38830 Federal Register / Vol. 74, No. 148 / Tuesday, August 4, 2009 / Rules and Regulations 

DEPARTMENT OF THE TREASURY 

Internal Revenue Service 

26 CFR Parts 1 and 31, and 602 

[TD 9456] 

RIN 1545–BI78, 1545–BI79, 1545–BI80 

Treatment of Services Under Section 

482; Allocation of Income and 

Deductions From Intangible Property; 

Stewardship Expense 

AGENCY: Internal Revenue Service (IRS), 

Treasury. 

ACTION: Final regulations and removal of 

temporary regulations. 

SUMMARY: This document contains final 

regulations that provide guidance 

regarding the treatment of controlled 

services transactions under section 482 

and the allocation of income from 

intangible property, in particular with 

respect to contributions by a controlled 

party to the value of intangible property 

owned by another controlled party. This 

document also contains final regulations 

that modify the regulations under 

section 861 concerning stewardship 

expenses to be consistent with the 

changes made to the regulations under 

section 482. These final regulations 

potentially affect controlled taxpayers 

within the meaning of section 482. They 

provide updated guidance necessary to 

reflect economic and legal 

developments since the issuance of the 

current guidance. 

DATES: Effective Date: These regulations 

are effective on July 31, 2009. 

Applicability Dates: These regulations 

apply to taxable years beginning after 

July 31, 2009. 

FOR FURTHER INFORMATION CONTACT: 

Carol B. Tan or Gregory A. Spring, (202) 

435–5265 for matters relating to section 

482, or Richard L. Chewning (202) 622– 

3850 for matters relating to stewardship 

expenses (not toll-free numbers). 

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act 

The collection of information 

contained in these final regulations has 

been reviewed and approved by the 

Office of Management and Budget in 

accordance with the Paperwork 

Reduction Act of 1995 (44 U.S.C. 

3507(d)) under control number 1545– 

2149. The collection of information in 

these final regulations is in § 1.482–9. 

This information is required to enable 

the IRS to verify that a taxpayer is 

reporting the correct amount of taxable 

income. An agency may not conduct or 

sponsor, and a person is not required to 

respond to, a collection of information 

unless it displays a valid control 

number. 

Books and records relating to a 

collection of information must be 

retained as long as their contents might 

become material in the administration 

of any internal revenue law. Generally, 

tax returns and tax return information 

are confidential, as required by 26 

U.S.C. 6103. 

Background 

Section 482 of the Internal Revenue 

Code generally provides that the 

Secretary may allocate gross income, 

deductions, and credits between or 

among two or more organizations, trades 

or businesses owned or controlled by 

the same interests in order to prevent 

evasion of taxes or clearly to reflect 

income of a controlled taxpayer. 

Regulations under section 482 

published in the Federal Register (33 

FR 5849) on April 16, 1968, provided 

guidance with respect to a wide range 

of controlled transactions, including 

transfers of tangible and intangible 

property and the provision of services. 

Revised and updated transfer pricing 

regulations were published in the 

Federal Register (59 FR 34971, 60 FR 

65553, 61 FR 21955, and 68 FR 51171) 

on July 8, 1994, December 20, 1995, 

May 13, 1996, and August 26, 2003. 

While comprehensive in other respects, 

these regulations did not modify 

substantively the rules dealing with 

controlled services transactions. On 

September 10, 2003, proposed 

regulations relating to the treatment of 

controlled services transactions and the 

allocation of income from intangible 

property, in particular with respect to 

contributions by a controlled party to 

the value of intangible property owned 

by another controlled party (the 2003 

proposed regulations), were published 

in the Federal Register (68 FR 53448, 

REG–146893–02 and REG–115037–00). 

On August 4, 2006, temporary 

regulations relating to the treatment of 

controlled services transactions, the 

allocation of income from intangible 

property, and stewardship expenses (the 

2006 temporary regulations) were 

published in the Federal Register (71 

FR 44466, TD 9278, REG–146893–02, 

REG–115037–00, and REG–138603–03). 

