IRS Issues Final and Temporary Regulations for Valuing Services
New regulations offer options for valuing services and intangible property
On August 1, the IRS issued final and temporary transfer pricing services regulations. These new regulations offer new methods for valuing services between related parties. According the the Treasury Department, the main features of these regulations include:
- Reducing administrative and compliance burdens for low-margin services;
- Ensuring that valuable intangibles cannot be transferred outside the United States for less than arm's length consideration;
- Achieving consistency between the transfer pricing methods for services and the transfer pricing methods allowed for transfers of tangible and intangible property and with international standards; and
- Coordinating the rules applicable to services related to intangibles with the transfer pricing rules applicable to transfers of intangible property.
The Treasury Department also noted that the 2006 regulations included a number of changes intended to address concerns about the proposed version issued in 2003, including the relacement of the proposed "Simplified-Cost Based Method" with the Services Cost Method, which is intended to reduced complexity for valuing low-margin services. The Services Cost Method includes a safe-harbor rule for reducing services transaction valuations by amounts paid for support services that was not available in the Simplified-Cost Based Method, which was roundly crticized and being too complicated by tax practitioners.
Oher changes from the 2003 proposed regulations include the narrowing of the "shareholder stweardship activies" definition, the incusion of st0ck-based compensation in the calculation of costs charged to affliliates, and the addition of a section on "Shared Services Arrangemetns" bewteen related parties.
Here is a pdf of the entire final and temporary transfer pricing services regulations section, as issued on August 1, 2006.
Here are some articles that discuss the new services regulations: