Simplified-Cost Based Method Elminated
New regulations replace it with "Services Cost Method"
On August 1, the IRS issued final and temporary transfer pricing services regulations. These new regulations make significant changes to the proposed regulations issued in 2003, including the elimination of the heavily crtiticized Simplified-Cost Based Method, which has been replaced in the new regulations by the Services Cost Method. According to the Treasury Department, the Services Cost Method 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 gross services margin method: