trademark product in the United that affords Company X contingent-payment alternative and the controlled
States market, and given that the parties’ compensation for its services in year 4 for the transaction, but will not restructure the
conduct during the years examined was benefit of Company Y, consisting of making
transaction as if the alternative had been
consistent with this allocation of risk, the fact available to Company Y technical data,
know-how, and other fruits of research and adopted by the taxpayer. See § 1.482–
that the cost of services plus markup on 1(d)(3) (factors for determining
USSub’s services was outside the arm’s development conducted in previous years.
length range does not, without more, support These services benefited Company Y by comparability; contractual terms and
imputation of additional contractual terms giving rise to and contributing to the value risk); §§ 1.482–3(e), 1.482–4(d), and
based on alternative views of the economic of the patent rights that were ultimately 1.482–9T(h) (unspecified methods).
substance of the transaction, such as terms registered by Company Y. In the alternative, (f)(2)(ii)(B) through (f)(2)(iii)(A)
indicating that USSub, rather than FP, bore the Commissioner may impute a transfer of [Reserved]. For further guidance, see
the risk associated with these activities. In patentable intangible rights from Company X § 1.482–1(f)(2)(ii)(B) through
to Company Y immediately preceding the
other facts and circumstances, had the
registration of patent rights by Company Y.
(f)(2)(iii)(A).
compensation paid to USSub been
The taxpayer may present additional facts (f)(2)(iii)(B) Circumstances warranting
significantly outside the arm’s length range, consideration of multiple year data. The
that could indicate which of these or other
that might lead the Commissioner to examine extent to which it is appropriate to
alternative agreements best reflects the
further whether, despite the contractual economic substance of the underlying consider multiple year data depends on
terms that require cost-plus reimbursement of transactions, consistent with the parties’ the method being applied and the issue
USSub, the economic substance of the course of conduct in the particular case.
transaction was not consistent with FP’s being addressed. Circumstances that
bearing the risk associated with promotional (d)(3)(iii) and (iv) [Reserved]. For may warrant consideration of data from
activities in the United States market. further guidance, see § 1.482–1(d)(3)(iii) multiple years include the extent to
Example 6. Contractual terms imputed and (d)(3)(iv). which complete and accurate data are
from economic substance. (i) Company X is (d)(3)(v) Property or services. available for the taxable year under
a member of a controlled group that has been Evaluating the degree of comparability review, the effect of business cycles in
in operation in the pharmaceutical sector for between controlled and uncontrolled the controlled taxpayer’s industry, or
many years. In years 1 through 4, Company transactions requires a comparison of the effects of life cycles of the product
X undertakes research and development or intangible being examined. Data from
the property or services transferred in
activities. As a result of those activities,
the transactions. This comparison may one or more years before or after the
Company X developed a compound that may
be more effective than existing medications include any intangibles that are taxable year under review must
in the treatment of certain conditions. embedded in tangible property or ordinarily be considered for purposes of
(ii) Company Y is acquired in year 4 by the services being transferred. The applying the provisions of paragraph
controlled group that includes Company X. comparability of the embedded (d)(3)(iii) of this section (risk),
Once Company Y is acquired, Company X intangibles will be analyzed using the paragraph (d)(4)(i) of this section
makes available to Company Y a large factors listed in § 1.482–4(c)(2)(iii)(B)(1) (market share strategy), § 1.482–4(f)(2)
amount of technical data concerning the new (comparable intangible property). The (periodic adjustments), § 1.482–5
compound, which Company Y uses to relevance of product comparability in (comparable profits method), § 1.482–
register patent rights with respect to the 9T(f) (comparable profits method for
evaluating the relative reliability of the
compound in several jurisdictions, making
Company Y the legal owner of such patents. results will depend on the method services), and § 1.482–9T(i) (contingent-
Company Y then enters into licensing applied. For guidance concerning the payment contractual terms for services).
agreements with group members that afford specific comparability considerations On the other hand, multiple year data
Company Y 100% of the premium return applicable to transfers of tangible and ordinarily will not be considered for
attributable to use of the intangible by its intangible property and performance of purposes of applying the comparable
subsidiaries. services, see §§ 1.482–3 through 1.482– uncontrolled price method of § 1.482–
(iii) In determining whether an allocation 6 and § 1.482–9T; see also § 1.482–3(f), 3(b) or the comparable uncontrolled
is appropriate in year 4, the Commissioner § 1.482–4T(f)(4), and § 1.482–9T(m), services price method of § 1.482–9T(c)
may consider the economic substance of the dealing with the coordination of the (except to the extent that risk or market
arrangements between Company X and
Company Y, and the parties’ course of
intangible and tangible property and share strategy issues are present).
conduct throughout their relationship. Based performance of services rules. (f)(2)(iii)(C) through (g)(3) [Reserved].
on this analysis, the Commissioner (d)(4) through (f)(2)(i) [Reserved]. For For further guidance, see § 1.482–
determines that it is unlikely that an further guidance, see § 1.482–1(d)(4) 1(f)(2)(iii)(C) through (g)(3).
uncontrolled taxpayer operating at arm’s through (f)(2)(i). (g)(4) Setoffs—(i) In general. If an
length would make available the results of its (f)(2)(ii) Allocation based on allocation is made under section 482
research and development or perform taxpayer’s actual transactions—(A) In with respect to a transaction between
controlled taxpayers, the Commissioner are generally applicable for taxable § 1.482–4 Methods to determine taxable
will take into account the effect of any years beginning after December 31, income in connection with a transfer of
other non-arm’s length transaction 2006. intangible property.
between the same controlled taxpayers (ii) A person may elect to apply the * * * * *
in the same taxable year which will provisions of paragraphs (a)(1), (b)(2)(i), (f) * * *
result in a setoff against the original (d)(3)(ii)(C) Example 3, Example 4, (3) [Reserved]. For further guidance,
section 482 allocation. Such setoff, Example 5, and Example 6, (d)(3)(v), see § 1.482–4T(f)(3).
however, will be taken into account (f)(2)(ii)(A), (f)(2)(iii)(B), (g)(4)(i), (4) [Reserved]. For further guidance,
only if the requirements of paragraph (g)(4)(iii), and (i) of this section to see § 1.482–4T(f)(4).
(g)(4)(ii) of this section are satisfied. If earlier taxable years in accordance with * * * * *
the effect of the setoff is to change the the rules set forth in § 1.482–9T(n)(2). (7) [Reserved]. For further guidance,
characterization or source of the income (iii) The applicability of § 1.482–1T see § 1.482–4T(f)(7).
or deductions, or otherwise distort expires on or before July 31, 2009. ■ Par. 9. Section 1.482–4T is added to
taxable income, in such a manner as to ■ Par. 6. Section 1.482–2 is amended as read as follows:
affect the U.S. tax liability of any follows:
member, adjustments will be made to ■ 1. Paragraph (b) is revised.
§ 1.482–4T Methods to determine taxable
reflect the correct amount of each income in connection with a transfer of
■ 2. Paragraph (e) is added.
category of income or deductions. For intangible property (temporary).
The addition and revision read as
purposes of this setoff provision, the (a) through (f)(2) [Reserved]. For
follows:
term arm’s length refers to the amount further guidance, see § 1.482–4(a)
defined in paragraph (b) of this section § 1.482–2 Determination of taxable income through (f)(2).
(Arm’s length standard), without regard in specific situations. (f)(3) Ownership of intangible
to the rules in § 1.482–2(a) that treat * * * * * property—(i) Identification of owner—
certain interest rates as arm’s length (b) Rendering of services. [Reserved]. (A) In general. The legal owner of an
rates of interest. For further guidance, see § 1.482–2T(b). intangible pursuant to the intellectual
(g)(4)(ii) [Reserved]. For further property law of the relevant jurisdiction,
* * * * *
guidance, see § 1.482–1(g)(4)(ii). or the holder of rights constituting an
(e) Effective date. [Reserved]. For
(g)(4)(iii) Examples. The following intangible pursuant to contractual terms
further guidance, see § 1.482–2T(e).
examples illustrate this paragraph (g)(4): (such as the terms of a license) or other
■ Par. 7. Section 1.482–2T is added to legal provision, will be considered the
Example 1. P, a U.S. corporation, renders
construction services to S, its foreign
read as follows: sole owner of the respective intangible
subsidiary in Country Y, in connection with § 1.482–2T Determination of taxable for purposes of this section unless such
the construction of S’s factory. An arm’s income in specific situations (temporary). ownership is inconsistent with the
length charge for such services determined economic substance of the underlying
under § 1.482–9T would be $100,000. During (a) [Reserved]. For further guidance,
see § 1.482–2(a). transactions. See § 1.482–1(d)(3)(ii)(B)
the same taxable year P makes available to S (identifying contractual terms). If no
the use of a machine to be used in the (b) Rendering of services. For rules
construction of the factory, and the arm’s
owner of the respective intangible is
governing allocations under section 482
length rental value of the machine is $25,000. identified under the intellectual
to reflect an arm’s length charge for
P bills S $125,000 for the services, but does property law of the relevant jurisdiction,
controlled transactions involving the
not charge S for the use of the machine. No or pursuant to contractual terms
rendering of services, see § 1.482–9T.
allocation will be made with respect to the (including terms imputed pursuant to
undercharge for the machine if P notifies the (c) [Reserved]. For further guidance,
§ 1.482–1(d)(3)(ii)(B)) or other legal
district director of the basis of the claimed see § 1.482–2(c).
provision, then the controlled taxpayer
setoff within 30 days after the date of the (d) [Reserved]. For further guidance, who has control of the intangible, based
letter from the district director transmitting see § 1.482–2(d). on all the facts and circumstances, will
the examination report notifying P of the (e) Effective date—(1) In general. The
proposed adjustment, establishes that the
be considered the sole owner of the
provision of paragraph (b) of this section intangible for purposes of this section.
excess amount charged for services was equal is generally applicable for taxable years
to an arm’s length charge for the use of the (B) Cost sharing arrangements. The
beginning after December 31, 2006. rule in paragraph (f)(3)(i)(A) of this
machine and that the taxable income and
income tax liabilities of P are not distorted, (2) Election to apply regulation to section will apply to interests in
and documents the correlative allocations earlier taxable years. A person may elect covered intangibles, as defined in
resulting from the proposed setoff. to apply the provisions of paragraph (b) § 1.482–7(b)(4)(iv), only as provided in
of this section to earlier taxable years in § 1.482–7 (sharing of costs).
(g)(4)(iii) Example 2 through (h)
accordance with the rules set forth in (ii) Examples. The principles of this
[Reserved]. For further guidance, see
§ 1.482–9T(n)(2). paragraph (f)(3) are illustrated by the
§ 1.482–1(g)(4)(iii) Example 2 through
(h). (3) Expiration date. The applicability following examples:
(i) Definitions. The definitions set of § 1.482–2T expires on or before July
Example 1. FP, a foreign corporation, is the
forth in paragraphs (i)(1) through (i)(10) 31, 2009.
registered holder of the AA trademark in the
of this section apply to this section and ■ Par. 8. Section 1.482–4 is amended as United States. FP licenses to its U.S.
§§ 1.482–2T through 1.482–9T. follows: subsidiary, USSub, the exclusive rights to
(j)(1) through (j)(5) [Reserved]. For ■ 1. Paragraph (f)(3) is revised. manufacture and market products in the
further guidance, see 1.482–1(j)(1) ■ 2. Paragraphs (f)(4) and (f)(5) are United States under the AA trademark. FP is
redesignated as paragraphs (f)(5) and the owner of the trademark pursuant to
through (j)(5).
intellectual property law. USSub is the
(j)(6)(i) The provisions of paragraphs (f)(6), respectively.

owner of the license pursuant to the terms of
(a)(1), (b)(2)(i), (d)(3)(ii)(C) Example 3, ■ 3. New paragraphs (f)(4) and (f)(7) are the license, but is not the owner of the
Example 4, Example 5, and Example 6, added. trademark. See paragraphs (b)(3) and (4) of
(d)(3)(v), (f)(2)(ii)(A), (f)(2)(iii)(B), The revision and additions read as this section (defining an intangible as, among
(g)(4)(i), (g)(4)(iii), and (i) of this section follows: other things, a trademark or a license).
Example 2. The facts are the same as in consideration for the exclusive right to re-sell executed in year 1. The parties do not
Example 1. As a result of its sales and YY trademarked merchandise in the United execute a separate agreement with respect to
marketing activities, USSub develops a list of States, are embedded in the transfer price these incremental marketing activities
several hundred creditworthy customers that paid for the wristwatches. Accordingly, performed by USSub The license agreement
regularly purchase AA trademarked pursuant to paragraph (f)(4)(i) of this section, executed in year 1 is of sufficient duration
products. Neither the terms of the contract ordinarily no separate allocation would be that it is reasonable to anticipate that USSub
between FP and USSub nor the relevant appropriate with respect to these embedded will obtain the benefit of its incremental
intellectual property law specify which party contributions. activities, in the form of increased sales or
owns the customer list. Because USSub has (iii) Whether an allocation is warranted revenues of trademarked products in the U.S.
knowledge of the contents of the list, and has with respect to the transfer price for the market.
practical control over its use and wristwatches is determined under §§ 1.482– (ii) To the extent that it was reasonable to
dissemination, USSub is considered the sole 1, 1.482–3, and this section through § 1.482– anticipate that USSub’s incremental
owner of the customer list for purposes of 6. The comparability analysis would include marketing activities would increase the value
this paragraph (f)(3). consideration of all relevant factors, only of USSub’s intangible (that is, USSub’s
including the nature of the intangible license to use the AA trademark for a
(4) Contribution to the value of an embedded in the wristwatches and the nature specified term), and not the value of the AA
intangible owned by another—(i) In of the marketing activities required under the trademark owned by FP, USSub’s
general. The arm’s length consideration agreement. This analysis would also take into incremental activities do not constitute a
for a contribution by one controlled account that the compensation for the contribution for which an allocation is
taxpayer that develops or enhances the activities performed by USSub and FP, as warranted under paragraph (f)(4)(i) of this
value, or may be reasonably anticipated well as the consideration for USSub’s use of section.
to develop or enhance the value, of an the YY trademark, is embedded in the Example 5. (i) Facts. The year 1 facts are
intangible owned by another controlled transfer price for the wristwatches, rather the same as in Example 3. In year 2, FP and
than provided for in separate agreements. See USSub enter into a separate services
taxpayer will be determined in §§ 1.482–3(f) and 1.482–9T(m)(4). agreement that obligates USSub to perform
accordance with the applicable rules Example 3. (i) Facts. FP, a foreign producer certain incremental marketing activities to
under section 482. If the consideration of athletic gear, is the registered holder of the promote AA trademark athletic gear in the
for such a contribution is embedded AA trademark in the United States and in United States, above and beyond the
within the contractual terms for a other countries. In year 1, FP licenses to a activities specified in the license agreement
controlled transaction that involves newly organized U.S. subsidiary, USSub, the executed in year 1. In year 2, USSub begins
such intangible, then ordinarily no exclusive rights to use certain manufacturing to perform these incremental activities,
separate allocation will be made with and marketing intangibles to manufacture pursuant to the separate services agreement
respect to such contribution. In such and market athletic gear in the United States with FP.
under the AA trademark. The license (ii) Whether an allocation is warranted
cases, pursuant to § 1.482–1(d)(3), the agreement obligates USSub to pay a royalty with respect to USSub’s incremental
contribution must be accounted for in based on sales of trademarked merchandise. marketing activities covered by the separate
evaluating the comparability of the The license agreement also obligates FP and services agreement would be evaluated under
controlled transaction to uncontrolled USSub to perform without separate §§ 1.482–1 and 1.482–9T, including a
comparables, and accordingly in compensation specified types and levels of comparison of the compensation provided for
determining the arm’s length marketing activities. In year 1, USSub the services with the results obtained under
consideration in the controlled manufactures and sells athletic gear under a method pursuant to § 1.482–9T, selected
transaction. the AA trademark in the United States. and applied in accordance with the best
(ii) Examples. The principles of this (ii) The consideration for FP’s and USSub’s method rule of § 1.482–1(c).
paragraph (f)(4) are illustrated by the respective marketing activities is embedded (iii) Whether an allocation is warranted
in the contractual terms of the license for the with respect to the royalty under the license
following examples: AA trademark. Accordingly, pursuant to agreement is determined under § 1.482–1 and
Example 1. A, a member of a controlled paragraph (f)(4)(i) of this section, ordinarily this section through § 1.482–6. The
group, allows B, another member of the no separate allocation would be appropriate comparability analysis would include
controlled group, to use tangible property, with respect to the embedded contributions consideration of all relevant factors, such as
such as laboratory equipment, in connection in year 1. See § 1.482–9T(m)(4). the term and geographical exclusivity of the
with B’s development of an intangible that B (iii) Whether an allocation is warranted license, the nature of the intangibles subject
owns. By furnishing tangible property, A with respect to the royalty under the license to the license, and the nature of the
makes a contribution to the development of agreement would be analyzed under § 1.482– marketing activities required to be
an intangible owned by another controlled 1 and this section through § 1.482–6. The undertaken pursuant to the license. The
taxpayer, B. Pursuant to paragraph (f)(4)(i) of comparability analysis would include comparability analysis would take into
this section, the arm’s length charge for A’s consideration of all relevant factors, such as account that the compensation for the
furnishing of tangible property will be the term and geographical exclusivity of the incremental activities by USSub is provided
determined under the rules for use of license, the nature of the intangibles subject for in the separate services agreement, rather
tangible property in § 1.482–2(c). to the license, and the nature of the than embedded in the royalty paid for use of
Example 2. (i) Facts. FP, a foreign producer marketing activities required to be the AA trademark. For illustrations of
of wristwatches, is the registered holder of undertaken pursuant to the license. Pursuant application of the best method rule, see
the YY trademark in the United States and to paragraph (f)(4)(i) of this section, the § 1.482–8T Example 10, Example 11, and
in other countries worldwide. FP enters into analysis would also take into account the fact Example 12.
an exclusive, five-year, renewable agreement that the compensation for the marketing Example 6. (i) Facts. The year 1 facts are
with its newly organized U.S. subsidiary, services is embedded in the royalty paid for the same as in Example 3. In year 2, FP and
USSub. The contractual terms of the use of the AA trademark, rather than USSub enter into a separate services
agreement grant USSub the exclusive right to provided for in a separate services agreement. agreement that obligates FP to perform
re-sell trademark YY wristwatches in the For illustrations of application of the best incremental marketing activities, not
United States, obligate USSub to pay a fixed method rule, see § 1.482–8T Example 10, specified in the year 1 license, by advertising
price per wristwatch throughout the entire Example 11, and Example 12. AA trademarked athletic gear in selected
term of the contract, and obligate both FP and Example 4. (i) Facts. The year 1 facts are international sporting events, such as the
USSub to undertake without separate the same as in Example 3, with the following Olympics and the soccer World Cup. FP’s
compensation specified types and levels of exceptions. In year 2, USSub undertakes corporate advertising department develops
marketing activities. certain incremental marketing activities, in and coordinates these special promotions.
(ii) The consideration for FP’s and USSub’s addition to those required by the contractual The separate services agreement obligates
marketing activities, as well as the terms of the license for the AA trademark USSub to pay an amount to FP for the benefit
to USSub that may reasonably be anticipated (B) * * * (1) * * * [Reserved]. For relies exclusively on external market
as the result of FP’s incremental activities. further guidance, see § 1.482– benchmarks. As indicated in § 1.482–
The separate services agreement is not a 6T(c)(2)(ii)(B)(1). 1(c)(2)(i), as the degree of comparability
qualified cost sharing arrangement under between the controlled and
§ 1.482–7. FP begins to perform the * * * * *
incremental activities in year 2 pursuant to (D) [Reserved]. For further guidance, uncontrolled transactions increases, the
the separate services agreement. see § 1.482–6T(c)(2)(ii)(D). relative weight accorded the analysis
(ii) Whether an allocation is warranted * * * * * under this method will increase. In
with respect to the incremental marketing (3) * * * addition, the reliability of the analysis
activities performed by FP under the separate (i) * * * under this method may be enhanced by
services agreement would be evaluated under (A) [Reserved]. For further guidance, the fact that all parties to the controlled
§ 1.482–9T. Under the circumstances, it is transaction are evaluated under the
reasonable to anticipate that FP’s activities
see § 1.482–6T(c)(3)(i)(A).
(B) [Reserved]. For further guidance, comparable profit split. However, the
would increase the value of USSub’s license reliability of the results of an analysis
as well as the value of FP’s trademark. see § 1.482–6T(c)(3)(i)(B).
(ii) * * * based on information from all parties to
Accordingly, the incremental activities by FP
may constitute in part a controlled services (D) [Reserved]. For further guidance, a transaction is affected by the
transaction for which USSub must see § 1.482–6T(c)(3)(ii)(D). reliability of the data and the
compensate FP. The analysis of whether an assumptions pertaining to each party to
* * * * * the controlled transaction. Thus, if the
allocation is warranted would include a
■ Par. 11. Section 1.482–6T is added to data and assumptions are significantly
comparison of the compensation provided for
the services with the results obtained under read as follows: more reliable with respect to one of the
a method pursuant to § 1.482–9T, selected parties than with respect to the others,
§ 1.482–6T Profit split method (temporary).
and applied in accordance with the best a different method, focusing solely on
method rule of § 1.482–1(c). the results of that party, may yield more
(iii) Whether an allocation is appropriate (a) through (c)(2)(ii)(A) [Reserved].
reliable results.
with respect to the royalty under the license For further guidance, see § 1.482–6(a) (c)(3)(i) [Reserved]. For further
agreement would be evaluated under through (c)(2)(ii)(A).
§ 1.482–1 through § 1.482–6 of this section.
guidance, see § 1.482–6(c)(3)(i).
(c)(2)(ii)(B) Comparability—(1) In (c)(3)(i)(A) Allocate income to routine
The comparability analysis would include general. The degree of comparability
consideration of all relevant factors, such as contributions. The first step allocates
between the controlled and operating income to each party to the
the term and geographical exclusivity of
USSub’s license, the nature of the intangibles
uncontrolled taxpayers is determined by controlled transactions to provide a
subject to the license, and the marketing applying the comparability provisions market return for its routine
activities required to be undertaken by both of § 1.482–1(d). The comparable profit contributions to the relevant business
FP and USSub pursuant to the license. This split compares the division of operating activity. Routine contributions are
comparability analysis would take into profits among the controlled taxpayers contributions of the same or a similar
account that the compensation for the to the division of operating profits kind to those made by uncontrolled
incremental activities performed by FP was among uncontrolled taxpayers engaged taxpayers involved in similar business
provided for in the separate services in similar activities under similar
agreement, rather than embedded in the
activities for which it is possible to
circumstances. Although all of the identify market returns. Routine
royalty paid for use of the AA trademark. For
illustrations of application of the best method
factors described in § 1.482–1(d)(3) must contributions ordinarily include
rule, see § 1.482–8T, Example 10, Example be considered, comparability under this contributions of tangible property,
11, and Example 12. method is particularly dependent on the services and intangibles that are
considerations described under the generally owned by uncontrolled
(f)(5) and (f)(6) [Reserved]. For further comparable profits method in § 1.482–
guidance, see § 1.482–4(f)(5) and (f)(6). taxpayers engaged in similar activities.
5(c)(2) or § 1.482–9T(f)(2)(iii) because A functional analysis is required to
(f)(7) Effective date. (i) In general. The
this method is based on a comparison of identify these contributions according to
provisions of paragraphs (f)(3) and (f)(4)
the operating profit of the controlled the functions performed, risks assumed,
are generally applicable for taxable
and uncontrolled taxpayers. In addition, and resources employed by each of the
years beginning after December 31,
because the contractual terms of the controlled taxpayers. Market returns for
2006.
(ii) Election to apply regulation to relationship among the participants in the routine contributions should be
earlier taxable years. A person may elect the relevant business activity will be a determined by reference to the returns
to apply the provisions of paragraphs principal determinant of the allocation achieved by uncontrolled taxpayers
(f)(3) and (f)(4) of this section to earlier of functions and risks among them, engaged in similar activities, consistent
taxable years in accordance with the comparability under this method also with the methods described in §§ 1.482–
rules set forth in § 1.482–9T(n)(2). depends particularly on the degree of 3, 1.482–4, 1.482–5 and 1.482–9T.
(iii) Expiration date. The applicability similarity of the contractual terms of the (B) Allocate residual profit—(1)
of § 1.482–4T expires on or before July controlled and uncontrolled taxpayers. Nonroutine contributions generally. The
31, 2009. Finally, the comparable profit split may allocation of income to the controlled
not be used if the combined operating taxpayer’s routine contributions will not
■ Par. 10. Section 1.482–6 is amended
profit (as a percentage of the combined reflect profits attributable to each
by revising paragraphs (c)(2)(ii)(B)(1),
assets) of the uncontrolled comparables controlled taxpayer’s contributions to
(c)(2)(ii)(D), (c)(3)(i)(A), (c)(3)(i)(B), and
varies significantly from that earned by the relevant business activity that are
(c)(3)(ii)(D) to read as follows:
The revisions and addition read as the controlled taxpayers. not routine (nonroutine contributions).
follows: (c)(2)(ii)(B)(2) through (C) [Reserved]. A nonroutine contribution is a
For further guidance, see § 1.482– contribution that is not accounted for as
§ 1.482–6 Profit split method. 6(c)(2)(ii)(B)(2) through (C). a routine contribution. Thus, in cases
* * * * * (c)(2)(ii)(D) Other factors affecting where such nonroutine contributions
(c) * * * reliability. Like the methods described are present there normally will be an
(2) * * * in §§ 1.482–3, 1.482–4, 1.482–5 and unallocated residual profit after the
(ii) * * * 1.482–9T, the comparable profit split allocation of income described in
paragraph (c)(3)(i)(A) of this section. benchmarks, the reliability of the X, an entertainment device targeted primarily
Under this second step, the residual analysis will be decreased in relation to at the youth market. FP’s wholly-owned,
profit generally should be divided an analysis under a method that relies exclusive U.S. distributor, USSub, sells
Product X in the U.S. market. USSub hires
among the controlled taxpayers based on market benchmarks. Finally, the
an independent marketing firm, Agency A, to
upon the relative value of their reliability of the analysis under this promote Product X in the U.S. market.
nonroutine contributions to the relevant method may be enhanced by the fact Agency A has successfully promoted other
business activity. The relative value of that all parties to the controlled electronic products on behalf of other
the nonroutine contributions of each transaction are evaluated under the uncontrolled parties. USSub executes a one-
taxpayer should be measured in a residual profit split. However, the year, renewable contract with Agency A that
manner that most reliably reflects each reliability of the results of an analysis requires it to develop the market for Product
nonroutine contribution made to the based on information from all parties to X, within an annual budget set by USSub. In
controlled transaction and each years 1 through 3, Agency A develops
a transaction is affected by the
advertising, buys media, and sponsors events
controlled taxpayer’s role in the reliability of the data and the featuring Product X. Agency A receives a
nonroutine contributions. If the assumptions pertaining to each party to markup of 25% on all expenses of promoting
nonroutine contribution by one of the the controlled transaction. Thus, if the Product X, with the exception of media buys,
controlled taxpayers is also used in data and assumptions are significantly which are reimbursed at cost. During year 3,
other business activities (such as more reliable with respect to one of the sales of Product X decrease sharply, as
transactions with other controlled parties than with respect to the others, Product X is displaced by competitors’
taxpayers), an appropriate allocation of a different method, focusing solely on products. At the end of year 3, sales of
the value of the nonroutine contribution the results of that party, may yield more Product X are discontinued.
must be made among all the business (ii) Prior to the start of year 4, FP develops
reliable results. a new entertainment device, Product Y. Like
activities in which it is used. (c)(3)(iii) [Reserved]. For further Product X, Product Y is intended for sale to
(2) Nonroutine contributions of guidance, see § 1.482–6(c)(3)(iii). the youth market, but it is marketed under a
intangible property. In many cases, (d) Effective date—(1) In general. The new trademark distinct from that used for
nonroutine contributions of a taxpayer provisions of paragraphs (c)(2)(ii)(B)(1) Product X. USSub decides to perform all U.S.
to the relevant business activity may be and (D), (c)(3)(i)(A) and (B), and market promotion for Product Y. USSub hires
contributions of intangible property. For (c)(3)(ii)(D) of this section are generally key Agency A staff members who handled
purposes of paragraph (c)(3)(i)(B)(1) of applicable for taxable years beginning the successful Product X campaign. To
this section, the relative value of after December 31, 2006. promote Product Y, USSub intends to use
nonroutine intangible property (2) Election to apply regulation to methods similar to those used successfully
contributed by taxpayers may be by Agency A to promote Product X (print
earlier taxable years. A person may elect advertising, media, event sponsorship, etc.).
measured by external market to apply the provisions of paragraphs FP and USSub enter into a one-year,
benchmarks that reflect the fair market (c)(2)(ii)(B)(1) and (D), (c)(3)(i)(A) and renewable agreement concerning promotion
value of such intangible property. (B), and (c)(3)(ii)(D) of this section to of Product Y in the U.S. market. Under the
Alternatively, the relative value of earlier taxable years in accordance with agreement, FP compensates USSub for
nonroutine intangible property the rules set forth in § 1.482–9T(n)(2). promoting Product Y, based on a cost of
contributions may be estimated by the (3) Expiration date. The applicability services plus markup of A%. Third-party
capitalized cost of developing the of § 1.482–6T expires on or before July media buys by USSub in connection with
intangible property and all related 31, 2009. Product Y are reimbursed at cost.
improvements and updates, less an (iii) Assume that under the contractual
■ Par. 12. Section 1.482–8 is amended arrangements between FP and USSub, the
appropriate amount of amortization
as follows: arm’s length consideration for Product Y and
based on the useful life of each ■ 1. Designating the undesignated the trademark or other intangibles may be
intangible. Finally, if the intangible introductory text as paragraph (a) and determined reliably under one or more
development expenditures of the parties
adding a paragraph heading. transfer pricing methods. At issue in this
are relatively constant over time and the ■ 2. Adding paragraph (b) designation, example is the separate evaluation of the
useful life of the intangible property heading, and Examples 10 through 12. arm’s length compensation for the year 4
contributed by all parties is The additions read as follows: promotional activities performed by USSub
approximately the same, the amount of pursuant to its contract with FP.
actual expenditures in recent years may § 1.482–8 Examples of the best method (iv) USSub’s accounting records contain
be used to estimate the relative value of rule. reliable data that separately state the costs
nonroutine intangible property (a) Introduction. * * * incurred to promote Product Y. A functional
contributions. analysis indicates that USSub’s activities to
(b) Examples. * * *
(c)(3)(ii)(A) through (C) [Reserved]. promote Product Y in year 4 are similar to
Examples 10 through 12. [Reserved]. activities performed by Agency A during
For further guidance, see § 1.482– For further guidance, see 1.482–8T(b) years 1 through 3 under the contract with FP.
6(c)(3)(ii)(A) through (C). Examples 10 through 12. In other respects, no material differences
(c)(3)(ii)(D) Other factors affecting ■ Par. 13. Section 1.482–8T is added to exist in the market conditions or the
reliability. Like the methods described read as follows: promotional activities performed in year 4, as
in §§ 1.482–3, 1.482–4, 1.482–5 and compared to those in years 1 through 3.
1.482–9T, the first step of the residual § 1.482–8T Examples of the best method (v) It is possible to identify uncontrolled
profit split relies exclusively on external rule (temporary). distributors or licensees of electronic
market benchmarks. As indicated in (a) [Reserved]. For further guidance, products that perform, as one component of
§ 1.482–1(c)(2)(i), as the degree of see § 1.482–8(a). their business activities, promotional
comparability between the controlled activities similar to those performed by
(b) [Reserved]. For further guidance,
and uncontrolled transactions increases, USSub. However, it is unlikely that publicly
see § 1.482–8(b), Examples 1 through 9. available accounting data from these
the relative weight accorded the Example 10. Cost of services plus method companies would allow computation of the
analysis under this method will preferred to other methods. (i) FP designs comparable transactional costs or total
increase. In addition, to the extent the and manufactures consumer electronic services costs associated with the marketing
allocation of profits in the second step devices that incorporate advanced or promotional activities that these entities
is not based on external market technology. In year 1, FP introduces Product perform, as one component of business
activities. If that were possible, the services in transactions similar to those uncontrolled company that owns a
comparable profits method for services might engaged in by FP and USSub. Nor is any nationwide chain of sporting goods retailers
provide a reliable measure of an arm’s length information available concerning in Country X. XSub has been SportMart’s
result. The functional analysis of the uncontrolled transactions that would allow primary supplier from the time that
marketing activities performed by USSub in application of the cost of services plus SportMart began operations. Under the
year 4 indicates that they are similar to the method. It is possible to identify agreement, SportMart will provide AA
activities performed by Agency A in years 1 uncontrolled distributors or licensees of merchandise preferred shelf-space and will
through 3 for Product X. Because reliable home furnishings that perform, as one feature AA merchandise at no charge in its
information is available concerning the component of their business activities, print ads and seasonal promotions. In
markup on costs charged in a comparable promotional activities similar to those consideration for these commitments, USP
uncontrolled transaction, the most reliable performed by USSub. However, it is unlikely and XSub grant SportMart advance access to
measure of an arm’s length price is the cost that publicly available accounting data from new products and the right to use the
of services plus method in § 1.482–9T(e). these companies would allow computation of professional athletes under contract with
Example 11. CPM for services preferred to the comparable transactional costs or total USP in SportMart advertisements featuring
other methods. (i) FP manufactures furniture services costs associated with the marketing AA merchandise (subject to approval of
and accessories for residential use. FP sells or promotional activities that these entities content by USP).
its products to retailers in Europe under the performed, as one component of their (iii) Assume that it is possible to segregate
trademark, ‘‘Moda.’’ FP holds all worldwide business activities. On the other hand, it is all transactions by XSub that involve
rights to the trademark, including in the possible to identify uncontrolled advertising distribution of merchandise acquired from
United States. USSub is FP’s wholly-owned and media relations companies, the principal uncontrolled distributors (non-controlled
subsidiary in the U.S. market and the business activities of which are similar to the transactions). In addition, assume that, apart
exclusive U.S. distributor of FP’s Phase I activities of USSub. Under these from the activities undertaken by USP and
merchandise. Historically, USSub dealt only circumstances, the most reliable measure of XSub to promote AA apparel in Country X,
with specialized designers in the U.S. market an arm’s length price is the comparable the arm’s length compensation for other
and advertised in trade publications targeted profits method of § 1.482–9T(f). The functions performed by USP and XSub in the
to this market. Although items sold in the uncontrolled advertising comparables’ Country X market in years 1 and following
U.S. and Europe are physically identical, treatment of material items, such as can be reliably determined. At issue in this
USSub’s U.S. customers generally resell the classification of items as cost of goods sold Example 12 is the application of the residual
merchandise as non-branded merchandise. or selling, general, and administrative profit split analysis to determine the
(ii) FP retains an independent firm to expenses, may differ from that of USSub. appropriate division between USP and XSub
evaluate the feasibility of selling FP’s Such inconsistencies in accounting treatment of the balance of the operating profits from
trademarked merchandise in the general the Country X market, that is the portion
between the uncontrolled comparables and
wholesale and retail market in the United attributable to nonroutine contributions to
the tested party, or among the comparables,
States. The study concludes that this segment the marketing and promotional activities.
are less important when using the ratio of
of the U.S. market, which is not exploited by (iv) A functional analysis of the marketing
operating profit to total services costs under
USSub, may generate substantial profits. and promotional activities conducted in the
the comparable profits method for services in
Based on this study, FP enters into a separate Country X market, as described in this
agreement with USSub, which provides that § 1.482–9T(f). Under this method, the
operating profit of USSub from the Phase I example, indicates that both USP and XSub
USSub will develop this market in the made nonroutine contributions to the
United States for the benefit of FP. USSub activities is compared to the operating profit
of uncontrolled parties that perform general business activity. FP contributed the long-
separately accounts for personnel expenses, term endorsement contracts with
overhead, and out-of-pocket costs attributable advertising and media relations as their
primary business activity. professional athletes. XSub contributed its
to the initial stage of the marketing campaign long-term contractual rights with SportMart,
(Phase I). USSub receives as compensation its Example 12. Residual profit split preferred
to other methods. (i) USP is a manufacturer which were made more valuable by its
costs, plus a markup of X%, for activities in successful, long-term relationship with
Phase I. At the end of Phase I, FP will of athletic apparel sold under the AA
trademark, to which FP owns the worldwide SportMart.
evaluate the program. If success appears (v) Because both USP and XSub made
likely, USSub will begin full-scale rights. USP sells AA trademark apparel in
countries throughout the world, but prior to valuable, nonroutine contributions to the
distribution of trademarked merchandise in marketing and promotional activities in
the new market segment, pursuant to year 1, USP did not sell its merchandise in
Country X. In year 1, USP acquires an Country X, neither the comparable
agreements negotiated with FP at that time. uncontrolled services price method, the cost
(iii) Assume that under the contractual uncontrolled Country X company which
becomes its wholly-owned subsidiary, XSub. of services plus method, nor the comparable
arrangements in effect between FP and
USP enters into an exclusive distribution profits method for services will provide a
USSub, the arm’s length consideration for the
arrangement with XSub in Country X. Before reliable measure of an arm’s length result. On
merchandise and the trademark or other
being acquired by USP in year 1, XSub account of the valuable, nonroutine
intangibles may be determined reliably under
distributed athletic apparel purchased from contributions made by both parties, the most
one or more transfer pricing methods. At
uncontrolled suppliers and resold that reliable measure of an arm’s length result is
issue in this example is the separate
merchandise to retailers. After being acquired the residual profit split method in § 1.482–
evaluation of the arm’s length compensation
by USP in year 1, XSub continues to 9T(g). The residual profit split analysis
for the marketing activities conducted by
distribute merchandise from uncontrolled would take into account both routine and
USSub in years 1 and following.
(iv) A functional analysis reveals that suppliers and also begins to distribute AA nonroutine contributions by USP and XSub,
USSub’s activities consist primarily of trademark apparel. Under a separate in order to determine an appropriate
modifying the promotional materials created agreement with USP, XSub uses its best allocation of the combined operating profits
by FP, negotiating media buys, and arranging efforts to promote the AA trademark in in the Country X market from the sale of AA
promotional events. FP separately Country X, with the goal of maximizing sales merchandise and from related promotional
compensates USSub for all Phase I activities, volume and revenues from AA merchandise. and marketing activities.
and detailed accounting information is (ii) Prior to year 1, USP executed long-term (c) Effective date—(1) In general. The
available regarding the costs of these endorsement contracts with several provisions of § 1.482–8T Example 10,
activities. The Phase I activities of USSub are prominent professional athletes. These Example 11, and Example 12 are
similar to those of uncontrolled companies contracts give USP the right to use the names
and likenesses of the athletes in any country
generally applicable for taxable years
that perform, as their primary business
activity, a range of advertising and media in which AA merchandise is sold during the beginning after December 31, 2006.
relations activities on a contract basis for term of the contract. These contracts remain (2) Election to apply regulation to
uncontrolled parties. in effect for five years, starting in year 1. earlier taxable years. A person may elect
(v) No information is available concerning Before being acquired by USP, XSub renewed to apply the provisions of § 1.482–8T
the comparable uncontrolled prices for a long-term agreement with SportMart, an Example 10, Example 11, and Example
12 to earlier taxable years in accordance competitive advantages, core procedure. Services will be included in
with the rules set forth in § 1.482– capabilities, or fundamental risks of such revenue procedure based upon the
9T(n)(2). success or failure in one or more trades Commissioner’s determination that the
(3) Expiration date. The applicability or businesses of the renderer, the specified covered services are support
of § 1.482–8T expires on or before July recipient, or both. In evaluating the services common among taxpayers
31, 2009. reasonableness of the conclusion across industry sectors and generally do
■ Par. 14. Section 1.482–9T is added to required by this paragraph (b)(2), not involve a significant median
read as follows: consideration will be given to all the comparable markup on total services
facts and circumstances. costs. For the definition of the median
§ 1.482–9T Methods to determine taxable (3) Other conditions on application of comparable markup on total services
income in connection with a controlled services cost method. The arm’s length costs, see paragraph (b)(4)(ii) of this
services transaction (temporary). section. The Commissioner may add to,
amount charged in a controlled services
(a) In general. The arm’s length transaction may be evaluated under the subtract from, or otherwise revise the
amount charged in a controlled services services cost method if it meets the specified covered services described in
transaction must be determined under requirements of paragraph (b)(3)(i) of the revenue procedure by subsequent
one of the methods provided for in this this section and is not described in revenue procedure, which amendments
section. Each method must be applied paragraph (b)(3)(ii) of this section. will ordinarily be prospective only in
in accordance with the provisions of (i) Adequate books and records. effect.
§ 1.482–1, including the best method Permanent books of account and records (ii) Low margin covered services. Low
rule of § 1.482–1(c), the comparability are maintained for as long as the costs margin covered services are controlled
analysis of § 1.482–1(d), and the arm’s with respect to the covered services are services transactions for which the
length range of § 1.482–1(e), except as incurred by the renderer. Such books median comparable markup on total
those provisions are modified in this and records must include a statement services costs is less than or equal to
section. The methods are— evidencing the taxpayer’s intention to seven percent. For purposes of this
(1) The services cost method, apply the services cost method to paragraph (b), the median comparable
described in paragraph (b) of this evaluate the arm’s length charge for markup on total services costs means
section; such services. Such books and records the excess of the arm’s length price of
(2) The comparable uncontrolled must be adequate to permit verification the controlled services transaction
services price method, described in by the Commissioner of the total determined under the general section
paragraph (c) of this section; services costs incurred by the renderer, 482 regulations without regard to this
(3) The gross services margin method, including a description of the services paragraph (b), using the interquartile
described in paragraph (d) of this in question, identification of the range described in § 1.482–1(e)(2)(iii)(C)
section; renderer and the recipient of such and as necessary adjusting to the
(4) The cost of services plus method, services, and sufficient documentation median of such interquartile range, over
described in paragraph (e) of this to allow verification of the methods total services costs, expressed as a
section; used to allocate and apportion such percentage of total services costs.
(5) The comparable profits method, (5) Shared services arrangement—(i)
costs to the services in question in
described in § 1.482–5 and in paragraph In general. If covered services are the
accordance with paragraph (k) of this
(f) of this section; subject of a shared services
section.
(6) The profit split method, described arrangement, then the arm’s length
(ii) Excluded transactions. The
in § 1.482–6 and in paragraph (g) of this charge to each participant for such
following categories of transactions, in
section; and services will be the portion of the total
whole or part, are not covered services:
(7) Unspecified methods, described in costs of the services otherwise
(A) Manufacturing;
paragraph (h) of this section. (B) Production; determined under the services cost
(b) Services cost method—(1) In (C) Extraction, exploration or method of this paragraph (b) that is
general. The services cost method processing of natural resources; properly allocated to such participant
evaluates whether the amount charged (D) Construction; pursuant to the arrangement.
for covered services meeting the (E) Reselling, distribution, acting as a (ii) Requirements for shared services
requirements of paragraphs (b)(2) and sales or purchasing agent, or acting arrangement. A shared services
(b)(3) of this section is arm’s length by under a commission or other similar arrangement must meet the
reference to the total services costs (as arrangement; requirements described in this
defined in paragraph (j) of this section) (F) Research, development, or paragraph (b)(5).
with no markup. If covered services experimentation; (A) Eligibility. To be eligible for
meet the conditions of this paragraph (G) Engineering or scientific; treatment under this paragraph (b)(5), a
(b), then the services cost method will (H) Financial transactions, including shared services arrangement must—
be considered the best method for guarantees; and (1) Include two or more participants;
purposes of § 1.482–1(c), and the (I) Insurance or reinsurance. (2) Include as participants all
Commissioner’s allocations will be (4) Covered services. For purposes of controlled taxpayers that reasonably
limited to adjusting the amount charged this paragraph (b), covered services anticipate a benefit (as defined under
for such services to the properly consist of a controlled transaction or a paragraph (l)(3)(i) of this section) from
determined amount of such total group of controlled service transactions one or more covered services specified
services costs. (see § 1.482–1(f)(2)(i) (aggregation of in the shared services arrangement; and
(2) Not services that contribute transactions)) that meets the definition (3) Be structured such that each
significantly to fundamental risks of of specified covered services or low covered service (or each reasonable
business success or failure. Services are margin covered services. aggregation of services within the
not covered services unless the taxpayer (i) Specified covered services. meaning of paragraph (b)(5)(iii)(B) of
reasonably concludes in its business Specified covered services are this section) confers a benefit on at least
judgment that the covered services do controlled services transactions that the one participant in the shared services
not contribute significantly to key Commissioner specifies by revenue arrangement.
(B) Allocation. The costs for covered (B) Aggregation. Two or more covered doctors and nurses during interviews and
services must be allocated among the services may be aggregated in a treatment of patients. Company P uses a
participants based on their respective reasonable manner taking into account scanning device to convert medical
information from various paper records into
shares of the reasonably anticipated all the facts and circumstances,
a digital format. Company Q and Company R
benefits from those services, without including whether the relative do not have a computer system that allows
regard to whether the anticipated magnitude of reasonably anticipated them to input or maintain this information,
benefits are in fact realized. Reasonably benefits of the participants sharing the but they have access to this information
anticipated benefits are benefits as costs of such aggregated services may be through their computer systems. Since
defined in paragraph (l)(3)(i) of this reasonably reflected by the allocation Company Q and Company R do not have the
section. The allocation of costs must basis employed pursuant to paragraph requisite computer infrastructure, Company
provide the most reliable measure of the (b)(5)(ii)(B) of this section. The P maintains this medical information for
participants’ respective shares of the aggregation of services under a shared itself as well as for Company Q and Company
R.
reasonably anticipated benefits under services arrangement may differ from
(ii) Assume that these services relating to
the principles of the best method rule. the aggregation used to evaluate the data entry are specified covered services
See § 1.482–1(c). The allocation must be median comparable markup for any low within the meaning of paragraph (b)(4)(i) of
applied on a consistent basis for all margin covered services described in this section. Under the facts and
participants and services. The allocation paragraph (b)(4)(ii) of this section, circumstances of the business of the PQR
to each participant in each taxable year provided that such alternative Controlled Group, the taxpayer could
must reasonably reflect that aggregation can be implemented on a reasonably conclude that these services do
participant’s respective share of reasonable basis, including not contribute significantly to the controlled
reasonably anticipated benefits for such appropriately identifying and isolating group’s key competitive advantages, core
taxable year. If the taxpayer reasonably relevant costs, as necessary. capabilities, or fundamental risks of success
or failure in the group’s business. If these
concluded that the shared services (C) Coordination with cost sharing
services meet the other requirements of
arrangement (including any aggregation arrangements. To the extent that an paragraph (b) of this section, Company P will
pursuant to paragraph (b)(5)(iii)(B) of allocation is made to a participant in a be eligible to charge these services to
this section) allocated costs for covered shared services arrangement that is also Company Q and Company R in accordance
services on a basis that most reliably a participant in a cost sharing with the services cost method.
reflects the participants’ respective arrangement subject to § 1.482–7, such Example 2. Data entry services. (i)
shares of the reasonably anticipated amount with respect to covered services Company P owns and operates several
benefits attributable to such services, as is first allocated pursuant to the shared gambling establishments. Company Q and
provided for in this paragraph (b)(5), services arrangement under this Company R own and operate travel agencies.
then the Commissioner may not adjust paragraph (b)(5). Costs allocated Company P provides its customers with a
‘‘player’s card,’’ which is a smart card device
such allocation basis. pursuant to a shared services
used in Company P’s gambling
(C) Documentation. The taxpayer arrangement may (if applicable) be establishments to track a player’s bets,
must maintain sufficient documentation further allocated between the intangible winnings, losses, hotel accommodations, and
to establish that the requirements of this development activity under § 1.482–7 food and drink purchases. Using their
paragraph (b)(5) are satisfied, and and other activities of the participant. customer lists, Company Q and Company R
include— (6) Examples. The application of this request marketing information about their
(1) A statement evidencing the section is illustrated by the following customers that Company P has gathered from
taxpayer’s intention to apply the examples. No inference is intended these player’s cards. Company Q and
services cost method to evaluate the whether the presence or absence of one Company R use the smart card data to sell
arm’s length charge for covered services or more facts is determinative of the customized vacation packages to their
conclusion in any example. For customers, taking into account their
pursuant to a shared services
individual preferences and spending
arrangement; purposes of Examples 1 through 14,
patterns. Annual reports for the PQR
(2) A list of the participants and the assume that Company P and its Controlled Group state that these smart card
renderer or renderers of covered subsidiaries, Company Q and Company data constitute an important element of the
services under the shared services R, are corporations and members of the group’s overall strategic business planning,
arrangement; same group of controlled entities (PQR including advertising and accommodations.
(3) A description of the basis of Controlled Group). For purposes of (ii) Assume that these services relating to
allocation to all participants, consistent Examples 15 through 17, assume that data entry are specified covered services
with the participants’ respective shares Company P and its subsidiary, Company within the meaning of paragraph (b)(4)(i) of
of reasonably anticipated benefits; and S, are corporations and members of the this section. Under the facts and
(4) A description of any aggregation of same group of controlled entities (PS circumstances, the taxpayer is unable to
covered services for purposes of the reasonably conclude that these services do
Controlled Group). For purposes of not contribute significantly to the controlled
shared services arrangement, and an Examples 18 through 26, assume that group’s key competitive advantages, core
indication whether this aggregation (if Company P and its subsidiaries, capabilities, or fundamental risks of success
any) differs from the aggregation used to Company X, Company Y, and Company or failure in the group’s business. Company
evaluate the median comparable Z, are corporations and members of the P is not eligible to charge these services to
markup for any low margin covered same group of controlled entities (PXYZ Company Q and Company R in accordance
services described in paragraph (b)(4)(ii) Group) and that Company P and its with the services cost method.
of this section. subsidiaries satisfy all of the Example 3. Recruiting services. (i)
(iii) Definitions and special rules—(A) requirements for a shared services Company P, Company Q and Company R are
Participant. A participant is a controlled manufacturing companies that sell their
arrangement specified in paragraphs products to unrelated retail establishments.
taxpayer that reasonably anticipates (b)(5)(ii) and (iii) of this section. Company P’s human resources department
benefits from covered services subject to recruits mid-level managers and engineers for
Example 1. Data entry services. (i)
a shared services arrangement that Company P, Company Q and Company R itself as well as for Company Q and Company
substantially complies with the own and operate hospitals. Company P also R by attending job fairs and other recruitment
requirements described in this owns and operates a computer system for events. For recruiting higher-level managers
paragraph (b)(5). maintaining medical information gathered by and engineers, each of these companies uses
recruiters from unrelated executive search charge these services to Company Q and payable information of Company P, Company
firms. Company R in accordance with the services Q and Company R, and identifies any
(ii) Assume that these services relating to cost method. inaccuracies in the records, such as double-
recruiting are specified covered services Example 6. Credit analysis services. (i) payments and double-charges.
within the meaning of paragraph (b)(4)(i) of Company P, Company Q and Company R (ii) Assume that these services relating to
this section. Under the facts and lease furniture to retail customers who verification of data are specified covered
circumstances of the business of the PQR present a significant credit risk and are services within the meaning of paragraph
Controlled Group, the taxpayer could generally unable to lease furniture from other (b)(4)(i) of this section. Under the facts and
reasonably conclude that these services do providers. As part of its leasing operations, circumstances of the business of the PQR
not contribute significantly to the controlled personnel in Company P perform credit Controlled Group, the taxpayer could
group’s key competitive advantages, core analysis on each of the potential lessees. The reasonably conclude that these services do
capabilities, or fundamental risks of success personnel have developed special expertise not contribute significantly to the controlled
or failure in the group’s business. If these in determining whether a particular customer group’s key competitive advantages, core
services meet the other requirements of who presents a significant credit risk (as capabilities, or fundamental risks of success
paragraph (b) of this section, Company P will indicated by credit reporting agencies) will or failure in the group’s business. If these
be eligible to charge these services to be likely to make the requisite lease services meet the other requirements of this
Company Q and Company R in accordance payments on a timely basis. In order to paragraph (b), Company P will be eligible to
with the services cost method. compensate for the specialized analysis of a charge these services to Company Q and
Example 4. Recruiting services. (i) customer’s default risk, as well as the default Company R in accordance with the services
Company P, Company Q and Company R are risk itself, Company P charges more than the cost method.
agencies that represent celebrities in the market lease rate charged to customers with Example 9. Data verification services. (i)
entertainment industry. Among the most average credit ratings. Also, as part of its Company P gathers from unrelated customers
important resources of these companies are operations, Company P performs similar information regarding accounts payable and
the highly compensated agents who have credit analysis services for Company Q and accounts receivable and utilizes its own
close personal relationships with celebrities Company R, which charge correspondingly computer system to analyze that information
in the entertainment industry. Company P high monthly lease payments. for purposes of identifying errors in payment
implements a recruiting plan to hire highly (ii) Assume that these services relating to and receipts (data mining). Company P is
compensated agents for itself, and other credit analysis are specified covered services compensated for these services based on a fee
highly compensated agents for each of its within the meaning of paragraph (b)(4)(i) of that reflects a percentage of amounts
wholly-owned subsidiaries in foreign this section. Under the facts and collected by customers as a result of the data
countries, Company Q and Company R. circumstances, the taxpayer is unable to mining services. These activities constitute a
(ii) Assume that these services relating to reasonably conclude that these services do significant portion of Company P’s business.
recruiting are specified covered services not contribute significantly to the controlled Company P performs similar activities for
within the meaning of paragraph (b)(4)(i) of group’s key competitive advantages, core Company Q and Company R by analyzing
this section. Under the facts and capabilities, or fundamental risks of success their accounts payable and accounts
circumstances, the taxpayer is unable to or failure in the group’s business. Company receivable records.
reasonably conclude that these services do P is not eligible to charge these services to (ii) Assume that these services relating to
not contribute significantly to the controlled Company Q and Company R in accordance data mining are specified covered services
group’s key competitive advantages, core with the services cost method. within the meaning of paragraph (b)(4)(i) of
capabilities, or fundamental risks of success Example 7. Credit analysis services. (i) this section. Under the facts and
or failure in the group’s business. Company Company P is a large full-service bank, which circumstances, the taxpayer is unable to
P is not eligible to charge these services to provides products and services to corporate reasonably conclude that these services do
Company Q and Company R in accordance and consumer markets, including unsecured not contribute significantly to the controlled
with the services cost method. loans, secured loans, lines of credit, letters of group’s key competitive advantages, core
Example 5. Credit analysis services. (i) credit, conversion of foreign currency, capabilities, or fundamental risks of success
Company P is a manufacturer and distributor consumer loans, trust services, and sales of or failure in the group’s business. Company
of clothing for retail stores. Company Q and certificates of deposit. Company Q makes P is not eligible to charge these services to
Company R are distributors of clothing for routine consumer loans to individuals, such Company Q and Company R in accordance
retail stores. As part of its operations, as auto loans and home equity loans. with the services cost method.
personnel in Company P perform credit Company R makes only business loans to Example 10. Legal services. (i) Company P
analysis on its customers. Most of the small businesses. is a domestic corporation with two wholly-
customers have a history of purchases from (ii) Company P performs credit analysis owned foreign subsidiaries, Company Q and
Company P, and the credit analysis involves and prepares credit reports for itself, as well Company R. Company P and its subsidiaries
a review of the recent payment history of the as for Company Q and Company R. Company manufacture and distribute equipment used
customer’s account. For new customers, the P, Company Q and Company R regularly by industrial customers. Company P
personnel in Company P perform a basic employ these credit reports in the ordinary maintains an in-house legal department
credit check of the customer, using reports course of business in making decisions consisting of attorneys experienced in a wide
from a business credit reporting agency. On regarding extensions of credit to potential range of business and commercial matters.
behalf of Company Q and Company R, customers (including whether to lend, rate of Company Q and Company R maintain small
Company P performs credit analysis on interest, and loan terms). legal departments, consisting of attorneys
customers who order clothing from Company (iii) Assume that these services relating to experienced in matters that most frequently
Q and Company R, using the same method credit analysis are specified covered services arise in the normal course of business of
as Company P uses for itself. within the meaning of paragraph (b)(4)(i) of Company Q and Company R in their
(ii) Assume that these services relating to this section. Under the facts and respective jurisdictions.
credit analysis are specified covered services circumstances, the credit analysis services (ii) Company P seeks to maintain in-house
within the meaning of paragraph (b)(4)(i) of constitute part of a ‘‘financial transaction’’ legal staff with the ability to address the
this section. Under the facts and described in paragraph (b)(3)(ii)(H) of this majority of legal matters that arise in the
circumstances of the business of the PQR section. Company P is not eligible to charge United States with respect to the operations
Controlled Group, the taxpayer could these services to Company Q and Company of Company P, as well as any U.S. reporting
reasonably conclude that these services do R in accordance with the services cost or compliance obligations of Company Q or
not contribute significantly to the controlled method. Company R. The in-house legal staffs of
group’s key competitive advantages, core Example 8. Data verification services. (i) Company Q and Company R are much more
capabilities, or fundamental risks of success Company P, Company Q and Company R are limited. It is necessary for Company P to
or failure in the group’s business. If these manufacturers of industrial supplies. retain several local law firms to handle
services meet the other requirements of this Company P’s accounting department litigation and business disputes arising from
paragraph (b), Company P will be eligible to performs periodic reviews of the accounts the activities of Company Q and Company R.
Although Company Q and Company R pay agreeing to licenses on terms less favorable (iii) Assume that the services performed by
the fees of these law firms, the hiring than those granted to competitors would Company P’s computer specialists that relate
authority and general oversight of the firms’ have a material adverse impact on the to modifying the ERP system are specifically
representation is in the legal department of operations of Company Q or Company R. excluded from the services described in a
Company P. Company P maintains a group of experienced revenue procedure referenced in paragraph
(iii) In determining what portion of the attorneys that exclusively represents (b)(4) of this section as developing hardware
legal expenses of Company P may be Company Q and Company R before the NRC. or software solutions (such as systems
allocated to Company Q and Company R, Although Company P occasionally hires an integration, Web site design, writing
Company P first excludes any expenses outside law firm or industry expert to assist computer programs, modifying general
relating to legal services that constitute on particular NRC matters, the majority of the applications software, or recommending the
shareholder activities and other items that work is performed by the specialized legal purchase of commercially available hardware
are not properly analyzed as controlled staff of Company P. or software). Company P is not eligible to
services. Assume that the remaining services (iv) Certain of the legal services performed charge these services to Company Q and
relating to general legal functions performed by Company P constitute duplicative or Company R in accordance with the services
by in-house legal counsel are specified shareholder activities that do not confer a cost method.
covered services within the meaning of benefit on the other companies and therefore Example 13. Group of services. (i)
paragraph (b)(4)(i) of this section. Under the do not need to be allocated to the other Company P manufactures and sells widgets
facts and circumstances of the business of the companies, while certain other legal services under an exclusive contract to Customer 1.
PQR Controlled Group, the taxpayer could are eligible to be charged to Company Q and Company Q and Company R sell widgets
reasonably conclude that these latter services Company R in accordance with the services under exclusive contracts to Customer 2 and
do not contribute significantly to the cost method. Customer 3, respectively. At least one year in
controlled group’s key competitive (v) Assume that the specialized legal advance, each of these customers can
advantages, core capabilities, or fundamental services relating to nuclear licenses accurately forecast its need for widgets.
risks of success or failure in the group’s performed by in-house legal counsel of Using these forecasts, each customer over the
business. If these services meet the other Company P are specified covered services course of the year places orders for widgets
requirements of this paragraph (b), Company within the meaning of paragraph (b)(4)(i) of with the appropriate company, Company P,
P will be eligible to charge these services to this section. Under the facts and Company Q or Company R. A customer’s
Company Q and Company R in accordance circumstances, the taxpayer is unable to actual need for widgets seldom deviates from
with the services cost method. reasonably conclude that these services do that customer’s forecasted need.
Example 11. Legal services. (i) Company P not contribute significantly to the controlled (ii) It is most efficient for the PQR
is a domestic holding company whose group’s key competitive advantages, core Controlled Group companies to manufacture
operating companies generate electric power capabilities, or fundamental risks of success and store an inventory of widgets in advance
for consumers by operating nuclear plants. or failure in the group’s business. Company of delivery. Although all three companies sell
Company P has several domestic operating P is not eligible to charge these services to widgets, only Company P maintains a
companies, including Companies Q and R. Company Q and Company R in accordance centralized warehouse for widgets. Pursuant
Assume that, although Company P owns with the services cost method. to a contract, Company P provides storage of
100% of the stock of Companies Q and R, the Example 12. Group of services. (i) these widgets to Company Q and Company
companies do not elect to file a consolidated Company P, Company Q and Company R are R at an arm’s length price.
Federal income tax return with Company P. manufacturing companies that sell their (iii) Company P’s personnel also obtain
(ii) Company P maintains an in-house legal products to unrelated retail establishments. orders from all three companies customers to
department consisting of experienced Company P has an enterprise resource draw up purchase orders for widgets as well
attorneys in the areas of Federal utilities planning (ERP) system that maintains data as make payment to suppliers for widget
regulation, Federal labor and environmental relating to accounts payable and accounts replacement parts. In addition, Company P’s
law, securities law, and general commercial receivable information for all three personnel use data entry to input information
law. Companies Q and R maintain their own, companies. Company P’s personnel perform regarding orders and sales of widgets and
smaller in-house legal staffs comprised of the daily operations on this ERP system such replacement parts for all three companies
experienced attorneys in the areas of state as inputting data relating to accounts payable into a centralized computer system.
and local utilities regulation, state labor and and accounts receivable into the system and Company P’s personnel also maintain the
employment law, and general commercial extracting data relating to accounts receivable centralized computer system and extract data
law. The legal department of Company P and accounts payable in the form of reports for all three companies when necessary.
performs general oversight of the legal affairs or electronic media and providing those data (iv) Assume that these services relating to
of the company and determines whether a to all three companies. Periodically, tracking purchases and sales of inventory are
particular matter would be more efficiently Company P’s computer specialists also specified covered services within the
handled by the Company P legal department, modify the ERP system to adapt to changing meaning of paragraph (b)(4)(i) of this section.
by the legal staffs in the operating companies, business functions in all three companies. Under the facts and circumstances of the
or in rare cases, by retained outside counsel. Company P’s computer specialists make business of the PQR Controlled Group, the
In general, Company P has succeeded in these changes by either modifying the taxpayer could reasonably conclude that
minimizing duplication and overlap of underlying software program or by these services do not contribute significantly
functions between the legal staffs of the purchasing additional software or hardware to the controlled group’s key competitive
various companies or by retained outside from unrelated third party vendors. advantages, core capabilities, or fundamental
counsel. (ii) Assume that these services relating to risks of success or failure in the group’s
(iii) The domestic nuclear power plant accounts payable and accounts receivable are business. If these services meet the other
operations of Companies Q and R are subject specified covered services within the requirements of this paragraph (b), Company
to extensive regulation by the U.S. Nuclear meaning of paragraph (b)(4)(i) of this section. P will be eligible to charge these services to
Regulatory Commission (NRC). Operators are Under the facts and circumstances of the Company Q and Company R in accordance
required to obtain pre-construction approval, business of the PQR Controlled Group, the with the services cost method.
operating licenses, and, at the end of the taxpayer could reasonably conclude that Example 14. Group of services. (i)
operational life of the nuclear reactor, these services do not contribute significantly Company P, Company Q and Company R
nuclear decommissioning certificates. to the controlled group’s key competitive assemble and sell gadgets to unrelated
Company P files consolidated financial advantages, core capabilities, or fundamental customers. Each of these companies
statements on behalf of itself, as well as risks of success or failure in the group’s purchases the components necessary for
Companies Q and R, with the United States business. If these services meet the other assembly of the gadgets from unrelated
Securities and Exchange Commission (SEC). requirements of this paragraph (b), Company suppliers. As a service to its subsidiaries,
In these SEC filings, Company P discloses P will be eligible to charge these services to Company P’s personnel obtain orders for
that failure to obtain any of these licenses Company Q and Company R in accordance components from all three companies,
(and the related periodic renewals) or with the services cost method. prepare purchase orders, and make payment
to unrelated suppliers for the components. In constitute low margin covered services performs human resources functions, such as
addition, Company P’s personnel use data within the meaning of paragraph (b)(4)(ii) of administration of pension, retirement, and
entry to input information regarding orders this section. With respect to the health insurance plans that are made
and sales of gadgets for all three companies determination and application of the available to employees of its subsidiaries,
into a centralized computer. Company P’s interquartile range, see § 1.482–1(e)(2)(iii)(C). Companies X, Y, Z, pursuant to a shared
personnel also maintain the centralized Example 17. Low margin covered services. services arrangement.
computer system and extract data for all Company P performs certain custodial and (ii) In evaluating the shares of reasonably
three companies on an as-needed basis. The maintenance services for certain office anticipated benefits from these centralized
services provided by Company P personnel, properties owned by Company S. Company services, the total revenues of each subsidiary
in conjunction with the centralized computer P uses the services cost method for the may not provide the most reliable measure of
system, constitute a state-of-the-art inventory services, and determines the amount charged reasonably anticipated benefit shares,
management system that allows Company P as Company P’s total cost of providing the because total revenues do not bear a
to order components necessary for assembly services plus no markup. Uncontrolled relationship to the shares of reasonably
of the gadgets on a ‘‘just-in-time’’ basis. comparables perform a similar range of anticipated benefits from the underlying
(ii) Unrelated suppliers deliver the custodial and maintenance services for services.
components directly to Company P, uncontrolled parties and charge those parties (iii) Employee headcount or total
Company Q and Company R. Each of the an annual fee based on the total square compensation paid to employees may
companies stores the components in its own footage of the property. These transactions provide a more reliable basis for evaluating
facilities for use in filling specific customer meet the criteria for application of the the shares of reasonably anticipated benefits
orders. The companies do not maintain any comparable uncontrolled services price from the covered services.
inventory that is not identified in specific method of paragraph (c) of this section. The Example 20. Shared services arrangement
customer orders. Because of the efficiencies arm’s length price for the custodial and and reliable measure of reasonably
associated with services provided by maintenance services is determined under anticipated benefit (allocation key). (i)
personnel of Company P, all three companies the general section 482 regulations without Company P performs human resource
are able to significantly reduce their regard to this paragraph (b), using the services (service A) on behalf of the PXYZ
inventory-related costs. Company P’s Chief interquartile range described in § 1.482– Group that qualify for the services cost
Executive Officer makes a statement in one 1(e)(2)(iii)(C) and as necessary adjusting to method. Under that method, Company P
of its press conferences with industry the median of such interquartile range. Based determines the amount charged for these
analysts that its inventory management on reliable accounting information, the total services pursuant to a shared services
system is critical to the company’s success. services costs (as defined in paragraph (j) of arrangement based on an application of
(iii) Assume that these services that relate this section) attributable to the custodial and paragraph (b)(5) of this section. Service A
to tracking purchase and sales of inventory maintenance services are subtracted from constitutes a specified covered service
are specified covered services within the such price. The resulting excess of such price described in a revenue procedure pursuant to
meaning of paragraph (b)(4)(i) of this section. of the controlled services transaction over paragraph (b)(4)(i) of this section. The total
Under the facts and circumstances, the total services costs, as expressed as a services costs for service A otherwise
taxpayer is unable to reasonably conclude percentage of total services costs, is determined under the services cost method is
that these services do not contribute determined to be 4%. Because the median 300.
significantly to the controlled group’s key comparable markup on total services costs as (ii) Companies X, Y and Z reasonably
competitive advantages, core capabilities, or determined by an application of the section anticipate benefits from service A. Company
fundamental risks of success or failure in the 482 regulations without regard to this P does not reasonably anticipate benefits
group’s business. Company P is not eligible paragraph (b) is 4%, which is less than 7%, from service A. Assume that if relative
to charge these services to Company Q and the custodial and maintenance services reasonably anticipated benefits were
Company R in accordance with the services constitute low margin covered services precisely known, the appropriate allocation
cost method. within the meaning of paragraph (b)(4)(ii) of of charges pursuant to § 1.482–9T(k) to
Example 15. Low margin covered services. this section. Company X, Y and Z for service A is as
Company P renders certain accounting Example 18. Shared services arrangement follows:
services to Company S. Company P uses the and reliable measure of reasonably
services cost method for the accounting anticipated benefit (allocation key). (i) SERVICE A
services, and determines the amount charged Company P operates a centralized data
[Total cost 300]
as Company P’s total cost of rendering the processing facility that performs automated
services, with no markup. Based on an invoice processing and order generation for
Company
application of the section 482 regulations all of its subsidiaries, Companies X, Y, Z,
without regard to this paragraph (b), the pursuant to a shared services arrangement.
X ..................................................... 150
interquartile range of arm’s length markups (ii) In evaluating the shares of reasonably
Y ..................................................... 75
on total services costs is between 3% and anticipated benefits from the centralized data
Z ...................................................... 75
6%, and the median is 4%. Because the processing services, the total value of the
median comparable markup on total services merchandise on the invoices and orders may
(iii) The total number of employees
costs is 4%, which is less than 7%, the not provide the most reliable measure of
(employee headcount) in each company is as
accounting services constitute low margin reasonably anticipated benefits shares,
follows:
covered services within the meaning of because value of merchandise sold does not
Company X—600 employees.
paragraph (b)(4)(ii) of this section. bear a relationship to the anticipated benefits
Company Y—250 employees.
Example 16. Low margin covered services. from the underlying covered services.
Company Z—250 employees.
Company P performs logistics-coordination (iii) The total volume of orders and
(iv) Company P allocates the 300 total
services for its subsidiaries, including invoices processed may provide a more
services costs of service A based on employee
Company S. Company P uses the services reliable basis for evaluating the shares of
headcount as follows:
cost method for the logistics services, and reasonably anticipated benefits from the data
determines the amount charged as Company processing services. Alternatively, depending
P’s total cost of rendering the services, with on the facts and circumstances, total central SERVICE A
no markup. Based on an application of the processing unit time attributable to the [Total cost 300]
section 482 regulations without regard to this transactions of each subsidiary may provide
paragraph (b), the interquartile range of arm’s a more reliable basis on which to evaluate the Company
length markups on total services costs is shares of reasonably anticipated benefits. Allocation key
between 6% and 13%, and the median is 9%. Example 19. Shared services arrangement Headcount Amount
Because the median comparable markup on and reliable measure of reasonably
total services costs is 9%, which exceeds 7%, anticipated benefit (allocation key). (i) X ....................... 600 164
the logistics-coordination services do not Company P operates a centralized center that Y ....................... 250 68
SERVICE A—Continued Company Y—200. behalf of the PXYZ Group that qualify for the
Company Z—200. services cost method. Company P determines
[Total cost 300]
(iv) The total number of transactions the amount charged for these services under
(transaction volume) with uncontrolled such method pursuant to a shared services
Company
Allocation key customers by each company is as follows: arrangement based on an application of
Headcount Amount Company X—2,000. paragraph (b)(5) of this section. Service A
Company Y—4,000.
and service B are specified covered services
Z ........................ 250 68 Company Z—3,500.
described in a revenue procedure pursuant to
(v) If Company P allocated the 500 total
services costs of service B based on employee paragraph (b)(4)(i) of this section. The total
(v) Based on these facts, Company P may
headcount, the resulting allocation would be services costs otherwise determined under
reasonably conclude that the employee
headcount allocation basis most reliably as follows: the services cost method for service A is 300
reflects the participants’ respective shares of and for service B is 500; total services costs
the reasonably anticipated benefits SERVICE B for services A and B are 800. Company P
attributable to service A. determines that aggregation of services A and
[Total cost 500]
Example 21. Shared services arrangement B for purposes of the arrangement is
and reliable measure of reasonably appropriate.
Company
anticipated benefit (allocation key). (i) Allocation key (ii) Companies X, Y and Z reasonably
Company P performs accounts payable Headcount Amount anticipate benefits from services A and B.
services (service B) on behalf of the PXYZ Company P does not reasonably anticipate
Group and determines the amount charged X ....................... 600 300 benefits from services A and B. Assume that
for the services under such method pursuant Y ....................... 200 100 if relative reasonably anticipated benefits
to a shared services arrangement based on an Z ........................ 200 100 were precisely known, the appropriate
application of paragraph (b)(5) of this section.
allocation of total charges pursuant to
Service B is a specified covered service (vi) In contrast, if Company P used volume
described in a revenue procedure pursuant to § 1.482–9T(k) to Companies X, Y and Z for
of transactions with uncontrolled customers
paragraph (b)(4)(i) of this section. The total services A and B is as follows:
as the allocation basis under the shared
services costs for service B otherwise services arrangement, the allocation would
determined under the services cost method is be as follows: SERVICES A AND B
500. [Total cost 800]
(ii) Companies X, Y and Z reasonably SERVICE B
anticipate benefits from service B. Company Company
P does not reasonably anticipate benefits [Total cost 500]
from service B. Assume that if relative X ..................................................... 350
reasonably anticipated benefits were Company
Y ..................................................... 100
precisely known, the appropriate allocation Allocation key Transaction Z ...................................................... 350
of charges pursuant to § 1.482–9T(k) to Amount
volume
Companies X, Y and Z for service B is as
follows: (iii) The total volume of transactions with
X ....................... 2,000 105 uncontrolled customers in each company is
Y ....................... 4,000 211 as follows:
SERVICE B Z ........................ 3,500 184
Company X—2,000.
[Total cost 500] Company Y—4,000.
(vi) Based on these facts, Company P may
Company Z—4,000.
Company reasonably conclude that the transaction
volume, but not the employee headcount, (iv) The total number of employees in each
X ..................................................... 125 allocation basis most reliably reflects the company is as follows:
Y ..................................................... 205 participants’ respective shares of the Company X—600.
Z ...................................................... 170 reasonably anticipated benefits attributable to Company Y—200.
service B. Company Z—200.
(iii) The total number of employees Example 22. Shared services arrangement (v) If Company P allocated the 800 total
(employee headcount) in each company is as and aggregation. (i) Company P performs services costs of services A and B based on
follows: human resource services (service A) and transaction volume or employee headcount,
Company X—600. accounts payable services (service B) on the resulting allocation would be as follows:
AGGREGATED SERVICES AB
[Total cost 800]
Allocation key Allocation key

