At your service--TEI testifies on section 482 services regulations: comments on PA bulletins and MTC's tax shelter report letter; testifies before IRS oversight board and Ontario Legislative Committee.

• Position: Recent Activities

Despite the cold grip of winter, Tax Executives Institute has been a hotbed of activity. During the last two months, TEI responded to proposed regulations issued vby the U.S. Treasury Department, draft bulletins at the state level, and provincial intentions in Canada. Recommending improvements in tax administration to the Multistate Tax Commission and the IRS Oversight Board rounded out the Institute's technical activities.

Proposed Section 482 Services Regulations

Proposed regulations issued in September--relating to the treatment of controlled services transactions and the allocation of income from intangibles--represent the government's first attempt to revamp the section 482 services regulations since the 1960s. Much has changed in the world of cross-border transactions since then, and in comments filed in December, TEI commended the Treasury Department and IRS for attempting to bring the rules more in line with today's global economy and OECD guidelines. TEI raised concerns, however, about several aspects of the proposed regulations, particularly the elimination of the cost safe harbor and its replacement with the simplified cost-based method (SCBM).

In January, TEI President Ray Rossi testified at an IRS hearing on the new rules. Mr. Rossi focused on three issues: the desirability of retaining a cost-based sale harbor, the administrative difficulties of applying the proposed SCBM method, and the need for examples to reflect the application of the statute of limitations.

TEI's President urged the Treasury and IRS representatives to retain the cost safe harbor, pointing out that "the safe harbor provides a simple and reliable pricing method for dealing with intercompany services that cannot be considered integral to the business or business activity of either the service provider or recipient." Mr. Rossi explained one reason the safe harbor is helpful is that, in the case of non-integral services, neither the service provider nor recipient is normally in a good position to develop comparable uncontrolled transaction data.

Back-office services are by definition routine, low-margin services for which charging cost is reasonable and appropriate, he said. And while the proposed regulations assume that back-office services are performed in the United States, if taxpayers may no longer charge out these services at cost, an incentive is created to consolidate the services elsewhere. "For these reasons, the cost safe harbor should be retained, at least with respect to certain enumerated services," Mr. Rossi concluded.

Mr. Rossi described the SCBM method as far from simple to apply because it effectively requires taxpayers to perform a full transfer pricing analysis for low-margin services and misapprehends the nature of service activities between controlled entities. Other concerns identified included running afoul of other jurisdictions that require charging for such services at cost, engendering inconsistency with the OECD guidelines, and causing an increase in competent authority cases. Mr. Rossi summed up by saying that "SCBM will increase the administrative and compliance burdens of taxpayers that adopt it--exactly the opposite of what a safe...