Table of Contents
Detailed Analysis
Chapter 7: TRANSFER PRICING - A CASE STUDY (METHODS AND DOCUMENTATION)
7:I. Introduction
7:II. Documentation Rules
7:III. Use of Case Study Format
7:IV. Functional Analysis
Introductory Material
A. The Importance of the Functional Analysis
B. How to Develop a Functional Analysis
7:V. Application of Functional Analysis to CPC Organization
Introductory Material
A. Products
B. Market for Health and Beauty Products
C. Functions
D. Intercompany Transactions
E. Contractual Terms
F. Economic Conditions
G. Functions
1. Research and Development
2. Manufacturing
3. Brand Development
4. Marketing and Sales
H. Assets
I. Risks
7:VI. Financial Results
A. CPC-Canada
B. CPC-France
C. CPC-UK
D. CPC-Ireland
7:VII. Transfer Pricing Methodology
A. U.S. Regulations
1. General Principles and History
2. Arm's-Length Standard
3. Standards of Comparability
4. Best Method Rule
B. Transfer Pricing Methods for Transfers of Tangible Property
1. Comparable Uncontrolled Price ("CUP") Method
2. Resale Price Method (RPM)
3. The Cost Plus Method (CPLM)
4. The Comparable Profits Method (CPM)
5. Profit Split Methods
a. Comparable Profit Split
b. Residual Profit Split
6. Other Methods
C. Application of the Comparable Profits Method
1. Identifying the Tested Party
2. Selection of Profit Level Indicator
D. Transfer Pricing Methods for Transfers of Intangible Property
E. Transfer Pricing Methods for Provision of Intercompany Services
1. Services Regulations
2. Selection of Method for Analyzing Service Transactions
F. OECD Guidelines
1. OECD Model Tax Convention and Guidelines
2. Reaffirmation of the Arm's-Length Principle
a. Transaction-Based Pricing Methods
b. Profit-Based Methods
c. Aggregation of Transactions
3. Special Rules for Intangible Property Transactions
7:VIII. Comparables Analysis
A. Comparables Search Guidelines
B. The Search for Comparable Transactions
1. Internal and External Comparable Transactions
2. Potential Sources of Comparable Transaction Data
C. The Search for Comparable Companies
D. Comparability Adjustments
E. Identifying Potentially Comparable Companies
F. The Use of Databases in Comparable Company Searches
G. North American Distributors of Consumer Products
1. Unadjusted Results
2. Adjustments for Working Capital Differences
3. Adjusted Results
H. European Distributors of Consumer Products
1. Unadjusted Results
2. Adjusted Results - CPC-France
3. Adjusted Results - CPC-UK
I. Comparable License Agreements
J. Consumer Products Manufacturers
1. Unadjusted Results
2. Adjusted Results
K. Contract R& D Service Providers
1. Unadjusted Results
2. Adjusted Results
7:IX. Summary and Conclusions
7:X. Application of the Residual Profit Split Method
A. Comparables Analysis and Valuation of Wholesale Distribution Functions
1. Pricing Method
2. Identification and Selection of Comparables
3. Overview of Comparables
4. Application of CPM
5. Working Capital Adjustments
6. Determination of Arm's-Length Range
B. Comparables Analysis and Valuation of Manufacturing Functions
1. Pricing Method
2. Identification and Selection of Comparables
3. Overview of Comparables
4. Application of CPM
5. Application of Additional Quantitative Adjustments
6. Determination of Arm's-Length Range
C. Application of Pricing Methodology to the Allergy Segment
D. When the Tested Party Result Is Outside the Determined Range
E. Application of Pricing Methodology Beyond 2000
Chapter 8: ADVANCE PRICING AGREEMENTS by Michael F. Patton, Esq. Ernst & Young, LLP Los Angeles, California
8:I. Organization of this Chapter
8:II. The APA Process in General
8:III. Factors to Consider in Deciding Whether to Seek an APA
A. Certainty of Result
B. Disclosure Issues
C. Choosing a TPM
D. Cost of Seeking an APA
E. Other Factors to Consider
8:IV. APAs as an Alternative Dispute Resolution Mechanism
A. Rollbacks
B. Comparison to Other ADR Procedures
1. Accelerated Issue Resolution
2. Joint Appeals and Competent Authority (aka SAP - Simultaneous Appeals Procedure)
3. Arbitration
4. Delegation Order 236
5. Prefiling Agreement Procedure
8:V. IRS Guidance - The APA Process in Transition: From Rev. Proc. 91-22 to Rev. Proc. 2006-9, CCDM Directives Manual Provisions, and Beyond
A. Rev. Procs. 96-53, 2004-40 and 2006-9
1. General Policy and Principles of Rev. Proc. 2006-9
2. Rollbacks
3. Competent Authority Coordination
4. Case Management
5. Case Management: Document Preparation
6. Case Management: Other Procedures