Company Transaction Amount Headcount Amount
volume
X ....................................................................................................................................... 2,000 160 600 480

Y ....................................................................................................................................... 4,000 320 200 160
Z ....................................................................................................................................... 4,000 320 200 160
(vi) In contrast, if aggregated services AB (vii) Based on these facts, Company P may The total services costs for services A
were allocated reference to the total U.S. reasonably conclude that the trade sales, but through Z otherwise determined under the
dollar value of sales to uncontrolled parties not the transaction volume or the employee services cost method is 500. Company P
(trade sales) by each company, the following headcount, allocation basis most reliably determines that aggregation of services A
results would obtain: reflects the participants’ respective shares of through Z for purposes of the arrangement is
the reasonably anticipated benefits appropriate.
attributable to services AB. (ii) Companies X and Y reasonably
AGGREGATED SERVICES AB Example 23. Shared services arrangement anticipate benefits from services A through Z
[Total costs 800] and aggregation. (i) Company P performs and Company Z reasonably anticipates
services A through P on behalf of the PXYZ benefits from services A through X but not
Allocation key Group that qualify for the services cost from services Y or Z (Company Z performs
method. Company P determines the amount services similar to services Y and Z on its
Company Trade sales charged for these services under such method own behalf). Company P does not reasonably
Amount
(millions) pursuant to a shared services arrangement anticipate benefits from services A through Z.
based on an application of paragraph (b)(5) Assume that if relative reasonably
X ............... $400 314 of this section. All of these services A anticipated benefits were precisely known,
Y ............... 120 94 through Z constitute either specified covered the appropriate allocation of total charges
Z ................ 500 392 services or low margin covered services pursuant to § 1.482–9T(k) to Company X, Y
described in paragraph (b)(4) of this section. and Z for services A through Z is as follows:
Services A–M Services N–P Services A–P