A notice of proposed rulemaking crossreferencing the temporary regulations 

was published in the Federal Register 

on the same day (71 FR 44247, REG– 

146893–02, REG–115037–00, and REG– 

138603–03). Written comments 

responding to the notice of proposed 

rulemaking were received, and a public 

hearing was held on October 27, 2006. 

The 2006 temporary regulations are 

generally effective with respect to 

taxable years beginning after December 

31, 2006, and Notice 2007–5, 2007–1 

C.B. 269, published on January 16, 2007, 

partially modified the effective date of 

the 2006 temporary regulations as it 

pertained to the identification of 

controlled services transactions eligible 

to be priced at cost. Accordingly, the 

2006 temporary regulations related to 

the new services cost method in 

§ 1.482–9T(b) (described in Section A.1 

in this preamble) apply to taxable years 

after December 31, 2007, with the 

exception of the business judgment rule 

described in § 1.482–9T(b)(2), which 

had the same effective date (taxable 

years after December 31, 2006) as the 

other provisions of the temporary 

regulations. 

By issuing the 2006 temporary 

regulations in temporary and proposed 

form, the Treasury Department and the 

IRS provided taxpayers an opportunity 

to submit additional comments prior to 

the time these regulations became 

effective. See § 601.601(d)(2)(ii)(b). After 

consideration of all the comments, the 

proposed regulations under section 482 

are adopted as revised by this Treasury 

decision, and the corresponding 

temporary regulations are removed. 

Explanation of Revisions and Summary 

of Comments 

Introduction 

The Treasury Department and the IRS 

received a number of comments on the 

2006 temporary regulations from 

taxpayers, their representatives, as well 

as industry and professional groups. 

Commentators generally approved of the 

2006 temporary regulations and found 

the changes from the 2003 proposed 

regulations to be useful. Specifically, 

commentators approved of the 

replacement of the simplified cost-based 

method with the services cost method 

(SCM) and the inclusion of the shared 

services arrangement provision in the 

SCM rules. Commentators also generally 

approved of changes made to the profit 

split method. However, commentators 

did express concerns with some aspects 

of the 2006 temporary regulations. 

While these final regulations reflect 

some modifications in response to 

comments received on the 2006 

temporary regulations, both the format 

and the substance of the final 

regulations are generally consistent with 

the 2006 temporary regulations. The 

changes adopted are intended to make 

certain clarifications and improvements 

without fundamentally altering the 

policies reflected in the 2006 temporary 

regulations. 

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Federal Register / Vol. 74, No. 148 / Tuesday, August 4, 2009 / Rules and Regulations 38831 

Explanation of Provisions 

A. Controlled Services 

1. Services Cost Method—Treas. Reg. 

§ 1.482–9(b) 

a. Applicability of the Services Cost 

Method 

Most comments focused on the SCM. 

Several commentators requested 

confirmation that application of the 

SCM is a matter within the control of 

the taxpayer, provided that the 

underlying services otherwise qualify 

for the SCM. Some commentators stated 

that the 2006 temporary regulations 

could be interpreted as requiring a 

taxpayer to apply the SCM if all the 

conditions for that method were 

satisfied. 

Notice 2007–5 confirmed that 

taxpayers control whether the SCM 

applies. The final regulations make this 

clear. Section 1.482–9(b)(1) provides 

that, if a taxpayer applies the SCM in 

accordance with the rules of § 1.482– 

9(b), which requires that a statement 

evidencing the taxpayer’s intent to 

apply the SCM be contained in the 

taxpayer’s books and records, then the 

SCM will be considered the best method 

for purposes of § 1.482–1(c). 

b. Specified Covered Services 

Several commentators contended that 

the proposed list of specified covered 

services in Announcement 2006–50, 

2006–2 C.B. 321, is too narrow. One 

commentator listed tax planning and 

public relations activities as examples of 

activities not on the list that illustrated 

the narrowness of the list. Some 

commentators suggested that the list 

should refer to departments, cost 

centers, or accounting classifications, 

rather than to specific activities or 

groups of activities. One commentator 

suggested that all activities in particular 

departments should be identified as 

eligible for the SCM. Commentators also 

stated that a comprehensive analysis 

would be required and that it would be 

too burdensome to track employee time 

for activities that are specified covered 

services vs. non-specified covered 

services. See § 601.601(d)(2)(ii)(b). The 

Treasury Department and the IRS also 

received suggestions to broaden the 

general administrative provision and 

add additional specific activities to the 

list of specified covered services, 

including warehousing and distribution, 

quality control and quality assurance 

relating to manufacturing and 

construction, and environmental 

remediation. 

