Effective date of section 482 services regulations should be delayed.

The following comments were filed with U.S. Department of Treasury and Internal Revenue Service on October 6, 2006. The comments were prepared under the aegis of TEI's International Tax Committee, whose Chair is Janice L. Lucchesi of Akzo Nobel Inc. TEI's detailed comments on the services regulations will be reprinted In the January-February 2007 issue.

On behalf of Tax Executives Institute, I am writing to recommend that the effective date of the revised section 482 regulations, relating to the treatment of services and the allocation of income and deductions from intangibles, be delayed from January 1, 2007, to at least January 1, 2008.

The revised effective date is necessary to permit taxpayers to make the necessary changes to their data collection systems and otherwise to ensure compliance with the new rules.

BACKGROUND

On July 31, 2006, the Internal Revenue Service and the U.S. Department of Treasury issued temporary and proposed regulations that provide guidance on the treatment of controlled services transactions and the allocation of income from intangibles. The regulations significantly revise the proposed regulations that were issued in 2003, and make material changes to the regulations now in effect, which were issued in 1968.

For example, under the new rules, certain services that are either specified in a revenue procedure or are low-margin services with an arm's-length mark-up of 7 percent or less may qualify for pricing under the Service Cost Method (SCM) and may be charged out with no mark-up. In addition, the proposed regulations adopt a direct benefit test that will require taxpayers to determine at the inception of any service-offering component the precise identity of the affiliates that will consume that component. As promulgated, the revised section 482 services regulations would generally be effective for taxable years beginning after December 31, 2006.

DISCUSSION

TEI commends the Treasury Department and IRS for responding to taxpayers' concerns about the 2003 proposed regulations by making the revised rules less burdensome. The Institute is preparing comments on the revised rules, but wanted to voice our concerns about the effective date of the regulations immediately.

Specifically, we believe the January 1, 2007, effective date is impractical because it will take many taxpayers longer than that to implement the regulations and to make the necessary modifications to their data processing systems to capture the...