Transfer Pricing: Economic, Managerial, and Accounting Principles , written by Clark J. Chandler of KPMG LLP, Irving H. Plotkin of PricewaterhouseCoopers and Jerrie V. Mirga of Economic Consulting Services Inc., analyzes the economics of transfer pricing and the use of a company's internal data to assist in establishing and defending transfer prices.

This detailed transfer pricing analysis makes up Chapters 4, 5, and 6 of Bloomberg BNA’s Tax Management Transfer Pricing Portfolio Series.

Chapter 4, The Economics of Transfer Pricing, analyzes transfer pricing from an economist's perspective, explaining the economic principles underlying intercompany pricing of tangible property, intangibles, and services. The chapter also explores the economics of location savings, looks at profits and rates of return from the standpoint of economic theory, and addresses issues of economic measurement in the transfer pricing context.

Chapter 5, Economic Analysis and the Regulatory Response to Multinational Group Theory and the Limitations of the Arm's Length Approach, continues the economic analysis by discussing some conceptual aspects of transfer pricing, including a review of transfer pricing economic literature and multinational group theory and a discussion of the arm's length and formulary apportionment approaches to transfer pricing. The chapter examines the attempts in the §482 regulations to address some of the inherent limitations of the arm's length approach and discusses the implicit emphasis of those regulations on profit split methods in situations in which complex or valuable intangibles are brought to bear in controlled party transactions.

Chapter 6, Use of Accounting and Managerial Data, demonstrates how to analyze a company's accounting and managerial data for transfer pricing purposes. The chapter shows how to use that data in implementing and updating the company's transfer pricing system, as well as in seeking an advance pricing agreement or competent authority assistance.

Transfer Pricing: Economic, Managerial, and Accounting Principles allows you to benefit from:

• Hundreds of hours of original research on specific tax planning topics from leading practitioners in this area
• Invaluable practice documents including tables, charts and lists
• Plain-English guidance from world-class experts
• Real-world and in-depth analysis that lets you explore various options
• Time-saving access to relevant sections of tax laws, regulations, court cases, IRS documents and more.
• Alternative approaches to both common and unique tax scenarios

This Portfolio is part of the Foreign Income Portfolios Library, a comprehensive series containing more than 90 Portfolios, which covers critical transactions and issues in international taxation. This highly-regarded resource service offers commentary on a wide range of foreign income topics including: Foreign Tax Credit, Business Operations in more than 40 foreign countries, Branch Profits Tax, Source of Income Rules, Subpart F (Controlled Foreign Corporations), Foreign Partnerships and Partners, Transfer Pricing, and more.

Detailed Analysis

Chapter 4: THE ECONOMICS OF TRANSFER PRICING by Clark Chandler KPMG LLP Washington, D.C. Irving Plotkin PricewaterhouseCoopers Boston, Massachusetts Jerrie Mirga Economic Consulting Services Inc. Washington, D.C.

4:I. Introduction

4:II. Intercompany Pricing of Tangible Property

A. "Comparables" and the Arm's Length Standard

B. The Comparable Uncontrolled Price Method: Product Comparables

C. Gross Margin Methods: The Resale and Cost Plus Approaches

1. The Resale Price Approach

2. Cost Plus Approach

3. Selection of Arm's Length Comparables

D. Net Margin Methods

1. Selection of the Tested Party

2. Identification of Third-Party Comparables

3. Selection of Profit Level Indicator

E. Profit Splits

F. Best Method Rule

G. Miscellaneous Issues

1. Adjustments for Differences in Working Capital Intensity

2. The Effects of Volume on Price

3. Adjustments for Differences in Operating Expenses Under the Resale Approach: The "Berry Ratio" and the Distributor

4. Implications of Inconsistent Accounting

5. Transfer Pricing for Round-Trip Transactions

4:III. Intangibles

Introductory Material

A. What Is an Intangible?

B. Determination of Ownership

C. Methods of Valuing Intangibles

1. Comparable Uncontrolled Transactions

2. Net Margin Methods (CPM and TNMM)

a. Income-Based Approach

b. Cost-Based Approach

3. Profit Split Methods

a. Comparable Profit Split

b. Residual Profit Split

D. Determination of Buy-In Payments Needed Under Cost Sharing Agreements

1. Residual Profit Split Approaches

a. Should R& D Be Treated as a Depreciable Asset?

