- Comparable Uncontrolled-Services Price Method. Under this method, the arm’s-length nature of charges for intercompany services would be evaluated using the prices charged in an “uncontrolled-services” transaction for services that are identical or have a high degree of similarity.
- Gross Service Margin Method. This method would test whether the amount charged in a controlled-services transaction is arm’s length by reference to the gross services profit margin realized in an uncontrolled-services transaction that involves similar services.
- Cost of Services-Plus Method. The cost-plus method would measure arm’s-length services charges by reference to the gross services profit markup in comparable uncontrolled transactions.
- The Comparable-Profits Method. This method would apply the arm’s-length standard by analyzing the profit-level indicators from financial information regarding uncontrolled taxpayers performing similar services under similar circumstances.
- Profit-Split Method. The proposed regulations would extend the use of the comparable profit-split and residual profit-split methods used under current regulations for transferring products to transactions involving controlled services. These methods evaluate whether the allocation of combined profit or loss is arm’s length by reference to the relative value of each controlled taxpayer’s “contributions” to the combined operating profit or loss.
More Fine Print
Under new rules for transfer pricing that the Internal Revenue Service proposed last September, certain types of service transactions are specifically excluded from the simplified cost-based method, including the following:
- Manufacturing, production, extraction, or construction.
- Reselling, distribution, acting as a sales or purchasing agent, or acting under a commission arrangement.
- Research, development, or experimentation; engineering or scientific activities.
- Financial transactions (including guarantees), insurance, or reinsurance.
Note that even if a services transaction does not fit into any of the above categories, it may be ineligible for the simplified cost-based method for other reasons.