7. Who's Who in the APA World
8. What's Not Said
B. Chief Counsel Directives Manual Provisions Chapter (42)(10)
1. Unilateral APAs
2. Bilateral and Multilateral APAs
3. Miscellaneous
C. Conclusion
8:VI. The Prefiling Conference
A. General
1. Roles of IRS Offices in APA Process
2. Verification of Taxpayer Information
3. Acceptability of a Bilateral or Unilateral APA
4. Bilateral APA Issues
5. Timing Issues
B. Preliminary Discussion of Substantive Issues
1. Extent of Specific Factual Disclosures and Economic Analysis
2. Specifying Covered and Non-Covered Product Lines, Transactions, or Affiliates
3. Preliminary Identification of Comparables
4. Acceptability of Taxpayer's Proposed TPM
5. Confirming Methods
6. Establishing an Appropriate Range of Results
7. Identifying Critical Assumptions
C. Economists and Other Experts
1. Taxpayer and IRS Use of Economists
2. Independent Experts
3. Other Experts
4. Foreign Government Experts
D. Miscellaneous Issues
1. Foreign Jurisdiction APA Procedures
2. Confidentiality of Information Submitted During the APA Process
3. Compensating Adjustments
4. Term and First Effective Year for the APA
5. Application of the APA to Open Years
6. Coordination of U.S. or Foreign Tax Examinations with the APA Process
7. Section 6038A Record Retention Agreements
8. IRS Contact Persons
8:VII. The APA Application and Supporting Data
Introductory Material
A. General Principles for APA Applications: Rev. Proc. 2006-9, § § 4.01 and 4.02
B. Explanation of the Proposed TPM: Rev. Proc. 2006-9, § 4.03 (20), (24)
C. General Factual and Legal Items Required for All APAs: Rev. Proc. 2006-9, § 4.03
1. Table of Contents
2. Organizations, Trades, Businesses, and Transactions Subject to the APA
3. A Properly Completed Form 2848 by Any Persons Authorized to Represent the Parties
4. History of Taxpayer's Operations, Structure, and Major Transaction Flows
5. Financial and Tax Data, and Supporting Material for Proposed TPM
6. Functional and Transactional Currencies of Each Party
7. Taxable Year of Each Party
8. Accounting Methods That Have a Direct Bearing on the Proposed TPM
9. Accounting Differences Between the Countries Bearing on the Proposed TPM
10. Discussion of Authorities Relevant to the Proposed TPM
11. Taxpayer and U.S. and Foreign Government Positions on Previous TPM-Related Issues
12. Economic Analysis of Pricing Practices and Economic Functions
13. A List of Taxpayer's Competitors, Their Businesses, and Economic Activities
14. Criteria for Independent Comparables
15. Detailed Information on Comparables
16. Selection and Application of Factors Used to Adjust Comparables
17. Application of the TPM
D. Specific Factual Items for a Cost-Sharing Arrangement: Rev. Proc. 2006-9, § 4.04(1) - (12)
1. Text of Complete Arrangement and Other Relevant Documents
2. Description of Intangible Costs for All Participants
3. Participants' Benefits
4. Calculation of Each Participant's Share of Intangible Development Costs
5. Accounting Methods
6. Results for Each Participant
7. Arrangements with Nonparticipants
8. CSA Operating Documents
9. Details on Secondary Buy-Ins and Buy-Outs
10. Treatment of Cost-Sharing Payments for U.S. Income Tax Purposes
11. Internal Guidelines for Implementing Cost-Sharing Reports
12. Coverage of CSA and Related Buy-in Transactions
E. Critical Assumptions
F. Contents of Annual Report
G. Term of the APA
H. Request for Competent Authority Consideration
I. Perjury Statements
J. Signatures
K. Copies and Mailing
L. User Fees
M. APA Procedures for Small Business Taxpayers
8:VIII. Negotiating the APA
A. General
B. National Office and Field Roles in the Negotiation
8:IX. Foreign APA Procedures
A. General
B. Prefiling Conference
C. Foreign Procedures
D. Contents of Foreign APA Submission
E. Foreign Competent Authority Role
F. Coordination with U.S. Submission
G. Formalities of the Foreign APA Agreement
8:X. Administering the APA
Introductory Material
A. Annual Reports
B. APA (Compensating) Adjustments
C. Examination of an APA Year
D. Record Retention
E. Revising an APA
F. Canceling an APA
G. Revoking an APA
H. Legal Effect of an APA
I. Competent Authority Coordination of Administrative Issues
J. Renewing the APA
K. Change in Law or Treaty
8:XI. APA Program Accountability and Recent Developments
A. Senate Finance Committee Investigation
B. Public Comments
Chapter 9: COST SHARING ARRANGEMENTS by Zion Levi, Womble Carlyle Sandridge & Rice, Washington, D.C.
