The lower possible tax revenues involved make such arrangements suitable for simplification.
In July 2010, the OECD conducted a survey of 33 jurisdictions on transfer pricing simplification measures. The results of the study, titled “Multi-Country Analysis of Existing Transfer Pricing Simplification Measures,” were released this month. More than 70% of the simplification measures implemented by survey respondents were targeted at smaller-scale transactions such as small and medium-sized enterprises (SMEs) and
Section 482 of the Internal Revenue Code which contains America's transfer pricing rules, does not state outright that it uses the arm’s-length principle as the benchmark for transfer pricing, though regulations have been implemented by tax authorities that make it the standard for transfer pricing. The transfer pricing simplification measures in place in the US cover loans, SMEs, low value-added services and smaller-scale transactions. The IRS responded in its report that the goal of one of its strategies, implementing the services cost method to determine
The arm’s-length principle has been the standard for transfer pricing the world over for decades. “Common acceptance and adherence to the arm's-length standard, is critical for the orderly administration and the functioning of transfer pricing across jurisdictions,” Brian Andreoli, a partner at Squire, Sanders & Dempsey’s New York office, told TPWeek on Tuesday. Yet the Obama administration seems to be considering a move away from the arm’s-length principle, says Theo van Stephoudt, an economist and transfer pricing expert also at Squire Sanders. A “formula approach is not going to work; at least not on a global basis,” he continued.
Administrative guidance issued by the IRS in 1996 states that transfer pricing simplification measures in the form of simplified
A safe harbour interest rate applies to loans, as set out in rules first promulgated in 1968 and last updated in 1994. The loans have to be between associated enterprises; businesses centred on making loans or loans made in a foreign currency are not eligible. The safe harbour rate is based on the applicable federal rate, which is calculated according to the average interest rate on federal government debt having similar maturity dates.
The services cost method (SCM) applies to low value-added services, particularly low margin services including those that, as the IRS responded, “do not contribute significantly to key competitive advantages, core capabilities or fundamental risks of success or failure”. First established in 1968, the regulatory framework concerning transfer pricing on low value-added services was revised in 2006. Under the SCM, items can be priced at cost, rather than using the arm’s-length principle.
Taxpayers can opt to take compliance one step further with associated shared services arrangement (SSA) transfer pricing simplification methods. The SSA allows for cost apportionment determined as according to “reasonably concluded” estimated benefits.
It is clear that the US is putting more resources into transfer pricing enforcement. Last month, the IRS appointed Sam Maruca, a partner at Washington, DC law firm Covington & Burling, as its transfer pricing director. As part of the Large Business and International Division, among his expected tasks will be to develop and implement a cogent transfer pricing policy.
