EUROPEAN-AMERICAN CHAMBER OF COMMERCE COMMENTS ON TRANSFER-PRICING REGS.

This organization represents the Belgian-American, British- American, Danish-American, French-American, German American, Hellenic-American, Ireland, Italy-America, Netherlands, Portugal-US, Spain-USA, Swedish-American Chambers of Commerce which have a membership of over 5,000 companies comprised of U.S. subsidiaries of European corporations and U.S. companies.

The following comments to the proposed inter-company transfer pricing and cost sharing regulations under Section 482 are being submitted because the methods proposed for determining inter-company prices would have a significant effect on and are of great concern to the members of our constituent Chambers.

THE COMPARABLE PROFIT INTERVAL IS AN INAPPROPRIATE STANDARD FOR THE DETERMINATION OF PRICES.

The proposed regulations require that the Comparable Profit Interval be used to test inter-company pricing for tangibles and intangibles wherever any of the proposed price determination methods other than the Matching Transaction Method (MTM) or the Comparable Uncontrolled Price (CUP) method is applicable. Since the applicability of the MTM has been restricted to uncontrolled third party transactions involving identical intangibles or goods under substantially the same terms, the effect of the new regulations will be to apply the objective statistically determined third party profitability CPI test to the overwhelming majority of inter-company prices.

The proposed revisions to the Regulations which were issued in response to the amendment to Section 482 under the Tax Reform Act of 1986 require that the income with respect to a transfer or license of an intangible shall be commensurate with the income attributable to such intangible. The Committee Reports which explain this amendment refer to the "profit or income stream generated by or associated with intangible property". This language cannot be interpreted to authorize the use of statistically determined profits of third parties which may not even be using the tested intangible. Moreover, the language clearly applies only to intangibles and not to inter- company pricing of tangible assets.

The four methods for determining the appropriateness of inter- company prices which are contained in the original Regulations have been adopted by the OECD and are given recognition in many European countries. Thus, double taxation can be avoided because a uniform method is generally applied. By introducing a total novel approach which tests only the price of one of the parties to a transaction without measuring the effects on the other party in the second country, the Regulations would expose taxpayers to a significant risk of double taxation.

The proposed process which recognizes inter-company pricing as the sole element of profitability of a taxpayer disregards the numerous other factors which distinguish a financially successful company from a less profitable one, such as management, general cost structure, differences in product quality that cannot be reflected in resale prices, standing in the market place, etc. The practical result of giving the CPI such a prominent role in inter-company pricing would be distortive and unfair to many taxpayers.

The proposed method of determining the CPI requires retroactive adjustment of pricing based on information which can be determined only after the end of the year subsequent to the year in which the transactions take place. The adjustment in effect results in a fictitious price designed only to reach a statistically determined level of profitability solely for tax purposes which has no relationship to competitive factors, the cost of manufacture of the item or creation of the intangible or the effect on the other party to the transaction. Pricing thus determined would be irrelevant for customs duty purposes and could violate anti-dumping laws.

RECOMMENDATIONS

In order to avoid the problems inherent in the proposed method for testing inter-company prices, the following recommendations are respectfully submitted:

1. The Matching Transaction Method for determining arm's length pricing of intangibles and the Comparable Uncontrolled Price method of determining pricing of tangibles should continue to apply wherever differences from uncontrolled third party transactions are reasonably measurable. Under these circumstances, there is no reason why uncontrolled third party pricing cannot be adjusted for such differences and the CPI should not be relevant or applicable.

2. If the Comparable Profit Interval is nevertheless deemed to be applicable, it is proposed:

a) that subjective factors which affect the profitability of the taxpayer should be applied to permit adjustment of the results obtained on the basis of third party profitability.

b) The method of determining the CPI should enable the taxpayer to calculate his prices in advance. This could be accomplished if the CPI can be based on comparative profits for the prior year. If subjective factors, as recommended under paragraph (a) above, could be considered, the proposed three year averaging method would not be necessary since specific economic changes in a particular year would result in appropriate adjustments.

c) The complicated and expensive CPI calculations should be made applicable only where inter-company transactions reach a significant volume. Smaller taxpayers and those whose inter- company transactions are not sufficiently significant should be permitted to continue to use the present simpler methods.

d) If the CPI is applied to adjust the price of the U.S. party to a transaction, the taxpayer should be able to show that the adjustment may not be appropriate because the effect of such a pricing adjustment on the foreign related party's profit would be distortive. In other words, an adjustment of inter-company prices must be economically justified for both parties to the transaction.

e) The taxpayer should be given access to comparative profit statistics and information concerning the functions performed by the companies with which it is to be compared so that a true comparison and appropriate adjustments for differences in conditions can be made. The information currently published in SEC reports of publicly traded companies is not sufficiently specific in order to enable a company to isolate the profitability of a product line and the functions which are performed by the reporting company.

Respectfully submitted,