TEI OUTLINES COMMENTS ON TRANSFER-PRICING REGS.
AUG. 17, 1992
TEI OUTLINES COMMENTS ON TRANSFER-PRICING REGS.
DOCUMENT ATTRIBUTES
- AuthorsPerlman, Robert H.
- Institutional AuthorsTax Executives Institute, Inc.
- Cross-ReferenceIL-372-88
IL-401-88 - Code Sections
- Subject Area/Tax Topics
- Index Termsrelated-party allocations
- Jurisdictions
- LanguageEnglish
- Tax Analysts Document NumberDoc 92-7837
- Tax Analysts Electronic Citation92 TNT 170-61
=============== SUMMARY ===============
Robert H. Perlman of Tax Executives Institute, Inc. (TEI), Washington, has submitted an outline of comments for the public hearing on the proposed section 482 regulations. TEI's comments will address the arm's-length standard, the comparable profit interval, safe harbors, transition rules, and penalties.
=============== FULL TEXT ===============
August 17, 1992
Internal Revenue Service
P.O. Box 7604
Ben Franklin Station
Attention: CC:CORP:T:R
(INTL-0372-88 and INTL-0401-88)
Room 5228
Washington, D.C. 20044
Re: Proposed Regulations Under Section 482 Relating to Cost
Sharing and Transfer Pricing
Dear Commissioner:
In the cover letter transmitting TEI's written comments on the above subject, the Institute requested the opportunity to speak at the public hearing on these proposed regulations scheduled for 10:00 a.m. on August 31, 1992. TEI hereby renews that request. An outline of points we expect to address in our presentation is enclosed.
Lisa Norton, Tax Counsel with Ingersoll-Rand Corporation and the 1992-1993 Chair of TEI's International Tax Committee, is the anticipated speaker on behalf of TEI.
If you have any questions concerning TEI's presentation, please call Jeffery P. Rasmussen of the Institute's professional tax staff at (202) 638-5601.
Respectfully yours,
Robert H. Perlman
International President
Tax Executives Institute, Inc.
Washington, D.C.
* * *
OUTLINE OF ORAL REMARKS OF
TAX EXECUTIVES INSTITUTE
to be presented at a public hearing on August 31, 1992,
on Proposed Regulations under section 482
on transfer pricing and cost sharing
INTL-372-88
INTL-401-88
I. Introduction -- except for one or two points, TEI's oral remarks
will generally be confined to transfer pricing. TEI's written
comments address cost sharing more extensively.
II. Arm's-Length Standard
A. Worldwide Acceptance -- any deviation from current standard
requires coordination with foreign jurisdictions --
especially treaty partners.
B. Proposed Regulations impose additional restrictions on use of
CUP and other internationally accepted methods for tangible
personal property sales. Similar restrictions apply to MTM
for intangibles.
C. Knowledge and experience of related parties imputed to
unrelated party transactions.
D. CPI shifts focus away from observable market transactions to
operating profits -- many factors other than pricing affect
operating profits.
III. Comparable Profit Internal
A. Arm's-length pricing can result in a range of acceptable
results which CPI recognizes. The concept of adjusting to the
most appropriate point in the interval undercuts the most
useful feature of CPI.
B. CPI superimposed on non-CUP methods -- e.g., resale-price,
cost-plus, CAT.
C. CPI applied to tangible property and high-profit and "low-
profit" intangible property.
1. Targeted statutory amendment in 1986.
2. Sweeping revision of regulations to overturn legal
precedent.
3. Increase in controversy is likely due to sweeping
application of CPI and the introduction of numerous new
concepts.
D. Proposed Regulations do not purport to impose a transfer
pricing method, but taxpayers will ignore the pricing results
dictated by CPI at their peril.
1. CPI appears to be a tool for examination adjustments.
2. Look-back or retrospective nature of CPI provides for
certainty of adjustment rather than certainty of
compliance.
3. Increased controversy likely.
a. identification of tested party.
b. appropriate business classification.
c. algorithms are needed to establish convergence.
E. Taxpayers should be able to continue to meet the arm's-length
standard under traditional pricing methods, including profit
split and other fourth methods, without resort to CPI
validation. Superimposing CPI on all other methods eliminates
the independence of the method.
F. Retain CPI as a safe harbor only.
IV. Safe Harbors -- As important now as ever.
A. Should be employed as either absolute or rebuttable
presumptions.
1. Provide certainty of result.
2. Permit taxpayers and the government to allocate their
resources more effectively.
B. No adverse inference should arise from falling outside of
safe harbors.
C. Particular categories of safe harbors:
1. High-tax jurisdiction.
2. Back-to-back transfers.
3. Prior IRS scrutiny.
D. TEI urges consideration of other safe harbors or rebuttable
presumptions as noted in its and other groups' written
comments.
V. Cost-sharing Generally
A. The Cost/Income ratio is far too rigid as a test of the
reasonableness of sharing of costs and income related to
intangibles.
1. Periodic measurement of costs incurred and income
derived from cost-sharing agreement should not require
annual adjustments to achieve a strict 1:1 sharing among
participants.
2. Cost-sharing agreements are generally long-term
arrangements and should be evaluated over a longer term.
A better measure of reasonable efforts to share costs in
proportion to income from an intangible would permit a
degree of variation among participant's ratios among
years.
B. The cost/income ratio test should be one factor in evaluating
the reasonableness of a cost-sharing agreement
VI. Transition Rules -- Additional guidance needed on the application
of section 482 in the interregnum between enactment of the
commensurate-with-income standard and the revised section 482
regulations.
VII. Penalties
A. Guidance on the application of the reasonable cause and good
faith exceptions to section 6662(e) is critical.
B. TEI recommends that the IRS defer application of section
6662(e) until the issuance of:
1. revised, final 482 regulations and
2. guidance on reasonable cause and good faith.
VIII. Concluding Remarks
DOCUMENT ATTRIBUTES
- AuthorsPerlman, Robert H.
- Institutional AuthorsTax Executives Institute, Inc.
- Cross-ReferenceIL-372-88
IL-401-88 - Code Sections
- Subject Area/Tax Topics
- Index Termsrelated-party allocations
- Jurisdictions
- LanguageEnglish
- Tax Analysts Document NumberDoc 92-7837
- Tax Analysts Electronic Citation92 TNT 170-61