b. Useful Economic Life of Technology

c. Allocation of Residual Profits Based on Depreciated R& D Expenditures

2. The Market Capitalization Method

a. Stock Market Values

b. The Difference Between the Intrinsic Value of a Business and the Value of its Assets

c. Allocation Issues

d. Economic Life of Intangible Property

e. MCM and the Commensurate With Income Standard

f. Conclusions

E. Bundling

4:IV. Services

Introductory Material

A. Pricing of Product-Related Services

B. Pricing of Engineering and R& D Types of Services

C. Relationship Between Prices and Costs

4:V. Profits, Rates of Return, and Economic Theory

Introductory Material

A. Relationship Between Rate of Return and Profit Margin Measures

B. Rate of Return Measures

C. Profit Margin Measures

D. The Role of Risk in Economic Theory

E. Risk Adjusted Rates of Return

F. Alternative Measures of Financial Performance

1. Cash Flows, Present Values, and Discount Rates

2. Internal Rate of Return

3. Average Cost of Capital

4:VI. Economic Concepts: Measurement Issues

Introductory Material

A. Financial Statements

B. Opportunity Cost and the Cost of Capital

C. Summary

Chapter 5: ECONOMIC ANALYSIS AND THE REGULATORY RESPONSE TO MULTINATIONAL GROUP THEORY AND THE LIMITATIONS OF THE ARM'S LENGTH APPROACH by Stanley I. Langbein Professor of Law University of Miami School of Law Miami, Florida

5:I. Introduction

5:II. Evolution of Transfer Pricing Analysis

Introductory Material

A. Early Developments

B. Postwar Expansion of United States Multinationals

C. United States Developments in the 1960s

D. International Developments in Response to United States Developments

1. Trade and Transfer Pricing

2. 1979 OECD Report

3. Controversy over the Unitary Method

a. Article 9(4) of the Proposed United States/United Kingdom Income Tax Convention

b. Proposed Statute Concerning Unitary Method

c. Constitutional Litigation over the Unitary Method

d. Working Group

E. Reconsideration of "Arm's Length" in the United States

1. Doubts About the "Arm's Length" Standard

2. Tax Reform Act of 1986

3. 1988 Treasury White Paper

4. Transfer Pricing and the General Public

5. 1992 Proposed Regulations

6. 1992 Election and 1993 Temporary Regulations

F. OECD Task Force Reports

G. Revised Transfer Pricing Regime of the 1990s

5:III. Economic Analysis: "Equilibrium," "Disequilibrium" and Neutrality

A. Two Elements of Theory

B. "Equilibrium" Economics

C. "Disequilibrium" Economics

1. The Schumpeterean "Entrepreneur"

2. Coasean Theory of the Firm

3. Game Theory Diseconomies

D. Disequilibrium Economics and "Capital Export Neutrality"

1. Capital Export Neutrality

2. A "Disequilibrium" Critique of Capital Export Neutrality

3. Rediscovery of the "Original Intent" of International Taxation

5:IV. Economic Analysis and the "Transaction-Based" Arm's Length System

A. The Regulations of the 1960s and "Equilibrium" Economics

1. Section 1.482-1 of the 1968 Regulations

2. Section 1.482-2 of the 1968 Regulations and the Five Categories of Transactions

a. Regulatory Provisions

b. Transaction Categories and the "Triad Schema"

