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Proposed 482 regs rely on economic data.

In January, the IRS issued proposed regulations under tax code section 482 that rely heavily on economic data to justify transfer pricing between U.S. and foreign related parties. Most significantly, the new rules replace current regulations that apply to intangible property and substantially modify rules relating to sales of tangible property. Rules on cost-sharing also are provided.

Although the terminology is different, the new rules continue the current regulations' arm's-length standard. However, the methodology for determining an arm's-length price varies greatly. A priority of methods is described for intangible property. The highest priority is given to exact comparables, the so-called matching transaction method (MTM). Moreover, periodic adjustments over time are required (with very limited exceptions) to reflect the commensurate-with-income standard, regardless of the method used.

The new rule's most significant aspect is the comparable profit interval. It is designed to identify profit levels of uncontrolled foreign corporations and apply those levels to similarly situated controlled foreign corporations (that is, corporations controlled by the parents in the United States, however, control is exercised).

Profit-level indicators that provide a reliable basis for comparing profits include rates of return on assets, ratios of operating income to sales and ratios of gross income to operating expenses. As a practical matter, the MTM method rarely will apply, requiring testing under the comparable profit interval in most cases.

Observation: Overall, the proposed regulations add considerable complexity and will make transfer pricing a full-time activity for U.S. multinational companies.
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Title Annotation:transfer pricing
Publication:Journal of Accountancy
Article Type:Brief Article
Date:Apr 1, 1992
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