9:I. What Is a Cost Sharing Arrangement?
A. In General
B. U.S. Regulatory History
1. The 1966 Proposed Regulations
2. The 1968 Regulations
3. The 1986 Tax Reform Act
4. The 1988 White Paper
5. 1992 Proposed Regulations
6. Comments on the 1992 Proposed Regulations
7. The 1993 Temporary Regulations
8. The 1995 Final Regulations
9. 2005 Proposed Regulations
10. 2009 Temporary Regulations
C. Business Alternatives to Cost Sharing Arrangements
1. Solo Development Followed by Transferring (or Licensing) the Intangible
2. Development with Assistance Followed by Transferring (Or Licensing) the Intangible
3. Development and Exploitation Through a Partnership
a. Separate Entity Status
b. Foreign Partner Subject to U.S. Tax
c. Withholding Tax
d. Permanent Establishment Status
9:II. Cost-Benefit Analysis of a Cost Sharing Arrangement
A. Reduction of Controversy
B. Matching Business Objectives
C. Reduced Risks of Double Taxation
D. Managing the Group's Worldwide Tax Exposure
1. Separation of Up Front Costs
2. Tax Effects of Royalty Payments
a. Withholding Tax
b. Deduction for Royalty Payments
c. Foreign Tax Credit Considerations
d. Anti-Deferral Regimes
e. Payment Restrictions
9:III. International Aspects of Cost Sharing Arrangements
A. The OECD
B. Development of Cost Sharing Rules in Other Countries
9:IV. The 1995 and 2009 U.S. Cost Sharing Rules
Introductory Material
A. Cost Sharing Arrangement
B. Who May Claim Benefits
C. QCSA Is Neither a Partnership nor a Trade or Business
D. Limitation on Allocations
9:V. Qualified Cost Sharing Arrangement
9:VI. Participant
A. In General
1. Controlled Participant
2. Uncontrolled Participant
B. Treatment of a Controlled Taxpayer That Is Not a Controlled Participant
C. Treatment of Consolidated Group
9:VII. Intangible Development Costs
9:VIII. Anticipated Benefits
9:IX. Cost Allocations
Introductory Material
A. Share of Intangible Development Costs
B. Share of Reasonably Anticipated Benefits
1. Measure of Benefits
a. Completeness and Accuracy of Data
b. Reliability of Assumptions
c. Sensitivity of Results to Deficiencies in Data and Assumptions
2. Indirect Bases for Measuring Anticipated Benefits
a. Units Used, Produced, or Sold
b. Sales
c. Operating Profit
d. Other Bases for Measuring Anticipated Benefits
3. Projections Used to Estimate Anticipated Benefits
a. In General
b. Unreliable Projections
c. Foreign-to-Foreign Adjustments
C. Timing of Allocations
9:X. Allocations of Income, Deductions or Other Items to Reflect Transfers of Intangibles (Buy-In)
Introductory Material
A. In General
B. Buy-In Payments
C. New Controlled Participant
D. Controlled Participant Relinquishes Interests
E. Conduct Inconsistent with the Terms of a Cost Sharing Arrangement
F. Failure to Assign Interests Under a QCSA
G. Form of Consideration
9:XI. Character of Payments Made Pursuant to a QCSA
9:XII. Accounting Requirements
9:XIII. Administrative Requirements
Introductory Material
A. Documentation
B. Coordination with Penalty Regulations
C. Reporting Requirements
9:XIV. Effective Date
9:XV. IRS Authority to Impose Cost Sharing
A. General Rule
B. Ciba-Geigy
9:XVI. Coordination With Advance Pricing Agreements
The 2009 Temporary Regulations - Revised U.S. Cost Sharing Rules
Content
Chapter 10: TRANSFER PRICING - INTERNATIONAL JOINT VENTURES by Kenneth J. Krupsky, Esq., and Karl L. Kellar, Esq., Jones Day, Washington, D.C.