c. "Embedded" Intangibles

3. 1968 Regulations and the Three "Transactional" Methods

B. Theoretical Critique of the "Transaction" Methods

1. Theoretical Basis of the Critique

a. Coasean Substitution

b. Information Impactedness

c. Multinational Corporation Theory

2. Application of Multinational Corporation Theory to Transfer Pricing

a. Two Prongs of Multinational Firm Theory

b. Substitution of Contract Forms and the Disutility of the CUP Method

c. The "Residual" and the RPM and Cost-Plus Methods

d. The "Continuum Price" Problem

3. Multinational Firm Theory and the Right to Tax of a "Source State"

C. The Profit Split/Modified Fractional Apportionment Structure

D. Transfer Pricing Reform and the "Globalization" Movement of the 1990s

1. Lack of Response to the Critique of "Arm's Length"

2. The OECD Task Force and the Definition of "Profit Methods"

3. Transfer Pricing and "Transparency"

4. Transfer Pricing, the Clinton Administration, and Globalization

5:V. Economic Analysis and the Current Regulations

A. Profit Split Structure and Allocation of the Residual Profit

B. The § 1.482-1 Regulations and the Indefiniteness of the System

1. Basic Precepts

2. Arm's Length Result

3. Best Method Rule

4. Comparability

a. Dual function

b. Five-Factor Test

c. Functional analysis

d. Contractual Terms, Risk, and Multinational Corporation Theory

e. Example 3

f. Final comparability factors

5. Arm's Length Range

a. Arm's Length Range and the Problematical Continuum

b. "Exact" and "Inexact" Comparables

c. Interquartile Range and "Inexact" Comparables

d. The Range, the Continuum, and the Question of "Tested Parties"

C. Intangible Property

1. Single Component Methods and the Continuum Price Problem

2. Intangible Property and Disequilibrium Analysis

3. "Embedded Intangibles"

a. Regulatory Rule

b. Ambiguity of the Rule

4. Returns on Intangibles

a. Methods

b. High-Profit Intangibles

5. Ownership of Intangible Property

a. Basic Rule

b. Divisible Intangibles

c. Protected and Unprotected Property

d. Allocations with Respect to Assistance

e. Modified Profit Split System

f. Fromage Frere

g. Proposed Revisions to Regulations

6. Services

a. Original Regulations

b. Proposed Regulations

c. Controlled Services Transactions

d. Embedded Services

e. Pricing Methods

D. Pricing Methods for Tangible Property

1. A Six-Step Process

2. Comparable Uncontrolled Prices

3. Single Component Methods - Presence of High-Profit Intangibles

a. Resale Price Method

b. Cost Plus Method

c. Comparable Profits Method

4. Presence of Intangible Property Within a Single Component

5. Requirement of a Separate Allocation for the Intangible

6. Consideration for the Intangible

7. Internal Determination of Consideration for the Intangible

E. Profit Split Method

F. The Primacy of the Profit Split

Chapter 6: USE OF ACCOUNTING AND MANAGERIAL DATA by Grant M. Clowery Clowery Consulting McLean, Virginia and R. William Morgan Horst Frisch Incorporated Washington, D.C.

6:I. Introduction

Introductory Material

A. The Transfer Pricing Environment

B. Case Study: Part 1 - The Facts

6:II. Analysis of Accounting Data

Introductory Material

A. Transaction-Based Approaches

1. Comparable Uncontrolled Price

2. Resale Price

3. Cost Plus

4. Summary

B. Case Study: Part 2 - The First Meeting

C. Entity-Based Approaches

1. Comparable Profits Method

2. Profit Split Methods

3. Summary

D. Case Study: Part 3 - The Second Meeting

E. Accounting Issues and Data Sources

1. Analysis of Controlled Party Data

2. Analysis of Uncontrolled Party Data

6:III. Implementing and Updating Transfer Pricing Systems

Introductory Material

A. Establishing Transfer Prices

B. Maintaining and Modifying Transfer Prices

C. Case Study: Part 4 - The Third Meeting

6:IV. Other Issues

Introductory Material

A. Advance Pricing Agreements

B. Competent Authority

6:V. Summary

Working Papers

Table of Worksheets

Worksheet 1 Economic Calculations in Transfer Pricing

Worksheet 11 Excerpt from Joseph A. Schumpeter, A History of Economic Analaysis

Worksheet 12 Excerpt from Ronald H. Coase, "The Nature of the Firm"

Worksheet 13 Excerpt from Alan M. Rugman, "Internationalization and Non-Equity Forms of International Involvement"

Worksheet 14 Excerpt from Richard E. Caves, Multinational Enterprise and Economic Analysis

Worksheet 15 Flowchart: Identification of the Best Method Under the Section 482 Regulations

Worksheet 21 Checklist of Potential Accounting Issues in Transfer Pricing Analysis

Worksheet 22 Illustration of Issues in Financial Statement Analysis for Transfer Pricing

Bibliography

OFFICIAL

Statutes:

Regulations:

Treasury Rulings:

International Governmental Publications:

Cases:

UNOFFICIAL

Miscellaneous

Periodicals:

1957

1971

1974

1975

1978

1979

1980

1981

1982

1983

1984

1986

1989

1990

1991

1992

1993

1994

1995

1996

1997

1999

2000

2001

2002

2003

2007