Company (cost 490) (cost 10) (total cost 500)
X ................................................................................................................................................... 90 5 95
Y ................................................................................................................................................... 240 5 245
Z ................................................................................................................................................... 160 ........................ 160
(iii) The total volume of transactions with Example 25. Coordination with cost (v) A portion of the charge under the
uncontrolled customers in each company is sharing arrangement. (i) Company P shared services arrangement is in turn
as follows: performs human resource services (service A) allocable to the intangible development
Company X—2,000. on behalf of the PXYZ Group that qualify for activity undertaken by Company P. The most
Company Y—4,500. the services cost method. Company P reliable estimate of the proportion allocable
Company Z—3,500. determines the amount charged for these to the intangible development activity is
(iv) Company P allocates the 500 total services under such method pursuant to a determined to be 500 (Company P’s R&D
services costs of services A through Z based shared services arrangement based on an expenses) divided by 1,500 (Company P’s
application of paragraph (b)(5) of this section. total non-covered services costs), or one-
on transaction volume as follows:
Service A constitutes a specified covered third. Accordingly, one-third of Company P’s
service described in a revenue procedure charge of 125, or 42, is allocated to the
AGGREGATED SERVICES A–Z intangible development activity. Companies
pursuant to paragraph (b)(4)(i) of this section.
[Total costs 500] The total services costs for service A P and X must share the intangible
otherwise determined under the services cost development costs of the cost shared
Allocation key intangibles (including the charge of 42 that
method is 300.
is allocated under the shared services
Company (ii) Company X, Y, Z and P reasonably
Transaction arrangement) in proportion to their
Amount anticipate benefits from service A. Using a
volume respective shares of reasonably anticipated
basis of allocation that is consistent with the
benefits under the cost sharing arrangement.
X ....................... 2,000 100 controlled participants’ respective shares of That is, the reasonably anticipated benefit
Y ....................... 4,500 225 the reasonably anticipated benefits from the shares under the cost sharing arrangement
shared services, the total charge of 300 is are determined separately from reasonably
Z ........................ 3,500 175
allocated as follows: anticipated benefit shares under the shared
X—100. services arrangement.
(v) Based on these facts, Company P may
Y—50. Example 26. Coordination with cost
reasonably conclude that the transaction
Z—25. sharing arrangement. (i) The facts and
volume allocation basis most reliably reflects
P—125. analysis are the same as in Example 25,
the participants’ respective shares of the
(iii) In addition to performing services, P except that Company X also performs
reasonably anticipated benefits attributable to
undertakes 500 of R&D and incurs intangible development activities related to
services A through Z. manufacturing and other costs of 1,000.
Example 24. Renderer reasonably the cost sharing arrangement. Using a basis
(iv) Companies P and X enter into a cost of allocation that is consistent with the
anticipates benefits. (i) Company P renders sharing arrangement in accordance with controlled participants’ respective shares of
services on behalf of the PXYZ Group that § 1.482–7. Under the arrangement, Company the reasonably anticipated benefits from the
qualify for the services cost method. P will undertake all intangible development shared services, the 300 of service costs is
Company P determines the amount charged activities. All of Company P’s research and allocated as follows:
for these services under such method. development (R&D) activity is devoted to the X—100.
Company P’s share of reasonably anticipated intangible development activity under the Y—50.
benefits from services A, B, C, and D is 20% cost sharing arrangement. Company P will Z—25.
of the total reasonably anticipated benefits of manufacture, market, and otherwise exploit P—125.
all participants. Company P’s total services the product in its defined territory. (ii) In addition to performing services,
cost for services A, B, C, and D charged Companies P and X will share intangible Company P undertakes 500 of R&D and
within the Group is 100. development costs in accordance with their incurs manufacturing and other costs of
(ii) Based on an application of paragraph reasonably anticipated benefits from the 1,000. Company X undertakes 400 of R&D
(b)(5) of this section, Company P charges 80 intangibles, and Company X will make and incurs manufacturing and other costs of
which is allocated among Companies X, Y payments to Company P as required under 600.
and Z. No charge is made to Company P § 1.482–7. Company X will manufacture, (iii) Companies P and X enter into a cost
under the shared services arrangement for market, and otherwise exploit the product in sharing arrangement in accordance with
activities that it performs on its own behalf. the rest of the world. § 1.482–7. Under the arrangement, both
Companies P and X will undertake intangible paragraphs (c)(2)(ii) and (iii) of this (4) Geographic market in which the
development activities. All of the research section. services are rendered or received;
and development activity conducted by (ii) Comparability—(A) In general. (5) Risks borne (for example, costs
Companies P and X is devoted to the The degree of comparability between incurred to render the services, without
intangible development activity under the
controlled and uncontrolled provision for current reimbursement);
cost sharing arrangement. Both Companies P
and X will manufacture, market, and transactions is determined by applying (6) Duration or quantitative measure
otherwise exploit the product in their the provisions of § 1.482–1(d). Although of services rendered;
respective territories and will share all of the factors described in § 1.482– (7) Collateral transactions or ongoing
intangible development costs in accordance 1(d)(3) must be considered, similarity of business relationships between the
with their reasonably anticipated benefits the services rendered, and of the renderer and the recipient, including
from the intangibles, and both will make intangibles (if any) used in performing arrangement for the provision of
payments as required under § 1.482–7. the services, generally will have the tangible property in connection with the
(iv) A portion of the charge under the greatest effects on comparability under services; and
shared services arrangement is in turn (8) Alternatives realistically available
this method. In addition, because even
allocable to the intangible development
minor differences in contractual terms to the renderer and the recipient.
activities undertaken by Companies P and X.
or economic conditions could materially (iii) Data and assumptions. The
The most reliable estimate of the portion
allocable to Company P’s intangible affect the amount charged in an reliability of the results derived from the
development activity is determined to be 500 uncontrolled transaction, comparability comparable uncontrolled services price
(Company P’s R&D expenses) divided by under this method depends on close method is affected by the completeness
1,500 (P’s total non-covered services costs), similarity with respect to these factors, and accuracy of the data used and the
or one-third. Accordingly, one-third of or adjustments to account for any reliability of the assumptions made to
Company P’s allocated services cost method differences. The results derived from apply the method. See § 1.482–1(c) (best
charge of 125, or 42, is allocated to its applying the comparable uncontrolled method rule).
intangible development activity. (3) Arm’s length range. See § 1.482–
services price method generally will be
(v) In addition, it is necessary to determine 1(e)(2) for the determination of an arm’s
the portion of the charge under the shared the most direct and reliable measure of
services arrangement to Company X that an arm’s length price for the controlled length range.
should be further allocated to Company X’s transaction if an uncontrolled (4) Examples. The principles of this
intangible development activities under the transaction has no differences from the paragraph (c) are illustrated by the
cost sharing arrangement. The most reliable controlled transaction that would affect following examples:
estimate of the portion allocable to Company the price, or if there are only minor Example 1. Internal comparable
X’s intangible development activity is 400 differences that have a definite and uncontrolled services price. Company A, a
(Company X’s R&D expenses) divided by reasonably ascertainable effect on price United States corporation, performs
1,000 (Company X’s costs), or 40%. and for which appropriate adjustments shipping, stevedoring, and related services
Accordingly, 40% of the 100 that was for controlled and uncontrolled parties on a
are made. If such adjustments cannot be
allocated to Company X, or 40, is allocated short-term or as-needed basis. Company A
in turn to Company X’s intangible made, or if there are more than minor
charges uncontrolled parties in Country X a
development activities. Company X makes a differences between the controlled and uniform fee of $60 per container to place
payment to Company P of 100 under the uncontrolled transactions, the loaded cargo containers in Country X on
shared services arrangement and includes 40 comparable uncontrolled services price oceangoing vessels for marine transportation.
of services cost method charges in the pool method may be used, but the reliability Company A also performs identical services
of intangible development costs. of the results as a measure of the arm’s in Country X for its wholly-owned
(vi) The parties’ respective contributions to length price will be reduced. Further, if subsidiary, Company B, and there are no
intangible development costs under the cost there are material differences for which substantial differences between the
sharing arrangement are as follows: reliable adjustments cannot be made, controlled and uncontrolled transactions. In
P: 500 + (0.333 * 125) = 542 evaluating the appropriate measure of the
X: 400 + (0.40 * 100) = 440
this method ordinarily will not provide
arm’s length price for the container-loading
a reliable measure of an arm’s length services performed for Company B, because
(c) Comparable uncontrolled services result. Company A renders substantially identical
price method—(1) In general. The (B) Adjustments for differences services in Country X to both controlled and
comparable uncontrolled services price between controlled and uncontrolled uncontrolled parties, it is determined that the
method evaluates whether the amount transactions. If there are differences comparable uncontrolled services price
charged in a controlled services between the controlled and constitutes the best method for determining
transaction is arm’s length by reference uncontrolled transactions that would the arm’s length price for the controlled
to the amount charged in a comparable affect price, adjustments should be services transaction. Based on the reliable
uncontrolled services transaction. The data provided by Company A concerning the
made to the price of the uncontrolled
comparable uncontrolled services price price charged for services in comparable
transaction according to the uncontrolled transactions, a loading charge of
method is ordinarily used where the comparability provisions of § 1.482– $60 per cargo container will be considered
controlled services either are identical 1(d)(2). Specific examples of factors that the most reliable measure of the arm’s length
to or have a high degree of similarity to may be particularly relevant to price for the services rendered to Company
the services in the uncontrolled application of this method include— B. See paragraph (c)(2)(ii)(A) of this section.
transaction. (1) Quality of the services rendered; Example 2. External comparable
(2) Comparability and reliability (2) Contractual terms (for example, uncontrolled services price. (i) The facts are
considerations—(i) In general. Whether scope and terms of warranties or the same as in Example 1, except that
results derived from application of this guarantees regarding the services, Company A performs services for Company
method are the most reliable measure of volume, credit and payment terms, B, but not for uncontrolled parties. Based on
the arm’s length result must be information obtained from unrelated parties
allocation of risks, including any (which is determined to be reliable under the
determined using the factors described contingent-payment terms and whether comparability standards set forth in
under the best method rule in § 1.482– costs were incurred without a provision paragraph (c)(2) of this section), it is
1(c). The application of these factors for current reimbursement); determined that uncontrolled parties in
under the comparable uncontrolled (3) Intangibles (if any) used in Country X perform services comparable to
services price method is discussed in rendering the services; those rendered by Company A to Company
B, and that such parties charge $60 per cargo category of employee. The company also warranted. See § 1.482–1(d)(3)(ii) and
container. charges, at no markup, for out-of-pocket paragraph (c)(2)(ii)(A) of this section.
(ii) In evaluating the appropriate measure expenses such as travel, lodging, and data
(5) Indirect evidence of the price of a
of an arm’s length price for the loading acquisition charges. The Company has
services that Company A renders to Company established the following schedule of hourly comparable uncontrolled services
B, the $60 per cargo container charge is rates: transaction—(i) In general. The price of
considered evidence of a comparable a comparable uncontrolled services
uncontrolled services price. See paragraph Category Rate transaction may be derived based on
(c)(2)(ii)(A) of this section. indirect measures of the price charged
Example 3. External comparable Project managers ...... $400 per hour. in comparable uncontrolled services
uncontrolled services price. The facts are the Technical staff ........... $300 per hour. transactions, but only if—
same as in Example 2, except that (A) The data are widely and routinely
uncontrolled parties in Country X render (iii) Thus, for example, a project involving used in the ordinary course of business
similar loading and stevedoring services, but 100 hours of the time of project managers and
only under contracts that have a minimum in the particular industry or market
400 hours of technical staff time would result
term of one year. If the difference in the in the following project fees (without regard segment for purposes of determining
duration of the services has a material effect to any out-of-pocket expenses): ([100 hrs. × prices actually charged in comparable
on prices, adjustments to account for these $400/hr.] + [400 hrs. × $300/hr.]) = $40,000 uncontrolled services transactions;
differences must be made to the results of the + $120,000 = $160,000. (B) The data are used to set prices in
uncontrolled transactions according to the (iv) Company B, a Country X subsidiary of the controlled services transaction in
provisions of § 1.482–1(d)(2), and such Company A, contracts to perform consulting the same way they are used to set prices
adjusted results may be used as a measure of services for a Country X client in the banking in uncontrolled services transactions of
the arm’s length result. industry. In undertaking this engagement, the controlled taxpayer, or in the same
Example 4. Use of valuable intangibles. (i) Company B uses its own consultants and also
Company A, a United States corporation in uses Company A project managers and
way they are used by uncontrolled
the biotechnology sector, renders research technical staff that specialize in the banking taxpayers to set prices in uncontrolled
and development services exclusively to its industry for 75 hours and 380 hours, services transactions; and
affiliates. Company B is Company A’s respectively. In determining an arm’s length (C) The amount charged in the
wholly-owned subsidiary in Country X. charge, the price that Company A charges for controlled services transaction may be
Company A renders research and consulting services as a subcontractor in reliably adjusted to reflect differences in
development services to Company B. comparable uncontrolled transactions will be quality of the services, contractual
(ii) In performing its research and considered evidence of a comparable terms, market conditions, risks borne
development services function, Company A uncontrolled services price. Thus, in this (including contingent-payment terms),
uses proprietary software that it developed case, a payment of $144,000, (or [75 hrs. ×
internally. Company A uses the software to $400/hr.] + [380 hrs. × $300/hr.] = $30,000
duration or quantitative measure of
evaluate certain genetically engineered + $114,000) may be used as a measure of the services rendered, and other factors that
compounds developed by Company B. arm’s length price for the work performed by may affect the price to which
Company A owns the copyright on this Company A project mangers and technical uncontrolled taxpayers would agree.
software and does not license it to staff. In addition, if the comparable (ii) Example. The following example
uncontrolled parties. uncontrolled services price method is used, illustrates this paragraph (c)(5):
(iii) No uncontrolled parties can be then, consistent with the practices employed Example. Indirect evidence of comparable
identified that perform services identical or by the comparables with respect to similar uncontrolled services price. (i) Company A is
with a high degree of similarity to those types of expenses, Company B must a United States insurance company.
performed by Company A. Because there are reimburse Company A for appropriate out-of- Company A’s wholly-owned Country X
material differences for which reliable pocket expenses. See paragraph (c)(2)(ii)(A) subsidiary, Company B, performs specialized
adjustments cannot be made, the comparable of this section. risk analysis for Company A as well as for
uncontrolled services price method is Example 6. Adjustments for differences. (i) uncontrolled parties. In determining the
unlikely to provide a reliable measure of the The facts are the same as in Example 5, price actually charged to uncontrolled
arm’s length price. See paragraph (c)(2)(ii)(A) except that the engagement is undertaken entities for performing such risk analysis,
of this section. with the client on a fixed fee basis. That is, Company B uses a proprietary, multi-factor
Example 5. Internal comparable. (i) prior to undertaking the engagement computer program, which relies on the gross
Company A, a United States corporation, and Company B and Company A estimate the value of the policies in the customer’s
its subsidiaries render computer consulting resources required to undertake the portfolio, the relative composition of those
services relating to systems integration and engagement, and, based on hourly fee rates, policies, their location, and the estimated
networking to business clients in various charge the client a single fee for completion number of personnel hours necessary to
countries. Company A and its subsidiaries of the project. Company A’s portion of the complete the project. Uncontrolled
render only consulting services, and do not engagement results in fees of $144,000. companies that perform comparable risk
manufacture computer hardware or software (ii) The engagement, once undertaken, analysis in the same industry or market-
nor distribute such products. The controlled requires 20% more hours by each of segment use similar proprietary computer
group is organized according to industry Companies A and B than originally programs to price transactions with
specialization, with key industry specialists estimated. Nevertheless, the unrelated client uncontrolled customers (the competitors’
working for Company A. These personnel pays the fixed fee that was agreed upon at the programs may incorporate different inputs, or
typically form the core consulting group that start of the engagement. Company B pays may assign different weights or values to
teams with consultants from the local- Company A $144,000, in accordance with the individual inputs, in arriving at the price).
country subsidiaries to serve clients in the fixed fee arrangement. (ii) During the taxable year subject to audit,
subsidiaries’ respective countries. (iii) Company A often enters into similar Company B performed risk analysis for
(ii) Company A and its subsidiaries fixed fee engagements with clients. In uncontrolled parties as well as for Company
sometimes undertake engagements directly addition, Company A’s records for similar A. Because prices charged to uncontrolled
for clients, and sometimes work as engagements show that when it experiences customers reflected the composition of each
subcontractors to unrelated parties on more cost overruns, it does not collect additional customer’s portfolio together with other
extensive supply-chain consulting fees from the client for the difference factors, the prices charged in Company B’s
engagements for clients. In undertaking the between projected and actual hours. uncontrolled transactions do not provide a
latter engagements with third party Accordingly, in evaluating whether the fees reliable basis for determining the comparable
consultants, Company A typically prices its paid by Company B to Company A are arm’s uncontrolled services price for the similar
services based on consulting hours worked length, it is determined that no adjustments services rendered to Company A. However,
multiplied by a rate determined for each to the intercompany service charge are in evaluating an arm’s length price for the
studies performed by Company B for (iv) Appropriate gross services profit. derived from transactions of
Company A, Company B’s proprietary The appropriate gross services profit is uncontrolled taxpayers involving
computer program may be considered as computed by multiplying the applicable comparable services or functions with
indirect evidence of the comparable
uncontrolled price by the gross services respect to similarly related transactions.
uncontrolled services price that would be
charged to perform the services for Company profit margin in comparable (B) Other comparability factors.
A. The reliability of the results obtained by uncontrolled transactions. The Comparability under this method is not
application of this internal computer determination of the appropriate gross dependent on close similarity of the
program as a measure of an arm’s length services profit will take into account relevant uncontrolled transaction to the
price for the services will be increased to the any functions performed by other related transactions involved in the
extent that Company A used the internal members of the controlled group, as uncontrolled comparables. However,
computer program to generate actual well as any other relevant factors substantial differences in the nature of
transaction prices for risk-analysis studies the relevant uncontrolled transaction
described in § 1.482–1(d)(3). The
performed for uncontrolled parties during the
same taxable year under audit; Company A comparable gross services profit margin and the relevant transactions involved
used data that are widely and routinely used may be determined by reference to the in the uncontrolled comparables, such
in the ordinary course of business in the commission in an uncontrolled as differences in the type of property
insurance industry to determine the price transaction, where that commission is transferred or service provided in the
charged; and Company A reliably adjusted stated as a percentage of the price relevant uncontrolled transaction, may
the price charged in the controlled services charged in the uncontrolled transaction. indicate significant differences in the
transaction to reflect differences that may (v) Arm’s length range. See § 1.482– services or functions performed by the
affect the price to which uncontrolled 1(e)(2) for determination of the arm’s controlled and uncontrolled taxpayers
taxpayers would agree.
length range. with respect to their respective relevant
(d) Gross services margin method—(1) (3) Comparability and reliability transactions. Thus, it ordinarily would
In general. The gross services margin considerations—(i) In general. Whether be expected that the services or
method evaluates whether the amount results derived from application of this functions performed in the controlled
charged in a controlled services method are the most reliable measure of and uncontrolled transactions would be
transaction is arm’s length by reference the arm’s length result must be with respect to relevant transactions
to the gross profit margin realized in determined using the factors described involving the transfer of property within
comparable uncontrolled transactions. under the best method rule in § 1.482– the same product categories or the
This method ordinarily is used in cases 1(c). The application of these factors provision of services of the same general
where a controlled taxpayer performs under the gross services margin method type (for example, information-
services or functions in connection with is discussed in paragraphs (d)(3)(ii) and technology systems design).
an uncontrolled transaction between a (iii) of this section. Furthermore, significant differences in
member of the controlled group and an (ii) Comparability—(A) Functional the intangibles (if any) used by the
uncontrolled taxpayer. This method comparability. The degree of controlled taxpayer in the controlled
may be used where a controlled comparability between an uncontrolled services transaction as distinct from the
taxpayer renders services (agent transaction and a controlled transaction uncontrolled comparables may also
services) to another member of the is determined by applying the affect the reliability of the comparison.
controlled group in connection with a comparability provisions of § 1.482– Finally, the reliability of profit measures
transaction between that other member 1(d). A gross services profit provides based on gross services profit may be
and an uncontrolled taxpayer. This compensation for services or functions adversely affected by factors that have
method also may be used in cases where that bear a relationship to the relevant less effect on prices. For example, gross
a controlled taxpayer contracts to uncontrolled transaction, including an services profit may be affected by a
provide services to an uncontrolled operating profit in return for the variety of other factors, including cost
taxpayer (intermediary function) and investment of capital and the structures or efficiency (for example,
another member of the controlled group assumption of risks by the controlled differences in the level of experience of
actually performs a portion of the taxpayer performing the services or the employees performing the service in
services provided. functions under review. Therefore, the controlled and uncontrolled
(2) Determination of arm’s length although all of the factors described in transactions). Accordingly, if material
price—(i) In general. The gross services § 1.482–1(d)(3) must be considered, differences in these factors are
margin method evaluates whether the comparability under this method is identified based on objective evidence,
price charged or amount retained by a particularly dependent on similarity of the reliability of the analysis may be
controlled taxpayer in the controlled services or functions performed, risks affected.
services transaction in connection with borne, intangibles (if any) used in (C) Adjustments for differences
the relevant uncontrolled transaction is providing the services or functions, and between controlled and uncontrolled
arm’s length by determining the contractual terms, or adjustments to transactions. If there are material
appropriate gross profit of the controlled account for the effects of any such differences between the controlled and
taxpayer. differences. If possible, the appropriate uncontrolled transactions that would
(ii) Relevant uncontrolled transaction. gross services profit margin should be affect the gross services profit margin,
The relevant uncontrolled transaction is derived from comparable uncontrolled adjustments should be made to the gross
a transaction between a member of the transactions by the controlled taxpayer services profit margin, according to the
controlled group and an uncontrolled under review, because similar comparability provisions of § 1.482–
taxpayer as to which the controlled characteristics are more likely found 1(d)(2). For this purpose, consideration
taxpayer performs agent services or an among different transactions by the of the total services costs associated
intermediary function. same controlled taxpayer than among with functions performed and risks
(iii) Applicable uncontrolled price. transactions by other parties. In the assumed may be necessary because
The applicable uncontrolled price is the absence of comparable uncontrolled differences in functions performed are
price paid or received by the transactions involving the same often reflected in these costs. If there are
uncontrolled taxpayer in the relevant controlled taxpayer, an appropriate differences in functions performed,
uncontrolled transaction. gross services profit margin may be however, the effect on gross services
profit of such differences is not manufacturers to the unrelated U.S. firm, Company A does not subcontract with
necessarily equal to the differences in purchasers for the equipment. Information the other consulting firm, nor does the other
the amount of related costs. Specific regarding the comparable agent services consulting firm play any role in Company A’s
provided by Company B to unrelated foreign consulting engagement.
examples of factors that may be
manufacturers is sufficiently complete to (iii) Company B, a Country X subsidiary of
particularly relevant to this method conclude that it is likely that all material Company A, assists Company A in obtaining
include— differences between the controlled and an engagement to perform computer
(1) Contractual terms (for example, uncontrolled transactions have been consulting services for a Company B banking
scope and terms of warranties or identified and adjustments for such industry client in Country X. Although
guarantees regarding the services or differences have been made. If the Company B has an established relationship
function, volume, credit and payment comparable gross services profit margin is with its Country X client and was
terms, and allocation of risks, including 5% of the price charged in the relevant instrumental in arranging for Company A’s
any contingent-payment terms); transactions involved in the uncontrolled engagement with the client, Company A’s
comparables, then the appropriate gross particular expertise was the primary
(2) Intangibles (if any) used in services profit that Company B may earn and consideration in motivating the client to
performing the services or function; the arm’s length price that it may charge engage Company A. Based on the relative
(3) Geographic market in which the Company A for its agent services is equal to contributions of Companies A and B in
services or function are performed or in 5% of the applicable uncontrolled price obtaining and undertaking the engagement,
which the relevant uncontrolled charged by Company A in sales of equipment Company B’s role was primarily to facilitate
transaction takes place; and in the relevant uncontrolled transactions. the consulting engagement between
(4) Risks borne, including, if Example 2. Agent services. The facts are Company A and the Country X client.
applicable, inventory-type risk. the same as in Example 1, except that Information regarding the commissions paid
Company B does not act as a commission by Company A to unrelated parties for
(D) Buy-sell distributor. If a controlled
agent for unrelated parties and it is not providing similar services to facilitate
taxpayer that performs an agent service possible to obtain reliable information Company A’s consulting engagements is
or intermediary function is comparable concerning commission rates charged by sufficiently complete to conclude that it is
to a distributor that takes title to goods uncontrolled commission agents that engage likely that all material differences between
and resells them, the gross profit margin in comparable transactions with respect to these uncontrolled transactions and the
earned by such distributor on relevant sales of property. It is possible, controlled transaction between Company B
uncontrolled sales, stated as a however, to obtain reliable information and Company A have been identified and
percentage of the price for the goods, regarding the gross profit margins earned by that appropriate adjustments have been made
may be used as the comparable gross unrelated parties that briefly take title to and for any such differences. If the comparable
then resell similar property in uncontrolled gross services margin earned by unrelated
services profit margin.
transactions, in which they purchase the parties in providing such agent services is
(iii) Data and assumptions—(A) In property from foreign manufacturers and 3% of total fees charged in the relevant
general. The reliability of the results resell the property to purchasers in the U.S. transactions involved in the uncontrolled
derived from the gross services margin market. Analysis of the facts and comparables, then the appropriate gross
method is affected by the completeness circumstances indicates that, aside from services profit that Company B may earn and
and accuracy of the data used and the certain minor differences for which the arm’s length price that it may charge
reliability of the assumptions made to adjustments can be made, the uncontrolled Company A for its agent services is equal to
apply this method. See § 1.482–1(c) parties that resell property perform similar this comparable gross services margin (3%),
(best method rule). functions and assume similar risks as multiplied by the applicable uncontrolled
Company B performs and assumes when it price charged by Company A in its relevant
(B) Consistency in accounting. The
acts as a commission agent for Company A’s uncontrolled consulting engagement with
degree of consistency in accounting sales of property. Under these circumstances, Company B’s client.
practices between the controlled the gross profit margin earned by the Example 4. Intermediary function. (i) The
transaction and the uncontrolled unrelated distributors on the purchase and facts are the same as in Example 3, except
comparables that materially affect the resale of property may be used, subject to any that Company B contracts directly with its
gross services profit margin affects the adjustments for any material differences Country X client to provide computer
reliability of the results under this between the controlled and uncontrolled consulting services and Company A performs
method. transactions, as a comparable gross services the consulting services on behalf of Company
(4) Examples. The principles of this profit margin. The appropriate gross services B. Company A does not enter into a
paragraph (d) are illustrated by the profit that Company B may earn and the consulting engagement with Company B’s
arm’s length price that it may charge Country X client. Instead, Company B
following examples: Company A for its agent services is therefore charges its Country X client an uncontrolled
Example 1. Agent services. Company A and equal to this comparable gross services price for the consulting services, and
Company B are members of a controlled margin, multiplied by the applicable Company B pays a portion of the
group. Company A is a foreign manufacturer uncontrolled price charged by Company A in uncontrolled price to Company A for
of industrial equipment. Company B is a U.S. its sales of equipment in the relevant performing the consulting services on behalf
company that acts as a commission agent for uncontrolled transactions. of Company B.
Company A by arranging for Company A to Example 3. Agent services. (i) Company A (ii) Analysis of the relative contributions of
make direct sales of the equipment it and Company B are members of a controlled Companies A and B in obtaining and
manufactures to unrelated purchasers in the group. Company A is a U.S. corporation that undertaking the consulting contract indicates
U.S. market. Company B does not take title renders computer consulting services, that Company B functioned primarily as an
to the equipment but instead receives from including systems integration and intermediary contracting party, and the gross
Company A commissions that are determined networking, to business clients. services margin method is the most reliable
as a specified percentage of the sales price for (ii) In undertaking engagements with method for determining the amount that
the equipment that is charged by Company clients, Company A in some cases pays a Company B may retain as compensation for
A to the unrelated purchaser. Company B commission of 3% of its total fees to its intermediary function with respect to
also arranges for direct sales of similar unrelated parties that assist Company A in Company A’s consulting services. In this
equipment by unrelated foreign obtaining consulting engagements. Typically, case, therefore, because Company B entered
manufacturers to unrelated purchasers in the such fees are paid to non-computer into the relevant uncontrolled transaction to
U.S. market. Company B charges these consulting firms that provide strategic provide services, Company B receives the
unrelated foreign manufacturers a management services for their clients. When applicable uncontrolled price that is paid by
commission fee of 5% of the sales price Company A obtains a consulting engagement the Country X client for the consulting
charged by the unrelated foreign with a client of a non-computer consulting services. Company A technically performs
services for Company B when it performs, on parties. These data indicate that a 3% appropriate cases may be a subset of
behalf of Company B, the consulting services commission (3% of total engagement fee) is total services costs. Generally accepted
Company B contracted to provide to the charged in such transactions. Information accounting principles or Federal income
Country X client. The arm’s length amount regarding the uncontrolled comparables is
tax accounting rules (where Federal
that Company A may charge Company B for sufficiently complete to conclude that it is
performing the consulting services on likely that all material differences between income tax data for comparable
Company B’s behalf is equal to the applicable the controlled and uncontrolled transactions transactions or business activities are
uncontrolled price received by Company B in have been identified and adjusted for. If the available) may provide useful guidance
the relevant uncontrolled transaction, less appropriate gross services profit margin is but will not conclusively establish the
Company B’s appropriate gross services 3% of total fees, then an arm’s length result appropriate comparable transactional
profit, which is the amount that Company B of the controlled services transaction is for costs for purposes of this method.
may retain as compensation for performing Company B to retain an amount equal to 3% (iv) Arm’s length range. See § 1.482–
the intermediary function. of total fees paid to it. 1(e)(2) for determination of an arm’s
(iii) Reliable data concerning the (e) Cost of services plus method—(1) length range.
commissions that Company A paid to (3) Comparability and reliability
In general. The cost of services plus
uncontrolled parties for assisting it in
obtaining engagements to provide consulting method evaluates whether the amount considerations—(i) In general. Whether
services similar to those it has provided on charged in a controlled services results derived from the application of
behalf of Company B provide useful transaction is arm’s length by reference this method are the most reliable
information in applying the gross services to the gross services profit markup measure of the arm’s length result must
margin method. However, consideration realized in comparable uncontrolled be determined using the factors
should be given to whether the third party transactions. The cost of services plus described under the best method rule in
commission data may need to be adjusted to method is ordinarily used in cases § 1.482–1(c).
account for any additional risk that Company where the controlled service renderer (ii) Comparability—(A) Functional
B may have assumed as a result of its provides the same or similar services to comparability. The degree of
function as an intermediary contracting comparability between controlled and
party, compared with the risk it would have
both controlled and uncontrolled
parties. This method is ordinarily not uncontrolled transactions is determined
assumed if it had provided agent services to
assist Company A in entering into an used in cases where the controlled by applying the comparability
engagement to provide its consulting service services transaction involves a provisions of § 1.482–1(d). A service
directly. In this case, the information contingent-payment arrangement, as renderer’s gross services profit provides
regarding the commissions paid by Company described in paragraph (i)(2) of this compensation for performing services
A to unrelated parties for providing agent section. related to the controlled services
services to facilitate its performance of (2) Determination of arm’s length transaction under review, including an
consulting services for unrelated parties is price—(i) In general. The cost of operating profit for the service
sufficiently complete to conclude that all services plus method measures an arm’s renderer’s investment of capital and
material differences between these length price by adding the appropriate assumptions of risks. Therefore,
uncontrolled transactions and the controlled
gross services profit to the controlled although all of the factors described in
performance of an intermediary function,
including possible differences in the amount taxpayer’s comparable transactional § 1.482–1(d)(3) must be considered,
of risk assumed in connection with costs. comparability under this method is
performing that function, have been (ii) Appropriate gross services profit. particularly dependent on similarity of
identified and that appropriate adjustments The appropriate gross services profit is services or functions performed, risks
have been made. If the comparable gross computed by multiplying the controlled borne, intangibles (if any) used in
services margin earned by unrelated parties taxpayer’s comparable transactional providing the services or functions, and
in providing such agent services is 3% of costs by the gross services profit contractual terms, or adjustments to
total fees charged in Company B’s relevant markup, expressed as a percentage of account for the effects of any such
uncontrolled transactions, then the the comparable transactional costs differences. If possible, the appropriate
appropriate gross services profit that
earned in comparable uncontrolled gross services profit markup should be
Company B may retain as compensation for
performing an intermediary function (and the transactions. derived from comparable uncontrolled
amount, therefore, that is deducted from the (iii) Comparable transactional costs. transactions of the same taxpayer
applicable uncontrolled price to arrive at the Comparable transactional costs consist participating in the controlled services
arm’s length price that Company A may of the costs of providing the services transaction because similar
charge Company B for performing consulting under review that are taken into account characteristics are more likely to be
services on Company B’s behalf) is equal to as the basis for determining the gross found among services provided by the
this comparable gross services margin (3%), services profit markup in comparable same service provider than among
multiplied by the applicable uncontrolled uncontrolled transactions. Depending services provided by other service
price charged by Company B in its contract on the facts and circumstances, such providers. In the absence of such
to provide services to the uncontrolled party. costs typically include all compensation services transactions, an appropriate
Example 5. External comparable. (i) The
facts are the same as in Example 4, except
attributable to employees directly gross services profit markup may be
that neither Company A nor Company B involved in the performance of such derived from comparable uncontrolled
engages in transactions with third parties that services, materials and supplies services transactions of other service
facilitate similar consulting engagements. consumed or made available in providers. If the appropriate gross
(ii) Analysis of the relative contributions of rendering such services, and may services profit markup is derived from
Companies A and B in obtaining and include as well other costs of rendering comparable uncontrolled services
undertaking the contract indicates that the services. Comparable transactional transactions of other service providers,
Company B’s role was primarily to facilitate costs must be determined on a basis that in evaluating comparability the
the consulting arrangement between will facilitate comparison with the controlled taxpayer must consider the
Company A and the Country X client.
Although no reliable internal data are

