New 482 services regulations reflect TEI comments.
Originally released in proposed form in September 2003, the new rules represent the first revision of the services regulations since the 1960s. The July 31, 2006, temporary and proposed regulations significantly change the 2003 regulations, which had eliminated the cost safe harbor and replaced it with the simplified cost-based method (SCBM) for valuing intercompany transfers of services. TEI filed comments on the proposed regulations in December 2003 and July 2004 and testified at the January 2004 hearing. The written comments are reprinted in the January-February and July-August 2004 issues of The Tax Executive.
In response to extensive criticism by TEI and others about the complexity and burden of the SCBM method, the IRS and Treasury Department abandoned that method in favor of a simpler services cost method (SCM). "We commend the government for listening to taxpayers' concerns about the SCBM method," Mr. Bernard stated, "especially for recognizing in the new rules that many back-office services should be charged out only at cost." He continued, "I also commend the members of TEI's International Tax Committee who participated in the Institute's working group on the proposed regulations. The positive changes in the rules underscore the benefit of getting involved."
Mr. Bernard also noted the simultaneous release of Announcement 2006-50, a proposed revenue procedure that details specific services--including accounting, public relations, treasury, training, database administration, and legal--that qualify for a cost-only safe harbor for "specified covered services." TEI urged the adoption of such a list in follow-up comments filed in July 2004, he noted, adding "we welcome this common-sense approach."
A modified quantitative approach is available under the new regulations for certain low-margin services for which the median comparable arm's-length mark-up is seven percent or less. Under Prop. Reg. [section] 1.482-9(b)(2), these services will qualify for SCM if the taxpayer reasonably concludes in its business judgment that the services do not contribute significantly to key competitive advantages, core capabilities, or fundamental chances of success or failure in one or more trades or businesses of the renderer, the recipient, or both. The preamble to the regulations explains that unlike the quantitative judgment called for under SCBM, "this is a business judgment preeminently within the business person's own expertise. Exact precision is not needed and it is expected that the taxpayer's judgment will be accepted in most cases." In addition, the SCM may be used for services provided through a shared service arrangement.
"TEI will study this cost-only approach more carefully," Mr. Bernard stated, "but the reliance on the taxpayer's own business judgment is a positive step." He promised a particularly close look at the documentation requirement for using SCM.
The new regulations also provide guidance on the ownership of intangibles, modify the profit split method, and clarify that financial guarantees provided by related parties are not services transactions. Proposed regulations were also released under section 861 of the Code, narrowing the definition of stewardship expenses.
The temporary regulations are effective for tax years beginning after December 31, 2006, but taxpayers may elect to apply the new rules in their entirety for tax years beginning after September 10, 2003.
Mr. Bernard noted that TEI's International Tax Committee is already reviewing the temporary regulations, adding that the Institute may submit additional comments on the rules. He invited TEI members to participate in preparing comments on the new regulations. "We can always use more help in understanding the real-world consequences of these changes." Interested members should contact firstname.lastname@example.org.
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|Title Annotation:||Tax Executives Institute|
|Date:||Jul 1, 2006|
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