Accounting—In Practice—for Back Office and Headquarters Services After Changes to Intercompany Service Transactions

Excerpt from Practical US/International Tax Strategies' interview with Transfer Pricing Specialist Eric Ryan, DLA Piper

In 2006 the Treasury Department and the IRS issued temporary regulations under Code Section 482 that phased out the simplified cost based method for reporting intercompany service transactions, and replaced it with the Services Cost Method (SCM). In order to find out how companies are adapting to the changes, Tax Strategies talked with Eric Ryan, a Partner with DLA Piper, resident in the Palo Alto office. Mr. Ryan has been working closely with many companies, primarily in high tech sectors, to implement the new rules.

Strategies: What kinds of companies are most affected by the changes to the new transfer pricing methods provided under the temporary service regulations?

Ryan: The key companies that are affected by this are U.S. multinationals that, on a regular basis, are charging out to their foreign affiliates some portion of what they consider U.S. headquarters costs. These companies in particular have basically had to do a complete relook at what they were doing previously.

Strategies: What has been the general taxpayer reaction to the SCM or Services Cost Method and the temporary regulations that allow expenses to be charged to affiliates without a markup?

Ryan: With the exception of one or two items, I think it has actually been favorable. Of course the SCM—the no-markup approach—is an exception to the arm’s length standard because the tax authorities would otherwise assume that there’s a profit motivation in arm’s length dealings. So what the IRS tried to do here was to keep the categories of expenses that could be allocated out without a markup to non high value-added activities. There was an earlier version of these proposed regulations issued in 2003 that had a formula which was just not workable, and it took a lot of effort to figure out if you could qualify for the new markup. Now the IRS has issued this list of 101 things that companies can allocate without a markup and that list, which is in Rev. Proc. 2007-13, we are coming to find out, is fairly extensive for General and Administrative activities.

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