Cost of Services Plus Method
When the same services are being offered to related and to unrelated parties, the value of those services is the price paid by unrelated parties.
The Cost of Services Plus Method, introduced in the August 1, 2006 , is useful when one entity provides essentially the same services to unrelated parties as it does to related ones. In such cases, the price charged to unrelated parties for those services can be used to value the same services when they are provided to related parties.final and temporary transfer pricing services regulations
Here is the official definition from Section 1.482-9T(e) of the regulations:
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(e) Cost of services plus method--(1) In general. The cost of services plus method evaluates whether the amount charged in a controlled services transaction is arm's length by reference to the gross services profit markup realized in comparable uncontrolled transactions. The cost of services plus method is ordinarily used in cases where the controlled service renderer provides the same or similar services to both controlled and uncontrolled parties. This method is ordinarily not used in cases where the controlled services transaction involves a contingent-payment arrangement, as described in paragraph (i)(2) of this section.
(2) Determination of arm's length price--(i) In general. The cost of services plus method measures an arm's length price by adding the appropriate gross services profit to the controlled taxpayer's comparable transactional costs.
(ii) Appropriate gross services profit. The appropriate gross services profit is computed by multiplying the controlled taxpayer's comparable transactional costs by the gross services profit markup, expressed as a percentage of the comparable transactional costs earned in comparable uncontrolled transactions.
(iii) Comparable transactional costs. Comparable transactional costs consist of the costs of providing the services under review that are taken into account as the basis for determining the gross services profit markup in comparable uncontrolled transactions. Depending on the facts and circumstances, such costs typically include all compensation attributable to employees directly involved in the performance of such services, materials and supplies consumed or made available in rendering such services, and may include as well other costs of rendering the services. Comparable transactional costs must be determined on a basis that will facilitate comparison with the comparable uncontrolled transactions. For that reason, comparable transactional costs may not necessarily equal total services costs, as defined in paragraph (j) of this section, and in appropriate cases may be a subset of total services costs. Generally accepted accounting principles or Federal income tax accounting rules (where Federal income tax data for comparable transactions or business activities are available) may provide useful guidance but will not conclusively establish the appropriate comparable transactional costs for purposes of this method.
(iv) Arm's length range. See ยง1.482-(e)(2) for determination of an arm's length range.
Here is a pdf of the complete .final and temporary transfer pricing services regulations
Articles that discuss use of the cost of services plus method include:
