Testimony on revised section 482 services regulations.

On October 27, 2006, JANICE L. LUCCHESI, Vice President of Tax for Akzo Nobel Inc., testified at an IRS hearing on behalf of TEI on The Proposed Regulations Relating to the Treatment of Services Under Section 482, The Allocation of Income and Deductions From Intangibles, and Stewardship Expense. TEI's detailed comments on the services regulations will be reprinted In the January-February 2007 issue.

Good morning. I am Janice Lucchesi, Vice President of Tax for Akzo Nobel Inc. in Chicago. I am here today as the chair of Tax Executives Institute's International Tax Committee. Thank you for the opportunity to present TEI's views on the revised section 482 services regulations.

TEI commends the government for substantially redesigning the 2003 proposed regulations. Those regulations presented many challenges to taxpayers, particularly the elimination of the cost safe harbor and its replacement with the simplified cost-based method, and TEI is gratified that the government responded to TEI's--and other groups'--concerns by, among other things, replacing the SCBM method with a services cost method under which covered services may be charged out at cost and proposing a revenue procedure detailing "specified covered services" eligible for the SCM.

First, I want to focus on the business judgment rule.

Under the revised regulations, two categories of covered services--"specified covered services" and "low margin covered services"--qualify for being billed at cost under SCM. (1) Specified covered services are those listed in a revenue procedure to be issued from time to time; low margin covered services are those for which the median comparable mark-up does not exceed seven percent. In addition, SCM may not apply to a specific list of excluded services. (2)

The regulations impose a restriction on the use of the SCM by requiring the taxpayer to "reasonably conclude in its business judgment that the covered services do not contribute significantly to key competitive advantages, core capabilities, or fundamental risks of success or failure in one or more trades or businesses of the renderer, the recipient, or both. In evaluating the reasonableness of the conclusion required by section (b)(2) consideration will be given to all the facts and circumstances." (3)

TEI recommends that this subjective "business judgment" qualifier on the use of the SCM be replaced with one that considers whether the taxpayer is in the business of providing the service. If so...