comparable uncontrolled transactions. results under this method expressed as
available regarding comparable transactions For that reason, comparable a markup on total services costs of the
with uncontrolled entities, reliable data exist transactional costs may not necessarily controlled taxpayer, because differences
regarding commission rates for similar equal total services costs, as defined in in functions performed may be reflected
facilitating services between uncontrolled paragraph (j) of this section, and in in differences in service costs other than
those included in comparable (1) The complexity of the services; (ii) Company A designed an information-
transactional costs. (2) The duration or quantitative technology network for its Country X
(B) Other comparability factors. measure of services; subsidiary, Company B. The services
Comparability under this method is less (3) Contractual terms (for example, rendered to Company B are similar in scope
scope and terms of warranties or and complexity to services that Company A
dependent on close similarity between
rendered to uncontrolled parties during the
the services provided than under the guarantees provided, volume, credit and year under examination. Using Company A’s
comparable uncontrolled services price payment terms, allocation of risks, accounting records (which are determined to
method. Substantial differences in the including any contingent-payment be reliable under paragraph (e)(3) of this
services may, however, indicate terms); section), it is possible to identify the
significant functional differences (4) Economic circumstances; and comparable transactional costs involved in
between the controlled and (5) Risks borne. the controlled services transaction with
uncontrolled taxpayers. Thus, it (iii) Data and assumptions—(A) In reference to the costs incurred by Company
ordinarily would be expected that the general. The reliability of the results A in rendering similar design services to
derived from the cost of services plus uncontrolled parties. Company A’s records
controlled and uncontrolled indicate that it does not incur any additional
transactions would involve services of method is affected by the completeness
and accuracy of the data used and the types of costs in rendering similar services to
the same general type (for example, uncontrolled customers. The data available
information-technology systems design). reliability of the assumptions made to are sufficiently complete to conclude that it
Furthermore, if a significant amount of apply this method. See § 1.482–1(c) is likely that all material differences between
the controlled taxpayer’s comparable (Best method rule). the controlled and uncontrolled transactions
transactional costs consists of service (B) Consistency in accounting. The have been identified and adjusted for. Based
costs incurred in a tax accounting degree of consistency in accounting on the gross services profit markup data
period other than the tax accounting practices between the controlled derived from Company A’s uncontrolled
transaction and the uncontrolled transactions involving similar design
period under review, the reliability of
comparables that materially affect the services, an arm’s length result for the
the analysis would be reduced. In controlled services transaction is equal to the
addition, significant differences in the gross services profit markup affects the
reliability of the results under this price that will allow Company A to earn a
value of the services rendered, due for 10% gross services profit markup on its
example to the use of valuable method. Thus, for example, if comparable transactional costs.
intangibles, may also affect the differences in cost accounting practices Example 2. Inability to adjust for
reliability of the comparison. Finally, would materially affect the gross differences in comparable transactional
the reliability of profit measures based services profit markup, the ability to costs. The facts are the same as in Example
on gross services profit may be make reliable adjustments for such 1, except that Company A’s staff that
adversely affected by factors that have differences would affect the reliability rendered the services to Company B
of the results obtained under this consisted primarily of engineers in training
less effect on prices. For example, gross
method. Further, reliability under this status or on temporary rotation from other
services profit may be affected by a Company A subsidiaries. In addition, the
variety of other factors, including cost method depends on the extent to which
Company B network incorporated innovative
structures or efficiency-related factors the controlled and uncontrolled features, including specially designed
(for example, differences in the level of transactions reflect consistent reporting software suited to Company B’s
experience of the employees performing of comparable transactional costs. For requirements. The use of less-experienced
the service in the controlled and purposes of this paragraph (e)(3)(iii)(B), personnel and staff on temporary rotation,
uncontrolled transactions). Accordingly, the term comparable transactional costs together with the special features of the
if material differences in these factors includes the cost of acquiring tangible Company B network, significantly increased
are identified based on objective property that is transferred (or used) the time and costs associated with the project
with the services, to the extent that the as compared to time and costs associated
evidence, the reliability of the analysis
arm’s length price of the tangible with similar projects completed for
may be affected. uncontrolled customers. These factors
(C) Adjustments for differences property is not separately evaluated as constitute material differences between the
between the controlled and uncontrolled a controlled transaction under another controlled and the uncontrolled transactions
transactions. If there are material provision. that affect the determination of Company A’s
differences between the controlled and (4) Examples. The principles of this comparable transactional costs associated
uncontrolled transactions that would paragraph (e) are illustrated by the with the controlled services transaction, as
affect the gross services profit markup, following examples: well as the gross services profit markup.
adjustments should be made to the gross Moreover, it is not possible to perform
Example 1. Internal comparable. (i)
services profit markup earned in the Company A designs and assembles reliable adjustments for these differences on
comparable uncontrolled transaction information-technology networks and the basis of the available accounting data.
systems. When Company A renders services Under these circumstances, the reliability of
according to the provisions of § 1.482–
for uncontrolled parties, it receives the cost of services plus method as a measure
1(d)(2). For this purpose, consideration of an arm’s length price is substantially
of the comparable transactional costs compensation based on time and materials as
well as certain other related costs necessary reduced.
associated with the functions performed Example 3. Operating loss by reference to
to complete the project. This fee includes the
and risks assumed may be necessary, cost of hardware and software purchased total services costs. The facts and analysis are
because differences in the functions from uncontrolled vendors and incorporated the same as in Example 1, except that an
performed are often reflected in these in the final network or system, plus a unrelated Company C, instead of Company
costs. If there are differences in reasonable allocation of certain specified A, renders similar services to uncontrolled
functions performed, however, the effect overhead costs incurred by Company A in parties and publicly available information
on gross services profit of such providing these services. Reliable accounting indicates that Company C earned a gross
records maintained by Company A indicate services profit markup of 10% on its time,
differences is not necessarily equal to
that Company A earned a gross services materials and certain specified overhead in
the differences in the amount of related providing those services. As in Example 1,

profit markup of 10% on its time, materials
comparable transactional costs. Specific and specified overhead in providing design Company A still provides services for its
examples of the factors that may be services during the year under examination Country X subsidiary, Company B. In
particularly relevant to this method on information technology projects for accordance with the requirements in
include— uncontrolled entities. paragraph (e)(3)(ii) of this section, the
taxpayer performs additional analysis and in the banking industry for 75 hours and 380 party and the uncontrolled service
restates the results of Company A’s hours, respectively. The data available are providers. For example, adjustments
controlled services transaction with its sufficiently complete to conclude that it is may be appropriate where the tested
Country X subsidiary, Company B, in the likely that all material differences between party and the uncontrolled comparables
form of a markup on Company A’s total the controlled and uncontrolled transactions
services costs. This analysis by reference to have been identified and adjusted for. Based
use inconsistent approaches to classify
total services costs shows that Company A on reliable data concerning the compensation similar expenses as ‘‘cost of goods sold’’
generated an operating loss on the controlled costs to Company A, an arm’s length result and ‘‘selling, general, and
services transaction, which indicates that for the controlled services transaction is administrative expenses.’’ Although
functional differences likely exist between equal to $144,000. This is calculated as distinguishing between these two
the controlled services transaction performed follows: [4 × (75 hrs. × $100/hr.)] + [4 × (380 categories may be difficult, the
by Company A and uncontrolled services hrs. × $75/hr.)] = $30,000 + $114,000 = distinction is less important to the
transactions performed by Company C, and $144,000, reflecting a 4× markup on the total extent that the ratio of operating profit
that these differences may not be reflected in compensation costs for Company A project
the comparable transactional costs. Upon to total services costs is used as the
managers and technical staff. In addition,
further scrutiny, the presence of such consistent with Company A’s pricing of
appropriate profit level indicator.
functional differences between the controlled uncontrolled transactions, Company B must Determining whether adjustments are
and uncontrolled transactions may indicate reimburse Company A for appropriate out-of- necessary under these or similar
that the cost of services plus method does not pocket expenses incurred in performing the circumstances requires thorough
provide the most reliable measure of an arm’s services. analysis of the functions performed and
length result under the facts and consideration of the cost accounting
circumstances. (f) Comparable profits method—(1) In
general. The comparable profits method practices of the tested party and the
Example 4. Internal comparable. (i)
Company A, a U.S. corporation, and its evaluates whether the amount charged uncontrolled comparables. Other
subsidiaries perform computer consulting in a controlled transaction is arm’s adjustments as provided in § 1.482–
services relating to systems integration and length, based on objective measures of 5(c)(2)(iv) may also be necessary to
networking for business clients in various profitability (profit level indicators) increase the reliability of the results
countries. Company A and its subsidiaries
derived from uncontrolled taxpayers under this method.
render only consulting services and do not (3) Examples. The principles of this
manufacture or distribute computer hardware that engage in similar business activities
under similar circumstances. The rules paragraph (f) are illustrated by the
or software to clients. The controlled group following examples:
is organized according to industry in § 1.482–5 relating to the comparable
specialization, with key industry specialists profits method apply to controlled Example 1. Ratio of operating profit to total
working for Company A. These personnel services transactions, except as services costs as the appropriate profit level
typically form the core consulting group that modified in this paragraph (f). indicator. (i) A Country T parent firm,
teams with consultants from the local- Company A, and its Country Y subsidiary,
(2) Determination of arm’s length Company B, both engage in manufacturing as
country subsidiaries to serve clients in the result—(i) Tested party. This paragraph
subsidiaries’ respective countries. their principal business activity. Company A
(f) applies where the relevant business also performs certain advertising services for
(ii) On some occasions, Company A and its
subsidiaries undertake engagements directly activity of the tested party as itself and its affiliates. In year 1, Company A
for clients. On other occasions, they work as determined under § 1.482–5(b)(2) is the renders advertising services to Company B.
subcontractors for uncontrolled parties on rendering of services in a controlled (ii) Based on the facts and circumstances,
more extensive consulting engagements for services transaction. Where the tested it is determined that the comparable profits
method will provide the most reliable
clients. In undertaking the latter engagements party determined under § 1.482–5(b)(2)
measure of an arm’s length result. Company
with third-party consultants, Company A is instead the recipient of the controlled A is selected as the tested party. No data are
typically prices its services at four times the services, the rules under this paragraph available for comparable independent
compensation costs of its consultants, (f) are not applicable to determine the manufacturing firms that render advertising
defined as the consultants’ base salary plus
arm’s length result. services to third parties. Financial data are
estimated fringe benefits, as defined in this available, however, for ten independent firms
table:
(ii) Profit level indicators. In addition
to the profit level indicators provided in that render similar advertising services as
§ 1.482–5(b)(4), a profit level indicator their principal business activity in Country
Category Rates X. The ten firms are determined to be
that may provide a reliable basis for
comparable under § 1.482–5(c). Neither
Project managers ...... $100 per hour. comparing operating profits of the tested Company A nor the comparable companies
Technical staff ........... $75 per hour. party involved in a controlled services use valuable intangibles in rendering the
transaction and uncontrolled services.
(iii) In uncontrolled transactions, Company comparables is the ratio of operating (iii) Based on the available financial data
A also charges the customer, at no markup, profit to total services costs (as defined of the comparable companies, it cannot be
for out-of-pocket expenses such as travel, in paragraph (j) of this section). determined whether these comparable
lodging, and data acquisition charges. Thus, companies report costs for financial
(iii) Comparability and reliability
for example, a project involving 100 hours of accounting purposes in the same manner as
time from project managers, and 400 hours of considerations—Data and
the tested party. The publicly available
technical staff time would result in total assumptions—Consistency in financial data of the comparable companies
compensation costs to Company A of (100 accounting. Consistency in accounting segregate total services costs into cost of
hrs. × $100/hr.) + (400 hrs. × $75/hr.) = practices between the relevant business goods sold and sales, general and
$10,000 + $30,000 = $40,000. Applying the activity of the tested party and the administrative costs, with no further
markup of 300%, the total fee charged would uncontrolled service providers is segmentation of costs provided. Due to the
thus be (4 × $40,000), or $160,000, plus out- particularly important in determining limited information available regarding the
of-pocket expenses. the reliability of the results under this cost accounting practices used by the
(iv) Company B, a Country X subsidiary of comparable companies, the ratio of operating
method, but less than in applying the
Company A, contracts to render consulting profits to total services costs is determined to
services to a Country X client in the banking cost of services plus method. be the most appropriate profit level indicator.
industry. In undertaking this engagement, Adjustments may be appropriate if This ratio includes total services costs to
Company B uses its own consultants and also materially different treatment is applied minimize the effect of any inconsistency in
uses the services of Company A project to particular cost items related to the accounting practices between Company A
managers and technical staff that specialize relevant business activity of the tested and the comparable companies.
Example 2. Application of the operating Company B for its costs associated with Company B incurs in performing the
profit to total services costs profit level rendering the consulting services, with no consulting services and do not make use of
indicator. (i) Company A is a foreign markup. valuable intangibles or special processes.
subsidiary of Company B, a U.S. corporation. (ii) Based on all the facts and (iii) Based on the available financial data
Company B is under examination for its year circumstances, it is determined that the of the comparables, it cannot be determined
1 taxable year. Company B renders comparable profits method will provide the whether the comparables report their costs
management consulting services to Company most reliable measure of an arm’s length for financial accounting purposes in the same
A. Company B’s consulting function includes result. Company B is selected as the tested manner as Company B reports its costs in the
analyzing Company A’s operations, party, and its rendering of management relevant business activity. The available
benchmarking Company A’s financial consulting services is identified as the financial data for the comparables report only
performance against companies in the same relevant business activity. Data are available an aggregate figure for costs of goods sold and
industry, and to the extent necessary, from ten domestic companies that operate in operating expenses, and do not segment the
developing a strategy to improve Company the industry segment involving management underlying services costs. Due to this
A’s operational performance. The accounting consulting and that perform activities limitation, the ratio of operating profits to
records of Company B allow reliable comparable to the relevant business activity total services costs is determined to be the
identification of the total services costs of the of Company B. These comparables include most appropriate profit level indicator.
consulting staff associated with the entities that primarily perform management (iv) For the taxable years 1 through 3,
management consulting services rendered to consulting services for uncontrolled parties. Company B shows the following results for
Company A. Company A reimburses The comparables incur similar risks as the services performed for Company A:
Year 1 Year 2 Year 3 Average
Revenues ......................................................................................................... 1,200,000 1,100,000 1,300,000 1,200,000

Cost of Goods Sold ......................................................................................... 100,000 100,000 (*) 66,667
Operating Expenses ........................................................................................ 1,100,000 1,000,000 1,300,000 1,133,333
Operating Profit ................................................................................................ 0 0 0 0
* N/A.
(v) After adjustments have been made to operating profit to total services costs is taxable years 1 through 3 would lead to the
account for identified material differences calculated for each of the uncontrolled following comparable operating profit (COP)
between the relevant business activity of service providers. Applying each ratio to for the services rendered by Company B:
Company B and the comparables, the average Company B’s average total services costs
ratio for the taxable years 1 through 3 of from the relevant business activity for the
OP/total Company B
Uncontrolled service provider service costs COP
(%)
Company 1 .............................................................................................................................................................. 15.75 $189,000

Company 2 .............................................................................................................................................................. 15.00 180,000
Company 3 .............................................................................................................................................................. 14.00 168,000
Company 4 .............................................................................................................................................................. 13.30 159,600
Company 5 .............................................................................................................................................................. 12.00 144,000
Company 6 .............................................................................................................................................................. 11.30 135,600
Company 7 .............................................................................................................................................................. 11.25 135,000
Company 8 .............................................................................................................................................................. 11.18 134,160
Company 9 .............................................................................................................................................................. 11.11 133,320
Company 10 ............................................................................................................................................................ 10.75 129,000
(vi) The available data are not sufficiently under § 1.482–1(e)(2)(iii)(C), which consists operating profit for year 3 is compared to the
complete to conclude that it is likely that all of the results ranging from $168,000 to comparable operating profits derived from
material differences between the relevant $134,160. Company B’s reported average the comparables’ results for year 3. The ratio
business activity of Company B and the operating profit of zero ($0) falls outside this of operating profit to total services costs in
comparables have been identified. Therefore, range. Therefore, an allocation may be year 3 is calculated for each of the
an arm’s length range can be established only appropriate.
comparables and applied to Company B’s
pursuant to § 1.482–1(e)(2)(iii)(B). The arm’s (vii) Because Company B reported income
length range is established by reference to the of zero, to determine the amount, if any, of year 3 total services costs to derive the
interquartile range of the results as calculated the allocation, Company B’s reported following results:
OP/total
service costs Company B
Uncontrolled service provider (for year 3) COP
(%)
Company 1 .............................................................................................................................................................. 15.00 $195,000

Company 2 .............................................................................................................................................................. 14.75 191,750
Company 3 .............................................................................................................................................................. 14.00 182,000
Company 4 .............................................................................................................................................................. 13.50 175,500
Company 5 .............................................................................................................................................................. 12.30 159,900

Company 6 .............................................................................................................................................................. 11.05 143,650
Company 7 .............................................................................................................................................................. 11.03 143,390
Company 8 .............................................................................................................................................................. 11.00 143,000
Company 9 .............................................................................................................................................................. 10.50 136,500
OP/total
service costs Company B
Uncontrolled service provider (for year 3) COP
(%)
Company 10 ............................................................................................................................................................ 10.25 133,250
(viii) Based on these results, the median of incorporate the controlled transaction (the includes salaries, fringe benefits, and related
the comparable operating profits for year 3 is relevant business activity). The compensation of these employees in ‘‘total
$151,775. Therefore, Company B’s income for Commissioner also identifies four services costs,’’ as defined in paragraph (j) of
year 3 is increased by $151,775, the uncontrolled domestic service providers, this section. Taxpayer does not include any
difference between Company B’s reported Companies A, B, C, and D, each of which amount attributable to stock options in total
operating profit for year 3 of zero and the performs exclusively activities similar to the services costs, nor does it deduct that amount
median of the comparable operating profits relevant business activity of Taxpayer that is in determining ‘‘reported operating profit’’
for year 3. subject to analysis under this paragraph (f). within the meaning of § 1.482–5(d)(5), for the
The stock of Companies A, B, C, and D is
Example 3. Material difference in year under examination.
publicly traded on a U.S. stock exchange.
accounting for stock-based compensation. (i) (iii) Stock options are granted to the
Assume that Taxpayer makes an election to
Taxpayer, a U.S. corporation the stock of apply these regulations to earlier taxable employees of Companies A, B, C, and D.
which is publicly traded, performs controlled years. Under a fair value method in accordance
services for its wholly-owned subsidiaries. (ii) Stock options are granted to the with U.S. generally accepted accounting
The arm’s length price of these controlled employees of Taxpayer that engage in the principles, the comparables include in total
services is evaluated under the comparable relevant business activity. Assume that, as compensation the value of the stock options
profits method for services in this paragraph, determined under a method in accordance attributable to the employees’ performance of
by reference to the net cost plus profit level with U.S. generally accepted accounting the relevant business activity for the annual
indicator (PLI). Taxpayer is the tested party principles, the fair value of such stock financial reporting period, and treat this
under paragraph (f)(2)(i) of this section. The options attributable to the employees’ amount as an expense in determining
Commissioner identifies the most narrowly performance of the relevant business activity operating profit for financial accounting
identifiable business activity of the tested is 500 for the taxable year in question. In purposes. The treatment of employee stock
party for which data are available that evaluating the controlled services, Taxpayer options is summarized in the following table.
Salaries
and other non- Stock options Stock options
option com- fair value expensed
pensation
Taxpayer ...................................................................................................................................... 1,000 500 0

Company A .................................................................................................................................. 7,000 2,000 2,000
Company B .................................................................................................................................. 4,300 250 250
Company C .................................................................................................................................. 10,000 4,500 4,500
Company D .................................................................................................................................. 15,000 2,000 2,000
(iv) A material difference exists in PLI by reference to the financial-accounting within the meaning of § 1.482–5(d)(5), for the
accounting for stock-based compensation, as data of Companies A, B, C, and D, which take taxable year under examination.
defined in § 1.482–7(d)(2)(i). Analysis into account compensatory stock options. (iii) Stock options are granted to the
indicates that this difference would Example 4. Material difference in employees of Companies A, B, C, and D, but
materially affect the measure of an arm’s utilization of stock-based compensation. none of these companies expense stock
length result under this paragraph (f). In options for financial accounting purposes.
(i) The facts are the same as in paragraph
making an adjustment to improve Under a method in accordance with U.S.
(i) of Example 3.
comparability under §§ 1.482–1(d)(2) and generally accepted accounting principles,
1.482–5(c)(2)(iv), the Commissioner includes (ii) No stock options are granted to the however, Companies A, B, C, and D disclose
in total services costs of the tested party the employees of Taxpayer that engage in the the fair value of the stock options for
total compensation costs of 1,500 (including relevant business activity. Thus, no financial accounting purposes. The
stock option fair value). In addition, the deduction for stock options is made in utilization and treatment of employee stock
Commissioner calculates the net cost plus determining ‘‘reported operating profit’’ options is summarized in the following table.
Salaries
and other non- Stock options Stock options
option com- fair value expensed
pensation
Taxpayer ...................................................................................................................................... 1,000 0 (*)

Company A .................................................................................................................................. 7,000 2,000 0
Company B .................................................................................................................................. 4,300 250 0
Company C .................................................................................................................................. 12,000 4,500 0
Company D .................................................................................................................................. 15,000 2,000 0
* N/A.
(iv) A material difference in the utilization materially affect the measure of an arm’s Taxpayer’s total services costs, which
of stock-based compensation exists within length result under this paragraph (f). In include total compensation costs of 1,000. In
the meaning of § 1.482–7(d)(2)(i). Analysis evaluating the comparable operating profits considering whether an adjustment is
indicates that these differences would of the tested party, the Commissioner uses necessary to improve comparability under
§§ 1.482–1(d)(2) and 1.482–5(c)(2)(iv), the stock-based compensation for financial the stock-based compensation incurred by
Commissioner recognizes that the total accounting purposes, their reported operating the comparable company.
compensation provided to employees of profits must be adjusted in order to improve (v) The adjustments to the data of
Taxpayer is comparable to the total comparability with the tested party. The Companies A, B, C, and D described in
compensation provided to employees of Commissioner increases each comparable’s paragraph (iv) of this Example 4 are
Companies A, B, C, and D. Because total services costs, and also reduces its
summarized in the following table:
Companies A, B, C, and D do not expense reported operating profit, by the fair value of
Salaries Net cost plus

Total services Operating
and other non- PLI
Stock options costs profit
option com- (B/A)
(A) (B)
pensation (%)
Per financial statements:

Company A .......................................................................... 7,000 2,000 25,000 6,000 24.00
Company B ................................................................... 4,300 250 12,500 2,500 20.00
Company C ................................................................... 12,000 4,500 36,000 11,000 30.56
Company D ................................................................... 15,000 2,000 27,000 7,000 25.93
As adjusted:
Company A ................................................................... 7,000 2,000 27,000 4,000 14.80
Company B ................................................................... 4,300 250 12,750 2,250 17.65
Company C ................................................................... 12,000 4,500 40,500 6,500 16.05
Company D ................................................................... 15,000 2,000 29,000 5,000 17.24
Example 5. Non-material difference in performance of the relevant business activity (iii) Stock options are granted to the
utilization of stock-based compensation. is 50 for the taxable year. Taxpayer includes employees of Companies A, B, C, and D, but
(i) The facts are the same as in paragraph salaries, fringe benefits, and all other none of these companies expense stock
(i) of Example 3. compensation of these employees (including options for financial accounting purposes.
(ii) Stock options are granted to the the stock option fair value) in ‘‘total services Under a method in accordance with U.S.
employees of Taxpayer that engage in the generally accepted accounting principles,
costs,’’ as defined in paragraph (j) of this
relevant business activity. Assume that, as however, Companies A, B, C, and D disclose
section, and deducts these amounts in
determined under a method in accordance the fair value of the stock options for
with U.S. generally accepted accounting determining ‘‘reported operating profit’’ financial accounting purposes. The
principles, the fair value of such stock within the meaning of § 1.482–5(d)(5), for the utilization and treatment of employee stock
options attributable to the employees’ taxable year under examination. options is summarized in the following table.
Salaries and
other Stock options Stock options
non-option fair value expensed
compensation
Taxpayer ...................................................................................................................................... 1,000 50 50

Company A .................................................................................................................................. 7,000 100 0
Company B .................................................................................................................................. 4,300 40 0
Company C .................................................................................................................................. 10,000 130 0
Company D .................................................................................................................................. 15,000 75 0
(iv) Analysis of the data reported by adjustment for differences in utilization of material effect on the determination of an
Companies A, B, C, and D indicates that an stock-based compensation would not have a arm’s length result.
Salaries and Net cost

other Stock options plus PLI
costs profit
non-option fair value (B/A)
(A) (B)
compensation (%)
Per financial statements:

Company A ................................................................... 7,000 100 25,000 6,000 24.00
Company B ................................................................... 4,300 40 12,500 2,500 20.00
Company C ................................................................... 12,000 130 36,000 11,000 30.56
Company D ................................................................... 15,000 75 27,000 7,000 25.93
As adjusted:
Company A ................................................................... 7,000 100 25,100 5,900 23.51
Company B ................................................................... 4,300 40 12,540 2,460 19.62
Company C ................................................................... 12,000 130 36,130 10,870 30.09
Company D ................................................................... 15,000 75 27,075 6,925 25.58
(v) Under the circumstances, the difference adjustment is made to the data of Companies compensation. (i) The facts are the same as
in utilization of stock-based compensation A, B, C, or D pursuant to §§ 1.482–1(d)(2) and in paragraph (i) of Example 3.

would not materially affect the determination 1.482–5(c)(2)(iv). (ii) Stock options are granted to the
of the arm’s length result under this Example 6. Material difference in employees of Taxpayer that engage in the
paragraph (f). Accordingly, in calculating the comparables’ accounting for stock-based relevant business activity. Assume that, as
net cost plus PLI, no comparability determined under a method in accordance
with U.S. generally accepted accounting section and deducts these amounts in accounting principles. Companies C and D
principles, the fair value of such stock determining ‘‘reported operating profit’’ do not expense the stock options for financial
options attributable to employees’ within the meaning of § 1.482–5(d)(5), for the accounting purposes. Under a method in
performance of the relevant business activity taxable year under examination. accordance with U.S. generally accepted
is 500 for the taxable year. Taxpayer includes (iii) Stock options are granted to the accounting principles, however, Companies
salaries, fringe benefits, and all other employees of Companies A, B, C, and D. C and D disclose the fair value of these
compensation of these employees (including Companies A and B expense the stock options in their financial statements. The
the stock option fair value) in ‘‘total services options for financial accounting purposes in utilization and accounting treatment of
costs,’’ as defined in paragraph (j) of this accordance with U.S. generally accepted options are depicted in the following table.
Salary and
other Stock options Stock options
non-option fair value expensed
compensation
Taxpayer ...................................................................................................................................... 1,000 500 500

Company A .................................................................................................................................. 7,000 2,000 2,000
Company B .................................................................................................................................. 4,300 250 250
Company C .................................................................................................................................. 12,000 4,500 0
Company D .................................................................................................................................. 15,000 2,000 0
(iv) A material difference in accounting for §§ 1.482–1(d)(2) and 1.482–5(c)(2)(iv), the reported. The Commissioner increases the
stock-based compensation exists, within the Commissioner recognizes that the total total services costs of Companies C and D by
meaning of § 1.482–7(d)(2)(i). Analysis employee compensation (including stock amounts equal to the fair value of their
indicates that this difference would options provided by Taxpayer and respective stock options, and reduces the
materially affect the measure of the arm’s Companies A, B, C, and D) provides a reliable operating profits of Companies C and D
length result under paragraph (f) of this basis for comparison. Because Companies A
section. In evaluating the comparable and B expense stock-based compensation for accordingly.
operating profits of the tested party, the financial accounting purposes, whereas (v) The adjustments described in paragraph
Commissioner includes in total services costs Companies C and D do not, an adjustment to (iv) of this Example 6 are depicted in the
Taxpayer’s total compensation costs of 1,500 the comparables’ operating profit is following table. For purposes of illustration,
(including stock option fair value of 500). In necessary. In computing the net cost plus the unadjusted data of Companies A and B
considering whether an adjustment is PLI, the Commissioner uses the financial- are also included.
necessary to improve comparability under accounting data of Companies A and B, as
Salaries and Net cost plus

other Stock options PLI
costs profit
non-option fair value (B/A)
(A) (B)
compensation (%)
Per financial Statements:

Company A ................................................................... 7,000 2,000 27,000 4,000 14.80
Company B ................................................................... 4,300 250 12,750 2,250 17.65
As adjusted:
Company C ................................................................... 12,000 4,500 40,500 6,500 16.05
Company D ................................................................... 15,000 2,000 29,000 5,000 17.24
(g) Profit split method—(1) In general. (2) Examples. The principles of this specialized communications network that
The profit split method evaluates paragraph (g) are illustrated by the connects its data center to Company A’s data
following examples: center in Country X. The communications
whether the allocation of the combined
network allows Company B to enter data
operating profit or loss attributable to Example 1. Residual profit split. (i) from uncontrolled companies on Company
one or more controlled transactions is Company A, a corporation resident in A’s database located in Country X. Company
arm’s length by reference to the relative Country X, auctions spare parts by means of B’s communications network also allows
value of each controlled taxpayer’s an interactive database. Company A uncontrolled companies to access Company
maintains a database that lists all spare parts A’s interactive database and purchase spare
contribution to that combined operating
available for auction. Company A developed parts. Company B bore the risks and cost of
profit or loss. The relative value of each the software used to run the database. developing this specialized communications
controlled taxpayer’s contribution is Company A’s database is managed by network. Company B enters into contracts
determined in a manner that reflects the Company A employees in a data center with uncontrolled companies and provides
functions performed, risks assumed and located in Country X, where storage and the companies access to Company A’s
resources employed by such controlled manipulation of data also take place. database through the Company B network.
Company A has a wholly-owned subsidiary, (ii) Analysis of the facts and circumstances
taxpayer in the relevant business Company B, located in Country Y. Company indicates that both Company A and Company
activity. For application of the profit B performs marketing and advertising B possess valuable intangibles that they use
split method (both the comparable profit activities to promote Company A’s to conduct the spare parts auction business.
split and the residual profit split), see interactive database. Company B solicits Company A bore the economic risks of
§ 1.482–6. The residual profit split unrelated companies to auction spare parts developing and maintaining software and the
method is ordinarily used in controlled on Company A’s database, and solicits interactive database. Company B bore the
customers interested in purchasing spare economic risks of developing the necessary

services transactions involving a parts online. Company B owns and maintains technology to transmit information from its
combination of nonroutine a computer server in Country Y, where it server to Company A’s data center, and to
contributions by multiple controlled receives information on spare parts available allow uncontrolled companies to access
taxpayers. for auction. Company B has also designed a Company A’s database. Company B helped to
enhance the value of Company A’s trademark B. Under this agreement, Company A agrees resources, etc.) in connection with providing
and to establish a network of customers in to supply to Company B project managers personnel to Company B. After the arm’s
Country Y. In addition, there are no market and other technical staff who have detailed length return for these functions is
comparables for the transactions between knowledge of Company A’s proprietary Level determined, residual profits may be present.
Company A and Company B to reliably 1 remediation techniques. Company A In the second stage of the residual profit
evaluate them separately. Given the facts and commits to perform under any long-term split, any residual profit is allocated by
circumstances, the Commissioner determines contracts entered into by Company B. reference to the relative value of the
that a residual profit split method will Company B agrees to compensate Company nonroutine contributions made by each
provide the most reliable measure of an arm’s A based on a markup on Company A’s taxpayer. Company A’s nonroutine
length result. marginal costs (pro rata compensation and contributions include its commitment to
(iii) Under the residual profit split method, current expenses of Company A personnel). perform under the contract and the
profits are first allocated based on the routine In the bid on the Country 2 for Level 1 waste, specialized technical knowledge made
contributions of each taxpayer. Routine Company B proposes to use a multi- available through the project managers under
contributions include general sales, disciplinary team of specialists from the services agreement with Company B.
marketing or administrative functions Company A and Company B. Project Company B’s nonroutine contributions
performed by Company B for Company A for managers from Company A will direct the include its licenses to handle Level 1 and
which it is possible to identify market team, which will also include employees of Level 2 waste in Country 2, its knowledge of
returns. Any residual profits will be allocated Company B and will make use of physical and contacts with procurement, regulatory
based on the nonroutine contributions of assets and facilities owned by Company B. and licensing officials in the government of
each taxpayer. Since both Company A and Only Company A and Company B personnel Country 2, and its record in Country 2 of
Company B provided nonroutine will perform services under the contract. successfully handling non-Level 1 waste.
contributions, the residual profits are Country 2 grants Company B a license to
allocated based on these contributions. handle Level 1 waste. (h) Unspecified methods. Methods not
Example 2. Residual profit split. (i) (v) Country 2 grants Company B a five- specified in paragraphs (b) through (g)
Company A, a Country 1 corporation, year, exclusive contract to provide processing of this section may be used to evaluate
provides specialized services pertaining to services for all Level 1 hazardous waste whether the amount charged in a
the processing and storage of Level 1 generated in County 2. Under the contract, controlled services transaction is arm’s
hazardous waste (for purposes of this Company B is to be paid a fixed price per ton
example, the most dangerous type of waste). length. Any method used under this
of Level 1 waste that it processes each year. paragraph (h) must be applied in
Under long-term contracts with private Company B undertakes that all services
companies and governmental entities in accordance with the provisions of
provided will meet international standards
Country 1, Company A performs multiple
applicable to processing of Level 1 waste.
§ 1.482–1. Consistent with the specified
services, including transportation of Level 1 methods, an unspecified method should
Company B begins performance under the
waste, development of handling and storage take into account the general principle
contract.
protocols, recordkeeping, and supervision of that uncontrolled taxpayers evaluate the
(vi) Analysis of the facts and circumstances
waste-storage facilities owned and
maintained by the contracting parties.
indicates that both Company A and Company terms of a transaction by considering the
Company A’s research and development unit B make nonroutine contributions to the Level realistic alternatives to that transaction,
has also developed new and unique 1 waste processing activity in Country 2. In including economically similar
processes for transport and storage of Level addition, it is determined that reliable transactions structured as other than
1 waste that minimize environmental and comparables are not available for the services services transactions, and only enter
occupational effects. In addition to this novel that Company A provides under the long-
term contract, in part because those services
into a particular transaction if none of
technology, Company A has substantial the alternatives is preferable to it. For
know-how and a long-term record of safe incorporate specialized knowledge and
process intangibles developed by Company example, the comparable uncontrolled
operations in Country 1.
(ii) Company A’s subsidiary, Company B, A. It is also determined that reliable services price method compares a
has been in operation continuously for a comparables are not available for the Level 2 controlled services transaction to
number of years in Country 2. Company B license in Country 2, the successful track similar uncontrolled transactions to
has successfully completed several projects record, the government contacts with provide a direct estimate of the price to
in Country 2 involving Level 2 and Level 3 Country 2 officials, and other intangibles that which the parties would have agreed
waste, including projects with government- Company B provided. In view of these facts, had they resorted directly to a market
owned entities. Company B has a license in the Commissioner determines that the
residual profit split method for services in
alternative to the controlled services
Country 2 to handle Level 2 waste (Level 3 transaction. Therefore, in establishing
does not require a license). Company B has paragraph (g) of this section provides the
established a reputation for completing these most reliable means of evaluating the arm’s whether a controlled services
projects in a responsible manner. Company B length results for the transaction. In transaction achieved an arm’s length
has cultivated contacts with procurement evaluating the appropriate returns to result, an unspecified method should
officers, regulatory and licensing officials, Company A and Company B for their provide information on the prices or
and other government personnel in Country respective contributions, the Commissioner profits that the controlled taxpayer
2. takes into account that the controlled parties could have realized by choosing a
(iii) Country 2 government publishes incur different risks, because the contract realistic alternative to the controlled
invitations to bid on a project to handle the between the controlled parties provides that
Company A will be compensated on the basis
services transaction (for example,
country’s burgeoning volume of Level 1
waste, all of which is generated in of marginal costs incurred, plus a markup, outsourcing a particular service
government-owned facilities. Bidding is whereas the contract between Company B function, rather than performing the
limited to companies that are domiciled in and the government of Country 2 provides function itself). As with any method, an
Country 2 and that possess a license from the that Company B will be compensated on a unspecified method will not be applied
government to handle Level 1 or Level 2 fixed-price basis per ton of Level 1 waste unless it provides the most reliable
waste. In an effort to submit a winning bid processed. measure of an arm’s length result under
to secure the contract, Company B points to (vii) In the first stage of the residual profit the principles of the best method rule.
its Level 2 license and its record of successful split, an arm’s length return is determined for See § 1.482–1(c). Therefore, in
completion of projects, and also routine activities performed by Company B
demonstrates to these officials that it has in Country 2, such as transportation,

accordance with § 1.482–1(d)
access to substantial technical expertise recordkeeping, and administration. In (comparability), to the extent that an
pertaining to processing of Level 1 waste. addition, an arm’s length return is unspecified method relies on internal
(iv) Company A enters into a long-term determined for routine activities performed data rather than uncontrolled
technical services agreement with Company by Company A (administrative, human comparables, its reliability will be
reduced. Similarly, the reliability of a performing the activities in the absence recipient is arm’s length, the charge
method will be affected by the of a provision that unconditionally determined under the rules of §§ 1.482–
reliability of the data and assumptions obligates the recipient to pay for the 3 and 1.482–4 for the transfer of similar
used to apply the method, including any activities performed in the tax property may be considered. See
projections used. accounting period in which the service § 1.482–1(f)(2)(ii).
Example. (i) Company T, a U.S. is rendered. (5) Examples. The principles of this
corporation, develops computer software (2) Contingent-payment arrangement. paragraph (i) are illustrated by the
programs including a real estate investment For purposes of this paragraph (i), an following examples:
program that performs financial analysis of arrangement will be treated as a Example 1. (i) Company X is a member of
commercial real properties. The primary contingent-payment arrangement if it a controlled group that has operated in the
business activity of Companies U, V and W meets all of the requirements in pharmaceutical sector for many years. In year
is commercial real estate development. For paragraph (i)(2)(i) of this section and is 1, Company X enters into a written services
business reasons, Company T does not sell consistent with the economic substance agreement with Company Y, another member
the computer program to its customers (on a and conduct in paragraph (i)(2)(ii) of of the controlled group, whereby Company X
compact disk or via download from Company this section. will perform certain research and
T’s server through the Internet). Instead, development activities for Company Y. The
(i) General requirements—(A) Written
Company T maintains the software program parties enter into the agreement before
on its own server and allows customers to
contract. The arrangement is set forth in
Company X undertakes any of the research
access the program through the Internet by a written contract entered into prior to, and development activities covered by the
using a password. The transactions between or contemporaneous with the start of the agreement. At the time the agreement is
Company T and Companies U, V and W are activity or group of activities entered into, the possibility that any new
structured as controlled services transactions constituting the controlled services products will be developed is highly
whereby Companies U, V and W obtain transaction. uncertain and the possible market or markets
access via the Internet to Company T’s (B) Specified contingency. The for any products that may be developed are
software program for financial analysis. Each contract states that payment is not known and cannot be estimated with any
year, Company T provides a revised version contingent (in whole or in part) upon reliability. Under the agreement, Company Y
of the computer program including the most the happening of a future benefit will own any patent or other rights that result
recent data on the commercial real estate from the activities of Company X under the
(within the meaning of paragraph (l)(3)
market, rendering the old version obsolete. agreement and Company Y will make
(ii) In evaluating whether the consideration of this section) for the recipient directly payments to Company X only if such
paid by Companies U, V and W to Company related to the controlled services activities result in commercial sales of one or
T was arm’s length, the Commissioner may transaction. more derivative products. In that event,
consider, subject to the best method rule of (C) Basis for payment. The contract Company Y will pay Company X, for a
§ 1.482–1(c), Company T’s alternative of provides for payment on a basis that specified period, x% of Company Y’s gross
selling the computer program to Companies reflects the recipient’s benefit from the sales of each of such products. Payments are
U, V and W on a compact disk or via services rendered and the risks borne by required with respect to each jurisdiction in
download through the Internet. The the renderer. Whether the specified which Company Y has sales of such a
Commissioner determines that the controlled derivative product, beginning with the first
contingency bears a direct relationship
services transactions between Company T year in which the sale of a product occurs in
to the controlled services transaction, the jurisdiction and continuing for six
and Companies U, V and W are comparable
to the transfer of a similar software program and whether the basis for payment additional years with respect to sales of that
on a compact disk or via download through reflects the recipient’s benefit and the product in that jurisdiction.
the Internet between uncontrolled parties. renderer’s risk, is evaluated based on all (ii) As a result of research and
Subject to adjustments being made for the facts and circumstances. development activities performed by
material differences between the controlled (ii) Economic substance and conduct. Company X for Company Y in years 1
services transactions and the comparable The arrangement, including the through 4, a compound is developed that
uncontrolled transactions, the uncontrolled contingency and the basis for payment, may be more effective than existing
transfers of tangible property may be used to medications in the treatment of certain
is consistent with the economic
evaluate the arm’s length results for the conditions. Company Y registers the patent
substance of the controlled transaction rights with respect to the compound in
controlled services transactions between
Company T and Companies U, V and W.
and the conduct of the controlled several jurisdictions in year 4. In year 6,
parties. See § 1.482–1(d)(3)(ii)(B). Company Y begins commercial sales of the
(i) Contingent-payment contractual (3) Commissioner’s authority to product in Jurisdiction A and, in that year,
terms for services—(1) Contingent- impute contingent-payment terms. Company Y makes the payment to Company
payment contractual terms recognized Consistent with the authority in X that is required under the agreement. Sales
in general. In the case of a contingent- § 1.482–1(d)(3)(ii)(B), the Commissioner of the product continue in Jurisdiction A in
payment arrangement, the arm’s length may impute contingent-payment years 7 through 9 and Company Y makes the
result for the controlled services contractual terms in a controlled payments to Company X in years 7 through
transaction generally would not require 9 that are required under the agreement.
services transaction if the economic (iii) The years under examination are years
payment by the recipient to the renderer substance of the transaction is 6 though 9. In evaluating whether the
in the tax accounting period in which consistent with the existence of such contingent-payment terms will be
the service is rendered if the specified terms. recognized, the Commissioner considers
contingency does not occur in that (4) Evaluation of arm’s length charge. whether the conditions of paragraph (i)(2) of
period. If the specified contingency Whether the amount charged in a this section are met and whether the
occurs in a tax accounting period contingent-payment arrangement is arrangement, including the specified
subsequent to the period in which the arm’s length will be evaluated in contingency and basis of payment, is
service is rendered, the arm’s length accordance with this section and other consistent with the economic substance of
result for the controlled services applicable regulations under section the controlled services transaction and with
the conduct of the controlled parties. The
transaction generally would require 482. In evaluating whether the amount Commissioner determines that the
payment by the recipient to the renderer charged in a contingent-payment contingent-payment arrangement is reflected
on a basis that reflects the recipient’s arrangement for the manufacture, in the written agreement between Company
benefit from the services rendered and construction, or development of tangible X and Company Y; that commercial sales of
the risks borne by the renderer in or intangible property owned by the products developed under the arrangement
represent future benefits for Company Y X a fee equal to the research and available to the parties in connection with
directly related to the controlled services development costs borne by Company X plus the controlled services transaction. One such
transaction; and that the basis for the an amount equal to x% of such costs, with alternative, in view of Company X’s
payment provided for in the event such sales the payment to be made in the first year in willingness and ability to bear the risks and
occur reflects the recipient’s benefit and the which any such sales occur. The x% markup expenses of research and development
renderer’s risk. Consistent with § 1.482– on costs is within the range, ascertainable in activities, would be for Company X to
1(d)(3)(ii)(B) and (iii)(B), the Commissioner year 1, of markups on costs of independent undertake such activities on its own behalf
determines that the parties’ conduct over the contract researchers that are compensated and to license the rights to products
term of the agreement has been consistent under terms that unconditionally obligate the successfully developed as a result of such
with their contractual allocation of risk; that recipient to pay for the activities performed activities. Accordingly, for purposes of its
Company X has the financial capacity to bear in the tax accounting period in which the determination, the Commissioner may
the risk that its research and development service is rendered. In year 6, Company Y consider the royalties (or other consideration)
services may be unsuccessful and that it may makes the single payment to Company X that charged for intangibles that are comparable to
not receive compensation for such services; is required under the arrangement. those incorporated in the derivative products
and that Company X exercises managerial (ii) The years under examination are years that resulted from Company X’s research and
and operational control over the research and 6 though 9. In evaluating whether the development activities under the contingent-
development, such that it is reasonable for contingent-payment terms will be payment arrangement.
Company X to assume the risk of those recognized, the Commissioner considers
activities. Based on all these facts, the whether the requirements of paragraph (i)(2) (j) Total services costs. For purposes
Commissioner determines that the of this section were met at the time the of this section, total services costs
contingent-payment arrangement is written agreement was entered into and means all costs of rendering those
consistent with economic substance. whether the arrangement, including the services for which total services costs
(iv) In determining whether the amount specified contingency and basis for payment,
are being determined. Total services
charged under the contingent-payment is consistent with the economic substance of
arrangement in each of years 6 through 9 is the controlled services transaction and with costs include all costs in cash or in kind
arm’s length, the Commissioner evaluates the conduct of the controlled parties. The (including stock-based compensation)
under this section and other applicable rules Commissioner determines that the that, based on analysis of the facts and
under section 482 the compensation paid in contingent-payment terms are reflected in the circumstances, are directly identified
each year for the research and development written agreement between Company X and with, or reasonably allocated in
services. This analysis takes into account that Company Y and that commercial sales of accordance with the principles of
under the contingent-payment terms products developed under the arrangement paragraph (k)(2) of this section to, the
Company X bears the risk that it might not represent future benefits for Company Y services. In general, costs for this
receive payment for its services in the event directly related to the controlled services
purpose should comprise provision for
that those services do not result in transaction. However, in this case, the
marketable products and the risk that the Commissioner determines that the basis for all resources expended, used, or made
magnitude of its payment depends on the payment provided for in the event such sales available to achieve the specific
magnitude of product sales, if any. The occur (costs of the services plus x%, objective for which the service is
Commissioner also considers the alternatives representing the markup for contract research rendered. Reference to generally
reasonably available to the parties in in the absence of any nonpayment risk) does accepted accounting principles or
connection with the controlled services not reflect the recipient’s benefit and the Federal income tax accounting rules
transaction. One such alternative, in view of renderer’s risks in the controlled services may provide a useful starting point but
Company X’s willingness and ability to bear transaction. Based on all the facts and will not necessarily be conclusive
the risk and expenses of research and circumstances, the Commissioner determines
regarding inclusion of costs in total
development activities, would be for that the contingent-payment arrangement is
Company X to undertake such activities on not consistent with economic substance. services costs. Total services costs do
its own behalf and to license the rights to (iii) Accordingly, the Commissioner not include interest expense, foreign
products successfully developed as a result determines to exercise its authority to impute income taxes (as defined in § 1.901–
of such activities. Accordingly, in evaluating contingent-payment contractual terms that 2(a)), or domestic income taxes.
whether the compensation of x% of gross accord with economic substance, pursuant to (k) Allocation of costs—(1) In general.
sales that is paid to Company X during the paragraph (i)(3) of this section and § 1.482– In any case where the renderer’s activity
first four years of commercial sales of 1(d)(3)(ii)(B). In this regard, the
derivative products is arm’s length, the Commissioner takes into account that at the
that results in a benefit (within the
Commissioner may consider the royalties (or time the arrangement was entered into, the meaning of paragraph (l)(3) of this
other consideration) charged for intangibles possibility that any new products would be section) for one recipient in a controlled
that are comparable to those incorporated in developed was highly uncertain and the services transaction also generates a
the derivative products and that resulted possible market or markets for any products benefit for one or more other members
from Company X’s research and development that may be developed were not known and of a controlled group (including the
activities under the contingent-payment could not be estimated with any reliability. benefit, if any, to the renderer), and the
arrangement. In such circumstances, it is reasonable to amount charged under this section in
Example 2. (i) The facts are the same as in conclude that one possible basis of payment, the controlled services transaction is
Example 1, except that no commercial sales in order to reflect the recipient’s benefit and
ever materialize with regard to the patented the renderer’s risks, would be a charge equal
determined under a method that makes
compound so that, consistent with the to a percentage of commercial sales of one or reference to costs, costs must be
agreement, Company Y makes no payments more derivative products that result from the allocated among the portions of the
to Company X in years 6 through 9. research and development activities. The activity performed for the benefit of the
(ii) Based on all the facts and Commissioner in this case may impute terms first mentioned recipient and such other
circumstances, the Commissioner determines that require Company Y to pay Company X members of the controlled group under
that the contingent-payment arrangement is a percentage of sales of the products this paragraph (k). The principles of this
consistent with economic substance, and the developed under the agreement in each of paragraph (k) must also be used
result (no payments in years 6 through 9) is years 6 through 9. whenever it is appropriate to allocate
consistent with an arm’s length result. (iv) In determining an appropriate arm’s
Example 3. (i) The facts are the same as in length charge under such imputed
and apportion any class of costs (for
Example 1, except that, in the event that contractual terms, the Commissioner example, overhead costs) in order to
Company X’s activities result in commercial conducts an analysis under this section and determine the total services costs of
sales of one or more derivative products by other applicable rules under section 482, and rendering the services. In no event will
Company Y, Company Y will pay Company considers the alternatives reasonably an allocation of costs based on a
generalized or non-specific benefit be methods, but need not be accorded for its own use and in rendering research
appropriate. conclusive weight by the Commissioner. services to its subsidiary, Company B.
(2) Appropriate method of allocation In determining the extent to which Company B obtains benefits from the
and apportionment—(i) Reasonable allocations are to be made to or from database that are similar to those that it
method standard. Any reasonable would obtain if it had independently
foreign members of a controlled group,
method may be used to allocate and licensed the database from the uncontrolled
practices employed by the domestic taxpayer. Evaluation of the arm’s length
apportion costs under this section. In members in apportioning costs among charge (under a method in which costs are
establishing the appropriate method of themselves will also be considered if the relevant) to Company B for the controlled
allocation and apportionment, relationships with the foreign members services that incorporate use of the database
consideration should be given to all are comparable to the relationships must take into account the full amount of the
bases and factors, including, for among the domestic members of the license fee of 500x paid by Company A, as
example, total services costs, total costs controlled group. For example, if for reasonably allocated and apportioned to the
for a relevant activity, assets, sales, purposes of reporting to public relevant benefits, although the incremental
compensation, space utilized, and time stockholders or to a governmental use of the database for the benefit of
spent. The costs incurred by supporting agency, a corporation apportions the Company B did not result in an increase in
departments may be apportioned to the license fee paid by Company A.
costs attributable to its executive Example 2. (i) Company A is a consumer
other departments on the basis of officers among the domestic members of products company located in the United
reasonable overall estimates, or such a controlled group on a reasonable and States. Companies B and C are wholly-owned
costs may be reflected in the other consistent basis, and such officers subsidiaries of Company A and are located in
departments’ costs by applying exercise comparable control over foreign Countries B and C, respectively. Company A
reasonable departmental overhead rates. members of the controlled group, such and its subsidiaries manufacture products for
Allocations and apportionments of costs domestic apportionment practice will be sale in their respective markets. Company A
must be made on the basis of the full considered in determining the hires a consultant who has expertise
cost, as opposed to the incremental cost. allocations to be made to the foreign regarding a manufacturing process used by
(ii) Use of general practices. The members. Company A and its subsidiary, Company B.
practices used by the taxpayer to (3) Examples. The principles of this Company C, the Country C subsidiary, uses
apportion costs in connection with a different manufacturing process, and
paragraph (k) are illustrated by the accordingly will not receive any benefit from
preparation of statements and analyses following examples: the outside consultant hired by Company A.
for the use of management, creditors,
Example 1. Company A pays an annual In allocating and apportioning the cost of
minority shareholders, joint venturers, license fee of 500x to an uncontrolled hiring the outside consultant (100), Company
clients, customers, potential investors, taxpayer for unlimited use of a database A determines that sales constitute the most
or other parties or agencies in interest within the corporate group. Under the terms appropriate allocation key.
will be considered as potential of the license with the uncontrolled taxpayer, (ii) Company A and its subsidiaries have
indicators of reliable allocation Company A is permitted to use the database the following sales:
Company A B C Total
Sales ................................................................................................................ 400 100 200 700
(iii) Because Company C does not obtain 100 are allocated and apportioned ratably to based on the total sales of those entities
any benefit from the consultant, none of the Company A and Company B as the entities (500). An appropriate allocation of the costs
costs are allocated to it. Rather, the costs of that obtain a benefit from the campaign, of the consultant is as follows:
Company A B Total
Allocation ..................................................................................................................................... 400/500 100/500 ........................

Amount ......................................................................................................................................... 80 20 100
(l) Controlled services transaction— recipient any property or other performed for itself the same activity or
(1) In general. A controlled services resources of the renderer. a similar activity. A benefit may result
transaction includes any activity (as (3) Benefit—(i) In general. An activity to the owner of an intangible if the
defined in paragraph (l)(2) of this is considered to provide a benefit to the renderer engages in an activity that is
section) by one member of a group of recipient if the activity directly results reasonably anticipated to result in an
controlled taxpayers (the renderer) that in a reasonably identifiable increment of increase in the value of that intangible.
results in a benefit (as defined in economic or commercial value that Paragraphs (l)(3)(ii) through (v) of this
paragraph (l)(3) of this section) to one or enhances the recipient’s commercial section provide guidelines that indicate
more other members of the controlled position, or that may reasonably be the presence or absence of a benefit for
group (the recipient(s)). anticipated to do so. An activity is the activities in the controlled services
(2) Activity. An activity includes the generally considered to confer a benefit transaction.
performance of functions, assumptions if, taking into account the facts and (ii) Indirect or remote benefit. An
of risks, or use by a renderer of tangible circumstances, an uncontrolled taxpayer activity is not considered to provide a
or intangible property or other in circumstances comparable to those of benefit to the recipient if, at the time the
resources, capabilities, or knowledge, the recipient would be willing to pay an activity is performed, the present or
such as knowledge of and ability to take uncontrolled party to perform the same reasonably anticipated benefit from that
advantage of particularly advantageous or similar activity on either a fixed or activity is so indirect or remote that the
situations or circumstances. An activity contingent-payment basis, or if the recipient would not be willing to pay,
also includes making available to the recipient otherwise would have on either a fixed or contingent-payment
basis, an uncontrolled party to perform campaign for a consumer product, Company benefit from the duplicative activities
a similar activity, and would not be X pays for and obtains designation as an performed by Company X.
willing to perform such activity for itself official sponsor of the Olympics. This Example 6. Duplicative activities.
designation allows Company X and all its Company X’s in-house legal staff has
for this purpose. The determination
subsidiaries, including Company Y, to specialized expertise in several areas,
whether the benefit from an activity is identify themselves as sponsors and to use including intellectual property law.
indirect or remote is based on the nature the Olympic logo in advertising and Company Y is involved in negotiations with
of the activity and the situation of the promotional campaigns. The Olympic an unrelated party to enter into a complex
recipient, taking into consideration all sponsorship campaign generates benefits to joint venture that includes multiple licenses
facts and circumstances. Company X, Company Y, and other and cross-licenses of patents and copyrights.
(iii) Duplicative activities. If an subsidiaries of Company X. Company Y retains outside counsel that
activity performed by a controlled Example 2. Indirect or remote benefit. specializes in intellectual property law to
Based on recommendations contained in a review the transaction documents. Outside
taxpayer duplicates an activity that is
study performed by its internal staff, counsel advises that the terms for the
performed, or that reasonably may be Company X implements certain changes in proposed transaction are advantageous to
anticipated to be performed, by another its management structure and the Company Y and that the contracts are valid
controlled taxpayer on or for its own compensation of managers of divisions and fully enforceable. Before Company Y
account, the activity is generally not located in the United States. No changes executes the contracts, the legal staff of
considered to provide a benefit to the were recommended or considered for Company X also reviews the transaction
recipient, unless the duplicative activity Company Y in Country B. The internal study documents and concurs in the opinion
itself provides an additional benefit to and the resultant changes in its management provided by outside counsel. The activities
the recipient. may increase the competitiveness and overall performed by Company X substantially
efficiency of Company X. Any benefits to duplicate the legal services obtained by
(iv) Shareholder activities. An activity Company Y as a result of the study are, Company Y, but they also reduce the
is not considered to provide a benefit if however, indirect or remote. Consequently, commercial risk associated with the
the sole effect of that activity is either Company Y is not considered to obtain a transaction in a way that confers an
to protect the renderer’s capital benefit from the study. additional benefit on Company Y.
investment in the recipient or in other Example 3. Indirect or remote benefit. Example 7. Shareholder activities.
members of the controlled group, or to Based on recommendations contained in a Company X is a publicly held corporation.
facilitate compliance by the renderer study performed by its internal staff, U.S. laws and regulations applicable to
with reporting, legal, or regulatory Company X decides to make changes to the publicly held corporations such as Company
requirements applicable specifically to management structure and management X require the preparation and filing of
compensation of its subsidiaries, in order to periodic reports that show, among other
the renderer, or both. Activities in the increase their profitability. As a result of the things, profit and loss statements, balance
nature of day-to-day management recommendations in the study, Company X sheets, and other material financial
generally do not relate to protection of implements substantial changes in the information concerning the company’s
the renderer’s capital investment. Based management structure and management operations. Company X, Company Y and
on analysis of the facts and compensation scheme of Company Y. The each of the other subsidiaries maintain their
circumstances, activities in connection study and the changes implemented as a own separate accounting departments that
with a corporate reorganization may be result of the recommendations are record individual transactions and prepare
considered to provide a benefit to one anticipated to increase the profitability of financial statements in accordance with their
or more controlled taxpayers. Company X and its subsidiaries. The local accounting practices. Company Y, and
increased management efficiency of the other subsidiaries, forward the results of
(v) Passive association. A controlled Company Y that results from these changes their financial performance to Company X,
taxpayer generally will not be is considered to be a specific and identifiable which analyzes and compiles these data into
considered to obtain a benefit where benefit, rather than remote or speculative. periodic reports in accordance with U.S. laws
that benefit results from the controlled Example 4. Duplicative activities. At its and regulations. Because Company X’s
taxpayer’s status as a member of a corporate headquarters in the United States, preparation and filing of the reports relate
controlled group. A controlled Company X performs certain treasury solely to its role as an investor of capital or
taxpayer’s status as a member of a functions for Company X and for its shareholder in Company Y or to its
controlled group may, however, be subsidiaries, including Company Y. These compliance with reporting, legal, or
taken into account for purposes of treasury functions include raising capital, regulatory requirements, or both, these
arranging medium and long-term financing activities constitute shareholder activities
evaluating comparability between for general corporate needs, including cash and therefore Company Y is not considered
controlled and uncontrolled management. Under these circumstances, the to obtain a benefit from the preparation and
transactions. treasury functions performed by Company X filing of the reports.
(4) Disaggregation of transactions. A do not duplicate the functions performed by Example 8. Shareholder activities. The
controlled services transaction may be Company Y’s staff. Accordingly, Company Y facts are the same as in Example 7, except
analyzed as two separate transactions is considered to obtain a benefit from the that Company Y’s accounting department
for purposes of determining the arm’s functions performed by Company X. maintains a general ledger recording
length consideration, if that analysis is Example 5. Duplicative activities. The facts individual transactions, but does not prepare
the most reliable means of determining are the same as in Example 4, except that any financial statements (such as profit and
Company Y’s functions include ensuring that loss statements and balance sheets). Instead,
the arm’s length consideration for the the financing requirements of its own Company Y forwards the general ledger data
controlled services transaction. See the operations are met. Analysis of the facts and to Company X, and Company X analyzes and
best method rule under § 1.482–1(c). circumstances indicates that Company Y compiles financial statements for Company
(5) Examples. The principles of this independently administers all financing and Y, as well as for Company X’s overall
paragraph (l) are illustrated by the cash-management functions necessary to operations, for purposes of complying with
following examples. In each example, support its operations, and does not utilize U.S. reporting requirements. Company Y is
assume that Company X is a U.S. financing obtained by Company X. Under the subject to reporting requirements in Country
corporation and Company Y is a wholly- circumstances, the treasury functions B similar to those applicable to Company X
owned subsidiary of Company X in performed by Company X are duplicative of in the United States. Much of the data that
similar functions performed by Company Y’s Company X analyzes and compiles regarding
Country B. staff, and the duplicative functions do not Company Y’s operations for purposes of
Example 1. In general. In developing a enhance Company Y’s position. Accordingly, complying with the U.S. reporting
worldwide advertising and promotional Company Y is not considered to obtain a requirements are made available to Company
Y for its use in preparing reports that must operations, and not solely to protect Example 16. Passive association/benefit.
be filed in Country B. Company Y Company X’s investment in Company Y or to The facts are the same as in Example 15,
incorporates these data, after minor facilitate Company X’s compliance with except that Company X executes a
adjustments for differences in local Country B’s corporate laws, or to both, these performance guarantee with respect to the
accounting practices, into the reports that it activities do not constitute shareholder contract, agreeing to assist in the project if
files in Country B. Under these activities. Company Y fails to meet certain mileposts.
circumstances, because Company X’s Example 13. Shareholder activities. This performance guarantee allowed
analysis and compilation of Company Y’s Company X establishes detailed personnel Company Y to obtain the contract on
financial data does not relate solely to its role policies for its subsidiaries, including materially more favorable terms than
as an investor of capital or shareholder in Company Y. Company X also reviews and otherwise would have been possible.
Company Y, or to its compliance with approves the performance appraisals of Company Y is considered to obtain a benefit
reporting, legal, or regulatory requirements, Company Y’s executives, monitors levels of from Company X’s execution of the
or both, these activities do not constitute compensation paid to all Company Y performance guarantee.
shareholder activities. personnel, and is involved in hiring and Example 17. Passive association/benefit.
Example 9. Shareholder activities. firing decisions regarding the senior The facts are the same as in Example 15,
Members of Company X’s internal audit staff executives of Company Y. Because this except that Company X began the process of
visit Company Y on a semiannual basis in personnel-related activity by Company X negotiating the contract with the financial
order to review the subsidiary’s adherence to involves day-to-day management of Company institution in Country B before acquiring
internal operating procedures issued by Y, this activity does not relate solely to Company Y. Once Company Y was acquired
Company X and its compliance with U.S. Company X’s role as an investor of capital or by Company X, the contract with the
anti-bribery laws, which apply to Company a shareholder of Company Y, and therefore financial institution was entered into by
Y on account of its ownership by a U.S. does not constitute a shareholder activity. Company Y. Company Y is considered to
corporation. Because the sole effect of the Example 14. Shareholder activities. Each obtain a benefit from Company X’s
reviews by Company X’s audit staff is to year, Company X conducts a two-day retreat negotiation of the contract.
protect Company X’s investment in Company for its senior executives. The purpose of the Example 18. Passive association/benefit.
Y, or to facilitate Company X’s compliance retreat is to refine the long-term business The facts are the same as in Example 15,
with U.S. anti-bribery laws, or both, the visits strategy of Company X and its subsidiaries, except that Company X sent a letter to the
are shareholder activities and therefore including Company Y, and to produce a financial institution in Country B, which
Company Y is not considered to obtain a confidential strategy statement. The strategy represented that Company X had a certain
benefit from the visits. statement identifies several potential growth percentage ownership in Company Y and
Example 10. Shareholder activities. initiatives for Company X and its subsidiaries that Company X would maintain that same
and lists general means of increasing the
Country B recently enacted legislation that percentage ownership interest in Company Y
profitability of the company as a whole. The
changed the foreign currency exchange until the contract was completed. This letter
strategy statement is made available without
controls applicable to foreign shareholders of allowed Company Y to obtain the contract on
charge to Company Y and the other
Country B corporations. Company X more favorable terms than otherwise would
subsidiaries of Company X. Company Y
concludes that it may benefit from changing have been possible. Since this letter from
independently evaluates whether to
the capital structure of Company Y, thus implement some, all, or none of the Company X to the financial institution
taking advantage of the new foreign currency initiatives contained in the strategy simply affirmed Company Y’s status as a
exchange control laws in Country B. statement. Because the preparation of the member of the controlled group and
Company X engages an investment banking strategy statement does not relate solely to represented that this status would be
firm and a law firm to review the Country B Company X’s role as an investor of capital or maintained until the contract was completed,
legislation and to propose possible changes a shareholder of Company Y, the expense of Company Y is not considered to obtain a
to the capital structure of Company Y. preparing the document is not a shareholder benefit from Company X’s furnishing of the
Because Company X’s retention of the firms expense. letter.
facilitates Company Y’s ability to pay Example 15. Passive association/benefit. Example 19. Passive association/benefit. (i)
dividends and other amounts and has the Company X is the parent corporation of a S is a company that supplies plastic
sole effect of protecting Company X’s large controlled group that has been in containers to companies in various
investment in Company Y, these activities operation in the information-technology industries. S establishes the prices for its
constitute shareholder activities and sector for ten years. Company Y is a small containers through a price list that offers
Company Y is not considered to obtain a corporation that was recently acquired by the customers discounts based solely on the
benefit from the activities. Company X controlled group from local volume of containers purchased.
Example 11. Shareholder activities. The Country B owners. Several months after the (ii) Company X is the parent corporation of
facts are the same as in Example 10, except acquisition of Company Y, Company Y a large controlled group in the information
that Company Y bears the full cost of obtained a contract to redesign and assemble technology sector. Company Y is a wholly-
retaining the firms to evaluate the new the information-technology networks and owned subsidiary of Company X located in
foreign currency control laws in Country B systems of a large financial institution in Country B. Company X and Company Y both
and to make appropriate changes to its stock Country B. The project was significantly purchase plastic containers from unrelated
ownership by Company X. Company X is larger and more complex than any other supplier S. In year 1, Company X purchases
considered to obtain a benefit from the project undertaken to date by Company Y. 1 million units and Company Y purchases
rendering by Company Y of these activities, Company Y did not use Company X’s 100,000 units. S, basing its prices on
which would be shareholder activities if marketing intangibles to solicit the contract, purchases by the entire group, completes the
conducted by Company X (see Example 10). and Company X had no involvement in the order for 1.1 million units at a price of $0.95
Example 12. Shareholder activities. The solicitation, negotiation, or anticipated per unit, and separately bills and ships the
facts are the same as in Example 10, except execution of the contract. For purposes of orders to each company. Companies X and Y
that the new laws relate solely to corporate this section, Company Y is not considered to undertake no bargaining with supplier S with
governance in Country B, and Company X obtain a benefit from Company X or any respect to the price charged, and purchase no
retains the law firm and investment banking other member of the controlled group other products from supplier S.
firm in order to evaluate whether because the ability of Company Y to obtain (iii) R1 and its wholly-owned subsidiary
restructuring would increase Company Y’s the contract, or to obtain the contract on R2 are a controlled group of taxpayers
profitability, reduce the number of legal more favorable terms than would have been (unrelated to Company X or Company Y)
entities in Country B, and increase Company possible prior to its acquisition by the each of which carries out functions
Y’s ability to introduce new products more Company X controlled group, was due to comparable to those of Companies X and Y
quickly in Country B. Because Company X Company Y’s status as a member of the and undertakes purchases of plastic
retained the law firm and the investment Company X controlled group and not to any containers from supplier S, identical to those
banking firm primarily to enhance Company specific activity by Company X or any other purchased from S by Company X and
Y’s profitability and the efficiency of its member of the controlled group. Company Y, respectively. S, basing its prices
on purchases by the entire group, charges R1 length remuneration for its facilitating transaction is evaluated as a controlled
and R2 $0.95 per unit for the 1.1 million services. If the most reliable method is one
services transaction under this section
units ordered. R1 and R2 undertake no that provides a markup on Y’s costs, then or whether one or more elements should
bargaining with supplier S with respect to ‘‘total services cost’’ in this context would be
$25. Alternatively, the Commissioner may
be evaluated separately under other
the price charged, and purchase no other
products from supplier S. determine that the intercompany service issections of the section 482 regulations
(iv) U is an uncontrolled taxpayer that most reliably analyzed as a single depends on which approach will
carries out comparable functions and transaction, based on comparable provide the most reliable measure of an
undertakes purchases of plastic containers uncontrolled transactions involving the arm’s length result. Ordinarily, an
from supplier S identical to Company Y. U facilitation of similar clinical trial services
integrated transaction of this type may
is not a member of a controlled group, performed by third parties. If the most be evaluated under this section and its
undertakes no bargaining with supplier S reliable method is one that provides a
separate elements need not be evaluated
with respect to the price charged, and markup on all of Y’s costs, and the base of
the markup determined by the comparable separately, provided that each
purchases no other products from supplier S.
U purchases 100,000 plastic containers from component of the transaction may be
companies includes the third-party clinical
S at the price of $1.00 per unit. trial costs, then such a markup would be adequately accounted for in evaluating
(v) Company X charges Company Y a fee the comparability of the controlled
applied to Y’s total services cost of $125.
of $5,000, or $0.05 per unit of plastic Examples 21. Disaggregation of transaction to the uncontrolled
containers purchased by Company Y, transactions. (i) X performs a number of comparables and, accordingly, in
reflecting the fact that Company Y receives administrative functions for its subsidiaries,
determining the arm’s length result in
the volume discount from supplier S. including Y, a distributor of widgets in
Country B. These services include those the controlled transaction. See § 1.482–
(vi) In evaluating the fee charged by 1(d)(3).
Company X to Company Y, the relating to working capital (inventory and
Commissioner considers whether the accounts receivable/payable) management. (2) Services transactions that effect a
transactions between R1, R2, and S or the transfer of intangible property. A
To facilitate provision of these services, X
transactions between U and S provide a more purchases an ERP system specifically transaction structured as a controlled
reliable measure of the transactions between dedicated to optimizing working capital services transaction may in certain cases
Company X, Company Y and S. The management. The system, which entails include an element that constitutes the
Commissioner determines that Company Y’s significant third-party costs and which
includes substantial intellectual property
transfer of intangible property or may
status as a member of a controlled group result in a transfer, in whole or in part,
should be taken into account for purposes of relating to its software, costs $1000.
of intangible property. Notwithstanding
(ii) Based on a detailed functional analysis,
evaluating comparability of the transactions,
and concludes that the transactions between the Commissioner determines that in paragraph (m)(1) of this section, if such
R1, R2, and S are more reliably comparable providing administrative services for Y, Xelement relating to intangible property
to the transactions between Company X, performed functions beyond merely is material to the evaluation, the arm’s
Company Y, and S. The comparable charge operating the ERP system itself, since X was
length result for the element of the
for the purchase was $0.95 per unit. effectively using the ERP as an input to the
transaction that involves intangible
administrative services it was providing to Y.
Therefore, obtaining the plastic containers at property must be corroborated or
a favorable rate (and the resulting $5,000 In determining arm’s length price for the
services, the Commissioner may consider a determined by an analysis under
savings) is entirely due to Company Y’s § 1.482–4.
number of alternatives. For example, if the
status as a member of the Company X
most reliable uncontrolled data is derived (3) Services subject to a qualified cost
controlled group and not to any specific
activity by Company X or any other member sharing arrangement. Services provided
from companies that use similar ERP systems
purchased from third parties to perform by a controlled participant under a
of the controlled group. Consequently,
similar administrative functions for qualified cost sharing arrangement are
Company Y is not considered to obtain a
uncontrolled parties, the Commissioner maysubject to § 1.482–7.
benefit from Company X or any other
determine that a CPM is the best method for
member of the controlled group. (4) Other types of transactions that
measuring the functions performed by X,
Example 20. Disaggregation of include controlled services transactions.
and, in addition, that a markup on total
transactions. (i) X, a domestic corporation, is A transaction structured other than as a
services costs, based on the markup from the
a pharmaceutical company that develops and comparable companies, is the most reliablecontrolled services transaction may
manufactures ethical pharmaceutical PLI. In this case, total services cost, and the
products. Y, a Country B corporation, is a
include one or more elements for which
basis for the markup, would include separate pricing methods are provided
distribution and marketing company that also appropriate reflection of the ERP costs of
performs clinical trials for USP in Country X. in this section. Whether such an
$1000. Alternatively, X’s functions may be
Because Y does not possess the capability to integrated transaction is evaluated
most reliably measured based on comparable
conduct the trials, it contracts with a third under another section of the section 482
uncontrolled companies that perform similar
party to undertake the trials at a cost of $100. administrative functions using their regulations or whether one or more
Y also incurs $25 in expenses related to the customers’ own ERP systems. Under these elements should be evaluated separately
third-party contract (for example, in hiring under this section depends on which
circumstances, the total services cost would
and working with the third party). equal X’s costs of providing the approach will provide the most reliable
(ii) Based on a detailed functional analysis, administrative services excluding the ERP
the Commissioner determines that Y
measure of an arm’s length result.
cost of $1000. Ordinarily, a single method may be
performed functions beyond merely
facilitating the clinical trials for X, such as (m) Coordination with transfer pricing applied to such an integrated
audit controls of the third party performing rules for other transactions—(1) Services transaction, and the separate services
those trials. In determining the arm’s length transactions that include other types of component of the transaction need not
price, the Commissioner may consider a transactions. A transaction structured as be separately analyzed under this
number of alternatives. For example, for a controlled services transaction may section, provided that the controlled
purposes of determining the arm’s length include other elements for which a services may be adequately accounted
price, the Commissioner may determine that separate category or categories of for in evaluating the comparability of
the intercompany service is most reliably
analyzed on a disaggregated basis as two

methods are provided, such as a loan or the controlled transaction to the
separate transactions: in this case, the advance, a rental, or a transfer of uncontrolled comparables and,
contract between Y and the third party could tangible or intangible property. See accordingly, in determining the arm’s
constitute an internal CUSP with a price of §§ 1.482–1(b)(2) and 1.482–2(a), (c), and length results in the controlled
$100. Y would be further entitled to an arm’s (d). Whether such an integrated transaction. See § 1.482–1(d)(3).
(5) Examples. The following examples Example 3. (i) The facts are the same as (ii) The controlled services transaction
illustrate paragraphs (m)(1) through (4) in Example 2 except that, after assisting between Company X and Company Y
of this section: Company Y in start-up, Company X also includes an element that constitutes the
renders ongoing services, including transfer of intangible property (such as,
Example 1. (i) U.S. parent corporation instruction and supervision regarding know-how). Because the element relating to
Company X enters into an agreement to Company Y’s ongoing use of the equipment. the intangible property is material to the
maintain equipment of Company Y, a foreign Company X structures the entire transaction, arm’s length evaluation, the arm’s length
subsidiary. The maintenance of the including the incremental ongoing services, result for that element must be corroborated
equipment requires the use of spare parts. as a sale of tangible property, and determines or determined by an analysis under § 1.482–
The cost of the spare parts necessary to the transfer price under the comparable 4.
maintain the equipment amounts to uncontrolled price method of § 1.482–3(b).
approximately 25 percent of the total costs of (ii) Whether this integrated transaction is (n) Effective date—(1) In general. This
maintaining the equipment. Company Y pays evaluated as a transfer of tangible property or section is generally applicable for
a fee that includes a charge for labor and is evaluated as a controlled services taxable years beginning after December
parts. transaction and a transfer of tangible property 31, 2006. In addition, a person may elect
(ii) Whether this integrated transaction is depends on which approach will provide the
evaluated as a controlled services transaction to apply the provisions of this section,
most reliable measure of an arm’s length § 1.482–9T, to earlier taxable years. See
or is evaluated as a controlled services result. It may not be possible to identify
transaction and the transfer of tangible paragraph (n)(2) of this section.
comparable uncontrolled transactions in
property depends on which approach will which a seller of merchandise renders (2) Election to apply regulations to
provide the most reliable measure of an arm’s services similar to the ongoing services earlier taxable years—(i) Scope of
length result. If it is not possible to find rendered by Company X to Company Y. In election. A taxpayer may elect to apply
comparable uncontrolled services such a case, the incremental services in §§ 1.482–1T, 1.482–2T, 1.482–4T,
transactions that involve similar services and connection with ongoing use of the
tangible property transfers as the controlled
1.482–6T, 1.482–8T, and 9T, 1.861–8T,
equipment could not be taken into account § 1.6038A–3T, § 1.6662–6T and
transaction between Company X and as a comparability factor because they are not
Company Y, it will be necessary to determine § 31.3121(s)-1T of this chapter to any
similar to the services rendered in taxable year beginning after September
the arm’s length charge for the controlled
connection with sales of similar tangible
services, and then to evaluate separately the
property. Accordingly, it may be necessary to
10, 2003. Such election requires that all
arm’s length charge for the tangible property of the provisions of this section,
evaluate separately the transfer price for such
transfers under § 1.482–1 and §§ 1.482–3 §§ 1.482–1T, 1.482–2T, 1.482–4T,
services under this section in order to
through 1.482–6. Alternatively, it may be 1.482–6T, 1.482–8T, and 1.482–9T, as
produce the most reliable measure of an
possible to apply the comparable profits
method of § 1.482–5, to evaluate the arm’s
arm’s length result. Alternatively, it may be well as the related provisions, §§ 1.861–
possible to apply the comparable profits 8T, 1.6038A–3T, 1.6662–6T and
length profit of Company X or Company Y
method of § 1.482–5 to evaluate the arm’s 31.3121(s)–1T of this chapter be applied
from the integrated controlled transaction.
The comparable profits method may provide length profit of Company X or Company Y to such taxable year and all subsequent
the most reliable measure of measure of an from the integrated controlled transaction. taxable years (earlier taxable years) of
arm’s length result if uncontrolled parties are The comparable profits method may provide
the most reliable measure of an arm’s length
the taxpayer making the election.
identified that perform similar, combined (ii) Effect of election. An election to
functions of maintaining and providing spare result if uncontrolled parties are identified
that perform the combined functions of apply the regulations to earlier taxable
parts for similar equipment.
Example 2. (i) U.S. parent corporation selling equipment and rendering ongoing years has no effect on the limitations on
Company X sells industrial equipment to its after-sale services associated with such assessment and collection or on the
foreign subsidiary, Company Y. In equipment. In that case, it would not be limitations on credit or refund (see
connection with this sale, Company X necessary to separately evaluate the transfer Chapter 66 of the Internal Revenue
renders to Company Y services that consist price for the controlled services under this Code).
of demonstrating the use of the equipment section.
Example 4. (i) Company X, a U.S.
(iii) Time and manner of making
and assisting in the effective start-up of the election. An election to apply the
equipment. Company X structures the corporation, and Company Y, a foreign
corporation, are members of a controlled regulations to earlier taxable years must
integrated transaction as a sale of tangible
property and determines the transfer price group. Both companies perform research and be made by attaching a statement to the
under the comparable uncontrolled price development activities relating to integrated taxpayer’s timely filed U.S. tax return
method of § 1.482–3(b). circuits. In addition, Company Y (including extensions) for its first
(ii) Whether this integrated transaction is manufactures integrated circuits. In years 1 taxable year after December 31, 2006.
evaluated as a transfer of tangible property or through 3, Company X engages in substantial (iv) Revocation of election. An
is evaluated as a controlled services research and development activities, gains
election to apply the regulations to
transaction and a transfer of tangible property significant know-how regarding the
development of a particular high-temperature earlier taxable years may not be revoked
depends on which approach will provide the
most reliable measure of an arm’s length resistant integrated circuit, and memorializes without the consent of the
result. In this case, the controlled services that research in a written report. In years 1 Commissioner.
may be similar to services rendered in the through 3, Company X generates overall net (3) In general. The applicability of
transactions used to determine the operating losses as a result of the § 1.482–9T expires on or before July 31,
comparable uncontrolled price, or they may expenditures associated with this research 2009.
appropriately be considered a difference and development effort. At the beginning of
■ Par. 15. Section 1.861–8 is amended
between the controlled transaction and year 4, Company X enters into a technical
comparable transactions with a definite and assistance agreement with Company Y. As as follows:
reasonably ascertainable effect on price for part of this agreement, the researchers from ■ 1. Paragraph (a)(5)(ii) is redesignated
which appropriate adjustments can be made. Company X responsible for this project meet as paragraph (a)(5)(iii).
See § 1.482–1(d)(3)(ii)(A)(6). In either case, with the researchers from Company Y and ■ 2. A new paragraph (a)(5)(ii) is added.
application of the comparable uncontrolled provide them with a copy of the written ■ 3. Paragraph (e)(4) is revised.
price method to evaluate the integrated report. Three months later, the researchers
■ 4. Paragraph (f)(4)(i) is revised.

