§ 1.482-9(e)(4) Example 2.

Category: (e) Cost of services plus method, Transfer Pricing Guidelines, US IRC Section 482 on Transfer Pricing, § 1.482-9 Methods to determine taxable income in connection with a controlled services transaction | Tag: , , , , ,
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Inability to adjust for differences in comparable transactional costs.

The facts are the same as in Example 1, except that Company A’s staff that rendered the services to Company B consisted primarily of engineers in training status or on temporary rotation from other Company A subsidiaries. In addition, the Company B network incorporated innovative features, including specially designed software suited to Company B’s requirements. The use of less-experienced personnel and staff on temporary rotation, together with the special features of the Company B network, significantly increased the time and costs associated with the project as compared to time and costs associated with similar projects completed for uncontrolled customers. These factors constitute material differences between the controlled and the uncontrolled transactions that affect the determination of Company A’s comparable transactional costs associated with the controlled services transaction, as well as the gross services profit markup. Moreover, it is not possible to perform reliable adjustments for these differences on the basis of the available accounting data. Under these circumstances, the reliability of the cost of services plus method as a measure of an arm’s length price is substantially reduced.






Related Guidelines

  1. TPG2022 Chapter VII paragraph 7.36For example, it may be the case that the market value of intra-group services is not greater than the costs incurred by the service provider. This could occur where, for example, the service is not an ordinary or recurrent activity of the service...
  2. TPG2022 Chapter VII paragraph 7.35Depending on the method being used to establish an arm’s length charge for intra-group services, the issue may arise whether it is necessary that the charge be such that it results in a profit for the service provider. In an arm’s length transaction,...
  3. TPG2022 Chapter VII paragraph 7.34When an associated enterprise is acting only as an agent or intermediary in the provision of services, it is important in applying a cost based method that the return or mark-up is appropriate for the performance of an agency function rather than for...
  4. TPG2022 Chapter VII paragraph 7.33Where a cost based method is determined to be the most appropriate method to the circumstances of the case, the analysis would require examining whether the costs incurred by the group service provider need some adjustment to make the comparison of the controlled...
  5. TPG2022 Chapter VII paragraph 7.31The method to be used to determine arm’s length transfer pricing for intra-group services should be determined according to the guidelines in Chapters I, II, and III. Often, the application of these guidelines will lead to use of the CUP or a cost-based...
  6. TPG2022 Chapter VII paragraph 7.19Once it is determined that an intra-group service has been rendered, it is necessary, as for other types of intra-group transfers, to determine whether the amount of the charge, if any, is in accordance with the arm’s length principle. This means that the...


Related Case Law

  1. Finland vs Corp, Sep. 2017, KHO:2017:146Ruling by the Finnish Supreme Administrative Court on a service provider’s obligation to add a mark-up on its costs when calculating an arm’s length service charge. A Plc had provided services to it’s subsidiaryes related to supply chains, marketing and product brand management...
  2. France vs. Eduard Kettner, March 2012, Administrative Court of Appeals of Paris, No. 10PA04193Kettner was a French distributor of hunting products. Kettner was charged service fees by it’s German parent company for a range of services including packaging, warehouse and inventory management, IT, management fees etc. The tax administration was of the opinion that the fees...
  3. Peru vs “Copper Corporation S.A.”, July 2011, Tax Tribunal, Case No 12609-8-2011“Copper Corporation S.A.” had deducted intra-group service payments in it’s taxable income. The Peruvian tax authorities determined that the documentation provided by the company did not sufficiently support the actual provision of these services. Hence, tax deductions for the expenses was denied. The...
  4. Finland vs A Oyj, May 2021, Supreme Administrative Court, Case No. KHO:2021:66A Oyj was the parent company of the A-group, and responsible for the group’s centralised financial activities. It owned the entire share capital of D Oy and B Oy. D Oy in turn owned the entire share capital of ZAO C, a Russian...
  5. Switzerland vs “Trust Administrator A. SA”, September 2019, Federal Supreme Court, Case No 2C_343/2019A Swiss company provided administration and other services to trusts. According to the company a related party in the Seychelles handled the daily business and received remuneration in accordance with an intra-group service agreement. Due to the service fees paid the Swiss company...