Supplemental comments on H.R. 5270, the Foreign Income Tax Rationalization and Simplification Act of 1992.

On September 4, 1992, Tax Executives Institute filed the following supplemental comments on H.R. 5270, the Foreign Income Tax Rationaization and Simplification Act of 1992. The comments follow up on TEI's testimony on the bill at a July 22 public hearing of the House Committee on Ways and Means, which is reprinted elsewhere in this issue. The Institute's follow-up comments were prepared under the aegis of its International Tax Committee, whose chair is Lisa Norton of the Ingersoll-Rand Company.

This letter responds to certain questions raised during the Institute's July 22 testimony before the House Ways and Means Committee on H.R. 5270, the Foreign Income Tax Rationalization and Simplification Act of 1992. During the hearing, Congressman Pickle asked for comments on the scope and function of section 482 of the Internal Revenue Code.

1. The Scope of Section 482. At the hearing Congressman Pickle questioned the feasibility of applying section 482 on other than a case-by-case basis. As you know, section 482 of the Code invests the Secretary of the Treasury with the discretion to distribute, apportion, or allocate gross income, deductions, credits, or allowances among two or more related entities if it is necessary to prevent the evasion of taxes or clearly to reflect income of any of the entities. Although the statute itself does not establish an arm's-length standard, current Treasury Regulations provide that "[t]he standard to be applied in every case is that of an uncontrolled taxpayer dealing at arm's length with another uncontrolled taxpayer." Treas. Reg. [section] 1.482-1(b)(1).(1)

   Although section 482 applies to both domestic and foreign-owned corporations, it has its greatest application in the examination of transfer prices between domestic and foreign related parties. The statute is results-oriented: if a taxpayer can demonstrate that its transfer prices are reasonable, then those prices are not subject to re-allocation under section 482. Section 482 mandates adjustments only where the taxpayer's method produces an unreasonable result. The arm's-length standard reflects the fact that the reasonableness of intercompany pricing can be determined accurately only by taking into account facts and circumstances surrounding specific transactions.

2. Section 482 as an International Standard. At the hearing, Congressman Pickle asked whether viable alternatives are available that would permit the United States to abandon the arm's-length...