transaction may provide a reliable measure of from Company Y apply for a patent for a
high-temperature resistant integrated circuit ■ 5. Paragraph (g), Example 17, Example
an arm’s length result, and application of a
separate transfer pricing method for the based in large part upon the know-how 18, and Example 30 are revised.
controlled services element of the transaction obtained from the researchers from Company The addition and revisions read as
is not necessary. X. follows:
§ 1.861–8 Computation of taxable income to which they relate. On the other hand, effect of which is either to protect the
from sources within the United States and it would be equally acceptable to corporation’s capital investment in the
from other sources and activities. attribute supportive deductions on some related corporation or to facilitate
(a) * * * reasonable basis directly to activities or compliance by the corporation with
(5) * * * property ordinarily be accomplished by reporting, legal, or regulatory
(ii) [Reserved]. For further guidance, allocating the supportive expenses to all requirements applicable specifically to
see § 1.861–8T(a)(5) (ii). gross income or to another broad class the corporation, or both. If a corporation
* * * * * of gross income and apportioning the has a foreign or international
(e) * * * expenses in accordance with paragraph department which exercises overseeing
(4) [Reserved]. For further guidance, (c)(1) of this section. For this purpose, functions with respect to related foreign
see § 1.861–8T(e)(4). reasonable departmental overhead rates corporations and, in addition, the
(f) * * * may be utilized. For examples of the department performs other functions
(4) * * * (i)[Reserved]. For further application of the principles of this that generate other foreign-source
guidance, see § 1.861–8T(f)(4)(i). paragraph (b)(3) to expenses other than income (such as fees for services
* * * * * expenses attributable to stewardship rendered outside of the United States for
(g) * * * activities, see Examples 19 through 21 the benefit of foreign related
Example 17. [Reserved]. For further of paragraph (g) of this section. See corporations, foreign-source royalties,
guidance, see § 1.861–8T(g), Example paragraph (e)(4)(ii) of this section for the and gross income of foreign branches),
17. allocation and apportionment of some part of the deductions with
Example 18. [Reserved]. For further deductions attributable to stewardship respect to that department are
guidance, see § 1.861–8T(g), Example expenses. However, supportive considered definitely related to the
18. deductions that are described in 1.861– other foreign-source income. In some
14T(e)(3) shall be allocated and instances, the operations of a foreign or
* * * * * international department will also
Example 30. [Reserved]. For further apportioned by reference only to the
gross income of a single member of an generate United States source income
guidance, see § 1.861–8T(g), Example (such as fees for services performed in
30. affiliated group of corporations as
defined in 1.861–14T. the United States). Permissible methods
* * * * * of apportionment with respect to
* * * * *
■ Par. 16. Section 1.861–8T is amended stewardship expenses include
(e) * * *
as follows: comparisons of time spent by employees
(4) Stewardship and controlled
■ 1. Paragraphs (a)(3) and (a)(4) are weighted to take into account
services—(i) Expenses attributable to
removed and reserved and paragraph differences in compensation, or
controlled services. If a corporation
(a)(5)(ii) is revised. comparisons of each related
performs a controlled services
■ 2. Paragraphs (b)(3) are revised. corporation’s gross receipts, gross
transaction (as defined in § 1.482–
■ 3. Paragraph (e)(4) is added. income, or unit sales volume, assuming
9T(l)(3)), which includes any activity by that stewardship activities are not
■ 4. Paragraph (f)(4)(i) is revised.
one member of a group of controlled substantially disproportionate to such
■ 5. Paragraph (g), Example 17, Example
taxpayers that results in a benefit to a factors. See paragraph (f)(5) of this
18, and Example 30 are added.
related corporation, and the rendering section for the type of verification that
■ 6. Paragraph (h) is revised.
corporation charges the related may be required in this respect. See
The addition and revisions read as
corporation for such services, section § 1.482–9T(l)(5) for examples that
follows:
482 and these regulations provide for an illustrate the principles of § 1.482–
§ 1.861–8T Computation of taxable income allocation where the charge is not 9T(l)(3). See Example 17 and Example
from sources within the United States and consistent with an arm’s length result as 18 of paragraph (g) of this section for the
from other sources and activities determined. The deductions for allocation and apportionment of
(temporary). expenses of the corporation attributable stewardship expenses. See paragraph
(a) * * * to the controlled services transaction are (b)(3) of this section for the allocation
(5) * * * considered definitely related to the and apportionment of deductions
(ii) Paragraph (e)(4), the last sentence amounts so charged and are to be attributable to supportive functions
of paragraph (f)(4)(i), and paragraph (g), allocated to such amounts. other than stewardship expenses, such
Example 17, Example 18, and Example (ii) Stewardship expenses attributable as expenses in the nature of day-to-day
30 of this section are generally to dividends received. Stewardship management, and paragraph (e)(5) of
applicable for taxable years beginning expenses, which result from this section generally for the allocation
after December 31, 2006. In addition, a ‘‘overseeing’’ functions undertaken for a and apportionment of deductions
person may elect to apply the provisions corporation’s own benefit as an investor attributable to legal and accounting fees
of paragraph (e)(4) of this section to in a related corporation, shall be and expenses.
earlier years. Such election shall be considered definitely related and (f) * * *
made in accordance with the rules set allocable to dividends received, or to be (4) Adjustments made under other
forth in § 1.482–9T(n)(2). received, from the related corporation. provisions of the Code—(i) In general. If
(b) * * * For purposes of this section, an adjustment which affects the
(3) Supportive functions. Deductions stewardship expenses of a corporation taxpayer is made under section 482 or
which are supportive in nature (such as are those expenses resulting from any other provision of the Code, it may
overhead, general and administrative, ‘‘duplicative activities’’ (as defined in be necessary to recompute the
and supervisory expenses) may relate to § 1.482–9T(l)(3)(iii)) or ‘‘shareholder allocations and apportionments
other deductions which can more activities’’ (as defined in § 1.482– required by this section in order to
readily be allocated to gross income. In 9T(l)(3)(iv)) of the corporation with reflect changes resulting from the
such instance, such supportive respect to the related corporation. Thus, adjustment. The recomputation made by
deductions may be allocated and for example, stewardship expenses the Commissioner shall be made using
apportioned along with the deductions include expenses of an activity the sole the same method of allocation and
apportionment as was originally used by sections referred to in paragraph (f)(1) of the section 482 allocation might not
the taxpayer, provided such method as this section is improperly determined, it otherwise be made.
originally used conformed with may be necessary for the Commissioner (g) * * *
paragraph (a)(5) of this section and, in to make an adjustment to the cost of
light of the adjustment, such method goods sold, consistent with the Example 17. Stewardship Expenses
does not result in a material distortion. principles of this section, before (Consolidation). (i) (A) Facts. X, a domestic
In addition to adjustments which would applying this section. Similarly, if a corporation, wholly owns M, N, and O, also
domestic corporations. X, M, N, and O file a
be made aside from this section, domestic corporation transfers the stock
consolidated income tax return. All the
adjustments to the taxpayer’s income in its foreign subsidiaries to a domestic
income of X and O is from sources within the
and deductions which would not subsidiary and the parent corporation
United States, all of M’s income is general
otherwise be made may be required continues to incur expenses in limitation income from sources within South
before applying this section in order to connection with protecting its capital America, and all of N’s income is general
prevent a distortion in determining investment in the foreign subsidiaries limitation income from sources within
taxable income from a particular source (see paragraph (e)(4) of this section), it Africa. X receives no dividends from M, N,
of activity. For example, if an item may be necessary for the Commissioner or O. During the taxable year, the
included as a part of the cost of goods to make an allocation under section 482 consolidated group of corporations earned
sold has been improperly attributed to with respect to such expenses before consolidated gross income of $550,000 and
specific sales, and, as a result, gross making allocations and apportionments incurred total deductions of $370,000 as
income under one of the operative required by this section, even though follows:
Gross income Deductions
Corporations:
X ....................................................................................................................................................................... $100,000 $50,000
M ....................................................................................................................................................................... 250,000 100,000
N ....................................................................................................................................................................... 150,000 200,000
O ....................................................................................................................................................................... 50,000 20,000
Total ........................................................................................................................................................... 550,000 370,000
(B) Of the $50,000 of deductions incurred allocable to the types of gross income to to income earned within the United States.
by X, $15,000 relates to X’s ownership of M; which they give rise, namely $25,000 wholly Hence, no apportionment of expenses of X,
$10,000 relates to X’s ownership of N; $5,000 to general limitation income from sources M, N, or O is necessary. For purposes of
relates to X’s ownership of O; and the sole outside the United States ($15,000 for applying the foreign tax credit limitation; the
effect of the entire $30,000 of deductions is stewardship of M and $10,000 for statutory grouping is general limitation gross
to protect X’s capital investment in M, N, and stewardship of N) and the remainder income from sources without the United
O. X properly categorizes the $30,000 of ($25,000) wholly to gross income from States and the residual grouping is gross
deductions as stewardship expenses. The sources within the United States. Expenses income from sources within the United
remainder of X’s deductions ($20,000) relates incurred by M and N are entirely related and States. As a result of the allocation of
to production of United States source income thus wholly allocable to general limitation deductions, the X consolidated group has
from its plant in the United States. income earned from sources without the taxable income from sources without the
(ii) (A) Allocation. X’s deductions of United States, and expenses incurred by O United States in the amount of $75,000,
$50,000 are definitely related and thus are entirely related and thus wholly allocable computed as follows:
Foreign source general limitation gross income:

($250,000 from M + $150,000 from N) ........................................................................................................................................ $400,000
Less: Deductions allocable to foreign source general limitation gross income:
($25,000 from X, $100,000 from M, and $200,000 from N) ........................................................................................................ 325,000
Total foreign-source taxable income ..................................................................................................................................... 75,000
(B) Thus, in the combined computation of corporation, manufactures and sells corporation derives substantial net income
the general limitation, the numerator of the pharmaceuticals in the United States. X’s during the taxable year that is general
limiting fraction (taxable income from domestic subsidiary S, and X’s foreign limitation income described in section
sources outside the United States) is $75,000. subsidiaries T, U, and V perform similar 904(d)(1). X’s gross income for the taxable
Example 18. Stewardship and Supportive functions in the United States and foreign year consists of:
Expenses. (i) (A) Facts. X, a domestic countries T, U, and V, respectively. Each
Domestic sales income ....................................................................................................................................................................... $32,000,000

Dividends from S (before dividends received deduction) ............................................................................................................... 3,000,000
Dividends from T ............................................................................................................................................................................... 2,000,000
Dividends from U ............................................................................................................................................................................... 1,000,000
Dividends from V ............................................................................................................................................................................... 0
Royalties from T and U ...................................................................................................................................................................... 1,000,000
Fees from U for services performed by X ......................................................................................................................................... 1,000,000
Total gross income ...................................................................................................................................................................... 40,000,000

(B) In addition, X incurs expenses of its (C) X’s supervision department (the supervision of its four subsidiaries and for
supervision department of $1,500,000. Department) is responsible for the rendering certain services to the subsidiaries,
and this Department provides all the T ........................................... 3,000,000 determined by multiplying apportionable
supportive functions necessary for X’s U ........................................... 500,000 taxable income by a fraction (the ‘‘state
foreign activities. The Department performs V ........................................... 1,500,000 apportionment fraction’’) that compares the
three principal types of activities. The first relative amounts of payroll, property, and
type consists of services for the direct benefit Total .............................. 9,000,000 sales within state A with worldwide payroll,
of U for which a fee is paid by U to X. The (C) Thus, the expenses of the Department property, and sales. Assuming that X’s
cost of the services for U is $900,000 (which are apportioned for purposes of the foreign apportionable taxable income equals
results in a total charge to U of $1,000,000). $180,000, $100,000 of which is from sources
tax credit limitation as follows:
The second type consists of activities without the United States, and $80,000 is
described in § 1.482–9(l)(3)(iii) that are in the from sources within the United States, and
nature of shareholder oversight that duplicate Apportionment of steward-
that the state apportionment fraction is equal
functions performed by the subsidiaries’ own ship expenses to the stat-
to 10 percent, X has state A taxable income
employees and that do not provide an utory grouping of gross
of $18,000. The state A income tax of $1,800
additional benefit to the subsidiaries. For income: $540,000 ×
is then derived by applying the state A
example, a team of auditors from X’s [($3,000,000 + $500,000 +
income tax rate of 10 percent to the $18,000
accounting department periodically audits $1,500,000)/$9,000,000] .. $300,000
of state A taxable income.
the subsidiaries’ books and prepares internal Apportionment of super-
(C)
reports for use by X’s management. Similarly, visory expenses to the re-
(i) Allocation and apportionment. Assume
X’s treasurer periodically reviews for the sidual grouping of gross
that under Example 29, it is determined that
board of directors of X the subsidiaries’ income: $540,000 ×
X’s deduction for state A income tax is
financial policies. These activities do not [$4,000,000/9,000,000] .... 240,000
definitely related to a class of gross income
provide an additional benefit to the related consisting of income from sources both
corporations. The cost of the duplicative Total: Apportioned
stewardship expense 540,000 within and without the United States, and
services and related supportive expenses is that the state A tax is apportioned $1,000 to
$540,000. The third type of activity consists * * * * * sources without the United States, and $800
of providing services which are ancillary to Example 30. Income Taxes. (i) (A) Facts. to sources within the United States. Under
the license agreements which X maintains As in Example 17 of this paragraph, X is a Example 17, without regard to the deduction
with subsidiaries T and U. The cost of the
domestic corporation that wholly owns M, N, for X’s state A income tax, X has a separate
ancillary services is $60,000.
and O, also domestic corporations. X, M, N, loss of ($25,000) from sources without the
(ii) Allocation. The Department’s outlay of
and O file a consolidated income tax return. United States. After taking into account the
$900,000 for services rendered for the benefit
All the income of X and O is from sources deduction for state A income tax, X’s
of U is allocated to the $1,000,000 in fees
within the United States, all of M’s income separate loss from sources without the
paid by U. The remaining $600,000 in the
is general limitation income from sources United States is increased by the $1,000 state
Department’s deductions are definitely
within South America, and all of N’s income A tax apportioned to sources without the
related to the types of gross income to which
is general limitation income from sources United States, and equals a loss of ($26,000),
they give rise, namely dividends from
subsidiaries S, T, U, and V and royalties from within Africa. X receives no dividends from for purposes of computing the numerator of
T and U. However, $60,000 of the $600,000 M, N, or O. During the taxable year, the the consolidated general limitation foreign
in deductions are found to be attributable to consolidated group of corporations earned tax credit limitation.
the ancillary services and are definitely consolidated gross income of $550,000 and
incurred total deductions of $370,000. X has (h) Effective dates—(1) In general. In
related (and therefore allocable) solely to general, the rules of this section, as well
royalties received from T and U, while the gross income of $100,000 and deductions of
remaining $540,000 in deductions are $50,000, without regard to its deduction for as the rules of §§ 1.861–9T, 1.861–10T,
definitely related (and therefore allocable) to state income tax. Of the $50,000 of 1.861–11T, 1.861–12T, and 1.861–14T
dividends received from all the subsidiaries. deductions incurred by X, $15,000 relates to apply for taxable years beginning after
(iii) (A) Apportionment. For purposes of X’s ownership of M; $10,000 relates to X’s December 31, 1986, except for
applying the foreign tax credit limitation, the ownership of N; $5,000 relates to X’s paragraphs (a)(5)(ii), (b)(3), (e)(4),
statutory grouping is general limitation gross ownership of O; and the entire $30,000 (f)(4)(i), paragraph (g) Example 17,
income from sources outside the United constitutes stewardship expenses. The
remainder of X’s $20,000 of deductions
Example 18, and Example 30, and
States and the residual grouping is gross
(which is assumed not to include state paragraph (h) of this section, which are
income from sources within the United
States. X’s deduction of $540,000 for the income tax) relates to production of U.S. generally applicable for taxable years
Department’s expenses and related source income from its plant in the United beginning after December 31, 2006.
supportive expenses which are allocable to States. M has gross income of $250,000 and However, see 1.861–8(e)(12)(iv) and
dividends received from the subsidiaries deductions of $100,000, which yield foreign- 1.861–14(e)(6) for rules concerning the
must be apportioned between the statutory source general limitation taxable income of allocation and apportionment of
and residual groupings before the foreign tax $150,000. N has gross income of $150,000 deductions for charitable contributions.
credit limitation may be applied. In and deductions of $200,000, which yield a In the case of corporate taxpayers,
determining an appropriate method for foreign-source general limitation loss of
$50,000. O has gross income of $50,000 and
transition rules set forth in 1.861–13T
apportioning the $540,000, a basis other than
X’s gross income must be used since the deductions of $20,000, which yield U.S. provide for the gradual phase-in of
dividend payment policies of the subsidiaries source taxable income of $30,000. certain provisions of this and the
bear no relationship either to the activities of (B) Unlike Example 17 of this paragraph foregoing sections. However, the
the Department or to the amount of income (g), however, X also has a deduction of following rules are effective for taxable
earned by each subsidiary. This is evidenced $1,800 for state A income taxes. X’s state A years commencing after December 31,
by the fact that V paid no dividends during taxable income is computed by first making 1988:
the year, whereas S, T, and U paid dividends adjustments to the Federal taxable income of (i) Section 1.861–9T(b)(2) (concerning
of $1 million or more each. In the absence X to derive apportionable taxable income for the treatment of certain foreign
of facts that would indicate a material state A tax purposes. An analysis of state A currency).
distortion resulting from the use of such law indicates that state A law also includes
method, the stewardship expenses ($540,000)
(ii) Section 1.861–9T(d)(2)
in its definition of the taxable business
may be apportioned on the basis of the gross income of X which is apportionable to X’s
(concerning the treatment of interest
receipts of each subsidiary. state A activities, the taxable income of M, incurred by nonresident aliens).
(B) The gross receipts of the subsidiaries N, and O, which is related to X’s business. (iii) Section 1.861–10T(b)(3)(ii)
were as follows: As in Example 25, the amount of (providing an operating costs test for
apportionable taxable income attributable to purposes of the nonrecourse
S ............................................ $4,000,000 business activities conducted in state A is indebtedness exception).
(iv) Section 1.861–10T(b)(6) (3) Expiration date. The applicability those described in paragraph
(concerning excess collaterilzation of of this section expires on or before July (d)(2)(ii)(A) of this section, to the extent
nonrecourse borrowings). 31, 2009. applicable.
(2) In addition, 1.861–10T(e) ■ Par. 19. Section 1.6662–6 is amended (d)(2)(iii)(A) through (d)(2)(iii)(B)(3)
(concerning the treatment of related as follows: [Reserved]. For further guidance, see
controlled foreign corporation ■ 1. Paragraphs (d)(2)(ii)(A) through § 1.6662–6(d)(2)(iii)(A) through
indebtedness) is applicable for taxable (d)(2)(ii)(G) are redesignated as (d)(2)(iii)(B)(3).
years commencing after December 31, paragraphs (d)(2)(ii)(A)(1) through (d)(2)(iii)(B)(4) A description of the
1987. For rules for taxable years (d)(2)(ii)(A)(7) and paragraph (d)(2)(ii) method selected and an explanation of
beginning before January 1, 1987, and introductory text as paragraph why that method was selected,
for later years to the extent permitted by (d)(2)(ii)(A), respectively. including an evaluation of whether the
1.861–13T, see 1.861–8 (revised as of ■ 2. A new paragraph (d)(2)(ii)(B) is regulatory conditions and requirements
April 1, 1986). added. for application of that method, if any,
(3) Expiration date. The applicability were met;
■ 3. Paragraphs (d)(2)(iii)(B)(4) and
of the paragraphs (a)(5)(ii), (b)(3), (e)(4), (d)(2)(iii)(B)(5) [Reserved]. For further
(d)(2)(iii)(B)(6) are revised
(f)(4)(i), paragraph (g) Example 17, guidance, see § 1.6662–6(d)(2)(iii)(B)(5).
■ 4. Paragraph (g) is revised.
Example 18, and Example 30, and (d)(2)(iii)(B)(6) A description of the
The additions and revisions read as
paragraph (h) of this section, expires on controlled transactions (including the
follows:
or before July 31, 2009. terms of sale) and any internal data used
■ Par. 17. Section 1.6038A–3(a)(3) is § 1.6662–6 Transactions between persons to analyze those transactions. For
amended by revising paragraph (a)(3), described in section 482 and net section example, if a profit split method is
Example 4 to read: 482 transfer price adjustments. applied, the documentation must
* * * * * include a schedule providing the total
§ 1.6038A–3 Record maintenance.
(d) * * * income, costs, and assets (with
(a) * * * (2) * * * adjustments for different accounting
(3) * * * practices and currencies) for each
(ii) * * *
Example 4. [Reserved]. For further
(B) [Reserved]. For further guidance, controlled taxpayer participating in the
guidance, see § 1.6038A–3T, Example 4.
see § 1.6662–6T(d)(2)(ii)(B). relevant business activity and detailing
* * * * * the allocations of such items to that
* * * * *
■ Par. 18. Section 1.6038A–3T is added activity. Similarly, if a cost-based
(iii) * * *
to read as follows: (B) * * * method (such as the cost plus method,
§ 1.6038A–3T Record maintenance (4) [Reserved]. For further guidance, the services cost method for certain
(temporary). see § 1.6662–6T(d)(2)(iii)(B)(4). services, or a comparable profits method
(a)(1) through (3) Examples 1 through with a cost-based profit level indicator)
* * * * *
3 [Reserved]. For further guidance, see is applied, the documentation must
(6) [Reserved]. For further guidance,
§ 1.6038A–3(a)(1) through (3) Examples include a description of the manner in
see § 1.6662–6T(d)(2)(iii)(B)(6).
1 through 3. which relevant costs are determined and
* * * * * are allocated and apportioned to the
Example 4. S, a U.S. reporting corporation, (g) [Reserved]. For further guidance, relevant controlled transaction.
provides computer consulting services for its see § 1.6662–6T(g). (d)(2)(iii)(B)(7) through (f) [Reserved].
foreign parent, X. Based on the application of ■ Par. 20. Section 1.6662–6T is added to
section 482 and the regulations, it is
For further guidance, see § 1.6662–
determined that the cost of services plus read as follows: 6(d)(2)(iii)(B)(7) through (f).
method, as described in § 1.482–9T(e), will (g) Effective date—(1) This section is
§ 1.6662–6T Transactions between parties generally effective February 9, 1996.
provide the most reliable measure of an arm’s described in section 482 and net section
length result, based on the facts and 482 transfer price adjustments (temporary).
However, taxpayers may elect to apply
circumstances of the controlled transaction this section to all open taxable years
between S and X. S is required to maintain (a) through (d)(2)(ii)(A) [Reserved]. beginning after December 31, 1993.
records to permit verification upon audit of For further guidance, see § 1.6662–6(a) (2)(i) The provisions of paragraphs
the comparable transactional costs (as through (d)(2)(ii)(A). (d)(2)(ii)(B), (d)(2)(iii)(B)(4) and
described in § 1.482–9T(e)(2)(iii)) used to (d)(2)(ii)(B) Services cost method. A
calculate the arm’s length price. Based on the (d)(2)(iii)(B)(6) of this section are
taxpayer’s selection of the services cost applicable for taxable years beginning
facts and circumstances, if it is determined
that X’s records are relevant to determine the
method for certain services, described in after December 31, 2006.
correct U.S. tax treatment of the controlled § 1.482–9T(b), and its application of that (ii) Election to apply regulation to
transaction between S and X, the record method to a controlled services earlier taxable years. A person may elect
maintenance requirements under section transaction will be considered to apply the provisions of this section to
6038A(a) and this section will be applicable reasonable for purposes of the specified earlier taxable years in accordance with
to the records of X. method requirement only if the taxpayer the rules set forth in § 1.482–9T(n)(2) of
(b)(1) through (h) [Reserved]. For reasonably allocated and apportioned this chapter.
further guidance, see § 1.6038A–3T(b)(1) costs in accordance with § 1.482–9T(k), (iii) Expiration date. The applicability
through (h). reasonably concluded that the of § 1.6662–6T expires on or before July
(i) Effective date—(1) In general. This controlled services transaction meets 31, 2009.
provision is generally applicable for the conditions of § 1.482–9T(b)(3), and
taxable years beginning after December reasonably concluded that the PART 31—EMPLOYMENT TAXES AND
31, 2006. controlled services transaction is not COLLECTION OF INCOME TAX AT THE
(2) Election to apply regulation to described in paragraph § 1.482–9T(b)(2). SOURCE

earlier taxable years. A person may elect Whether the taxpayer’s conclusion was
to apply the provisions of this section to reasonable must be determined from all ■ Par. 21. The authority citation for part
earlier taxable years in accordance with the facts and circumstances. The factors 31 continues to read as follows:
the rules set forth in § 1.482–9T(n)(2). relevant to this determination include Authority: 26 U.S.C. 7805 * * *
■ Par. 22. Section 31.3121(s)–1 is allocate the taxes imposed by sections [§ 31.3121(s)–1]. The fourth sentence of
amended by revising paragraphs 3102 and 3111 in an appropriate paragraph (c)(2)(iii) of this section is
(c)(2)(iii) and (d) to read as follows: manner to a related corporation that applicable with respect to wages paid
remunerates an employee through a after December 31, 1978, and on or
§ 31.3121(s)–1 Concurrent employment by common paymaster if the common before December 31, 2006. The fifth
related corporations with common
paymaster fails to remit the taxes to the sentence of paragraph (c)(2)(iii) of this
paymaster.
Internal Revenue Service. Allocation in section is applicable with respect to
* * * * * an appropriate manner varies according wages paid after December 31, 2006.
(c) * * * to the circumstances. It may be based on
(2) * * * (2) Election to apply regulation to
sales, property, corporate payroll, or any earlier taxable years. A person may elect
(iii) [Reserved]. For further guidance, other basis that reflects the distribution
see § 31.3121(s)–1T(c)(2)(iii). to apply the fifth sentence of paragraph
of the services performed by the (c)(2)(iii) of this section to earlier
* * * * * employee, or a combination of the taxable years in accordance with the
(d) [Reserved]. For further guidance, foregoing bases. To the extent rules set forth in § 1.482–9T(n)(2).
see § 31.3121(s)–1T(d). practicable, the Commissioner may use
■ Par. 23. Section 31.3121(s)–1T is the principles of § 1.482–2(b) of this (3) The applicability of § 31.3121(s)–
added to read as follows: chapter in making the allocations with 1T expires on or before July 31, 2009.
respect to wages paid after December 31, Mark E. Matthews,
§ 31.3121(s)–1T Concurrent employment 1978, and on or before December 31,
by related corporations with common Deputy Commissioner for Services and
2006. To the extent practicable, the Enforcement.
paymaster (temporary). Commissioner may use the principles of
(a) through (c)(2)(ii) [Reserved]. For Approved: July 11, 2006.
§ 1.482–9T of this chapter in making the
further guidance, see § 31.3121(s)–1(a) allocations with respect to wages paid Eric Solomon,
through (c)(2)(ii). after December 31, 2006. Acting Deputy Assistant Secretary of the
(c)(2)(iii) Group-wide allocation rules. (d) Effective date—(1) In general. This Treasury.
Under the group-wide method of section is applicable with respect to [FR Doc. 06–6497 Filed 7–31–06; 4:40 pm]
allocation, the district director may wages paid after December 31, 1978. BILLING CODE 4830–01–P

Rule: Income Taxes, Etc.: Section 482 Treatment of Controlled Services Transactions and Allocation of Income and Deductions From Intangibles

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Rule: Income Taxes, Etc.: Section 482 Treatment of Controlled Services Transactions and Allocation of Income and Deductions From Intangibles

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Friday,

26 CFR Parts 1 and 31

(including extensions) for its first 26 CFR Part 31 (iii) * * *

List of Subjects (2) * * * § 1.482–8 Examples of the best method

(j)(6)(i) The provisions of paragraphs (f)(6), respectively.

Allocation key Allocation key

X ....................................................................................................................................... 2,000 160 600 480

Services A–M Services N–P Services A–P

Although no reliable internal data are

the differences in the amount of related providing those services. As in Example 1,

Year 1 Year 2 Year 3 Average

Revenues ......................................................................................................... 1,200,000 1,100,000 1,300,000 1,200,000

Company 1 .............................................................................................................................................................. 15.75 $189,000

Company 1 .............................................................................................................................................................. 15.00 $195,000

Company 5 .............................................................................................................................................................. 12.30 159,900

Company 10 ............................................................................................................................................................ 10.25 133,250

Taxpayer ...................................................................................................................................... 1,000 500 0

Taxpayer ...................................................................................................................................... 1,000 0 (*)

Salaries Net cost plus

Per financial statements:

Taxpayer ...................................................................................................................................... 1,000 50 50

Salaries and Net cost

Per financial statements:

in utilization of stock-based compensation A, B, C, or D pursuant to §§ 1.482–1(d)(2) and in paragraph (i) of Example 3.

Taxpayer ...................................................................................................................................... 1,000 500 500

Salaries and Net cost plus

Per financial Statements:

customers interested in purchasing spare economic risks of developing the necessary

demonstrates to these officials that it has in Country 2, such as transportation,

Sales ................................................................................................................ 400 100 200 700

Allocation ..................................................................................................................................... 400/500 100/500 ........................

analyzed on a disaggregated basis as two

■ 4. Paragraph (f)(4)(i) is revised.

Gross income Deductions

Total ........................................................................................................................................................... 550,000 370,000

Foreign source general limitation gross income:

Total foreign-source taxable income ..................................................................................................................................... 75,000

Domestic sales income ....................................................................................................................................................................... $32,000,000

Fees from U for services performed by X ......................................................................................................................................... 1,000,000

Total gross income ...................................................................................................................................................................... 40,000,000

(2) Election to apply regulation to described in paragraph § 1.482–9T(b)(2). SOURCE

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