10:I. Introduction
Introductory Material
A. Background
B. Hypothetical Joint Venture
10:II. Legal Framework
A. General Standard for Common Control
B. Application of Legal Standard to 50/50 Joint Ventures
C. Evaluation of the Regulatory Standard for Control
10:III. Establishing Absence of Common Control
Introductory Material
A. Establishing Adversity of Economic Interest
B. Establishing Independence of Motivations
C. Contractual Arrangements
D. Business Plans, Memos, Financial Analyses
E. Documentation of Arm's Length Negotiation
F. Sections 6038A, 6038B, and 6038C
G. Economic Experts' Reports
H. Opinions of Tax Counsel
I. Consider an APA
10:IV. Hidden or "Creeping" Control
Introductory Material
A. Disproportionate Loans
B. Personnel Transfers
C. Shareholder Agreements
D. Stock Options
E. Directors
F. Cross-Ownership Interest
G. Comparative Economic Power
H. Conclusions
10:V. Joint Venture Pricing as an Arm's Length Comparable
Introductory Material
A. Comparability of Transactions and Products
B. Comparability in Time
10:VI. Additional Tax Planning Issues
A. Tax Cooperation Agreement
B. Choice of Entity
C. Sham Treatment and Doing Business in U.S.
D. Taxation of Formation Transactions
1. U.S. Joint Venture
2. Foreign Joint Venture
E. Taxation of Operating Income
1. Corporate Joint Venture
2. Joint Venture Partnership
F. Repatriation and Foreign Tax Credit Planning
G. Termination of Joint Venture
10:VII. Conclusions
Working Papers
Table of Worksheets
Worksheet 1 Sample Questionnaire
Worksheet 2 Screening Process for North American Distributors of Consumer Products
Worksheet 3 Financial Statements for North American Distributors of Consumer Products
Worksheet 4 Screening Process for European Distributors of Consumer Products
Worksheet 5 Financial Statements for European Distributors of Consumer Products
Worksheet 6 Screening Process for Comparable License Agreements
Worksheet 7 Screening Process for Consumer Products Manufacturers
Worksheet 8 Financial Statements for Consumer Products Manufacturers
Worksheet 9 Screening Process for Contract R& D Service Providers
Worksheet 10 Financial Statements for Contract R& D Service Providers
Worksheet 11 Sample Documentation Report
Worksheet 21 International Examiners CPE Seminar, Advance Pricing Agreement Program Supplement
Worksheet 22 Ernst & Young LLP Public Comments on APA Program
Worksheet 23 Announcement 2009-28, 2009-15 I.R.B. 760, Annual IRS Report Concerning Advance Pricing Agreements
Worksheet 24 Notice 94-40, 1994-1 C.B. 351, Global Trading APAs.
Worksheet 25 IRS Chief Counsel Directives Manual: Advice Pricing Agreement Program Provisions (Issued 1/22/97)
Worksheet 26 Rev. Proc. 2006-9, 2006-2 I.R.B. 278 Procedural Rules for the APA Program
Worksheet 27 Continuing Professional Education for International Examiners, FY 1992 Technical Update.
Worksheet 41 Side-by-Side Comparison of IRS Final Regulations on Qualified Cost Sharing Arrangements and OECD Guidelines Governing Cost Contribution Arrangements (Prepared by Zion Levi, Miller & Chevalier, Chartered, Washington, D.C.)
Worksheet 51 Sample Currency Fluctuation Agreement.
Bibliography
OFFICIAL
Statutes:
Regulations:
IRS Guidance:
Cases:
UNOFFICIAL
Treatises:
Periodicals:
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