Transfer Pricing: Perspectives of Economists and Accountants (Part 2) (Portfolio 6909)

Chapter 4 examines the availability of potential U.S. and non-U.S. external comparables that might be used to apply transfer pricing methods that depend on external comparables, including an analysis of the ranges of markups that are observed for generic sets of providers of various types of services. As background, the chapter begins with the history of the U.S. regulations under §482 governing the pricing of services between related parties. Final U.S. services regulations were issued in 2009, and the chapter describes in detail the provisions and transfer pricing methods in those final regulations. Non-U.S. guidance on the transfer pricing of services is provided in the form of the OECD’s Guidelines, and this chapter provides the historical context as well as a description of the major provisions of the Guidelines as they relate to the pricing of services. After discussing the economic considerations in the application of potential U.S. and non-U.S. external comparables, the chapter concludes with a discussion of major issues affecting transfer pricing for services.

CHAPTER 5: Relationship Between Intangible Valuations Done for Financial Statement Purposes and for Transfer Pricing Purposes

Mergers and acquisitions are one of the key ways in which companies acquire new technology and other intangibles. Companies typically integrate the newly acquired capabilities into existing business after a merger or acquisition. This often involves the transfer of intangibles across legal entities. Under such circumstances, companies often prepare one study that determines the fair value of the intangibles that they have purchased for financial statement purposes, and a separate study to determine the transfer price that should be charged when the intangible is transferred from one legal entity to another.

The definition of “intangibles” for financial reporting is generally consistent with the definition used for transfer pricing, and, in each case, the value should reflect the price paid between a willing buyer and a willing seller. Taxpayers, therefore, often would like to use fair value computed for financial reporting to determine the transfer price for the acquired intangibles when they are transferred across different legal entities, both to save on costs and to minimize the chance of using inconsistent data and assumptions.

The IRS, however, is generally skeptical about the use of intangible valuations developed under a financial reporting framework for transfer pricing purposes and has stated in Reg. §1.482-7(g)(2)(vii)(A) that “allocations or other valuations done for accounting purposes may provide a useful starting point but will not be conclusive for purposes of the best method analysis in evaluating the arm’s length charge in a [platform contribution transaction], particularly where the accounting treatment of an asset is inconsistent with its economic value.” The IRS does not provide any discussion of the relationship between financial reporting and tax standards and, therefore, neither identifies what parts of a valuation done for accounting purposes may provide “a useful starting point” or what changes have to be made to such a valuation before it can be used as the basis for a transfer pricing analysis.

This chapter discusses the similarities and differences between financial statement reporting and transfer pricing analyses. As will be seen, while differences exist between the two, once these differences are taken into account the use of an integrated approach to valuing intangibles for financial reporting and transfer pricing analyses may provide taxpayers with a stronger basis for supporting their positions on audit.

This Portfolio may be cited as Amerkhail, Mirga, Blough, Chandler, and Williams, 6909 T.M., Transfer Pricing: Perspectives of Economists and Accountants (Part 2).