The SCM is intended to provide a 

practical and administrable means of 

identifying low-margin services that 

may be evaluated by reference to total 

services cost without a markup. The list 

of services eligible to be priced at cost 

in the specified covered services portion 

of the SCM was added specifically in 

response to requests from commentators 

that the former simplified cost-based 

method be eliminated and replaced with 

just such a list of eligible services. In 

response to public comments, the 

Treasury Department and the IRS 

published Rev. Proc. 2007–13, 2007–1 

C.B. 295, which added several 

categories as well as activities within 

existing categories. In particular, public 

relations and tax planning services were 

added to the list, and the individual 

categories of specified covered services 

were expanded to include ‘‘other similar 

activities.’’ 

After careful consideration, the 

Treasury Department and the IRS 

believe that Rev. Proc. 2007–13 strikes 

the appropriate balance between 

broadening the list to include services 

similar to the specific services described 

and expanding the categories of 

services. The Treasury Department and 

the IRS do not believe that other 

additional services suggested by 

commentators were appropriate, but 

will continue to consider other 

recommendations for additional 

services to be added to the list in the 

future. 

One commentator expressed concern 

that a review of services to determine if 

they qualify as specified covered 

services may require a more extensive 

analysis than under previous 

regulations, including interviews of 

individual employees or of small groups 

of employees. Although the covered 

services list is not applied on a 

departmental basis, a reasonable 

aggregation of similar services may be 

appropriate for performing the specified 

covered services analysis in some cases. 

To determine if the services cost method 

should apply to a particular service (or 

group of services) performed by a group 

of employees, the aggregation principle 

of Treas. Reg. § 1.482–1(f)(2)(i)(A) 

should be followed as appropriate. In 

certain cases, aggregation may assure a 

more accurate result, especially if it 

recognizes synergies that an individual 

employee analysis might ignore. An 

aggregation of employee services may, 

thus, efficiently evaluate the work of 

employees engaged in a common 

function, as well as recognize the added 

value that their collaborative effort 

might produce. Conversely, analysis on 

an aggregate basis does not permit 

characterization of an individual service 

as a specified covered service if it, in 

fact, is not a specified covered service. 

c. Low Margin Covered Services 

Commentators provided comments on 

low margin covered services described 

in § 1.482–9T(b)(4)(ii) of the 2006 

temporary regulations. One 

commentator believed that the 7 percent 

limit is too high for the SCM. In the 

commentator’s view, the limit should be 

lower because the 7 percent figure will 

cover activities that are risky. Most of 

the commentators, however, believed 

that the 7 percent limit is an appropriate 

measure. The Treasury Department and 

the IRS continue to believe that the 7 

percent limit is appropriate in light of 

its purpose. That is, it minimizes the 

compliance burden on taxpayers and 

the IRS for relatively low-margin 

services. 

Several commentators requested more 

guidance on low margin covered 

services. One commentator suggested 

that the Treasury Department and the 

IRS develop an analysis to determine if 

certain services have a markup of 7 

percent or less and publish the results. 

For example, the IRS could develop a 

set of comparables for various groups of 

low margin services, such as human 

resources, accounting and finance, 

information services, and training. Some 

commentators requested guidance on 

when and how often a transfer pricing 

study is needed to support a 

determination that services are low 

margin covered services. In this regard, 

some commentators requested that the 

regulations specify a period of years 

(such as three years) for which a transfer 

pricing study may be valid for purposes 

of determining if a service is a low 

margin covered service. In support of 

this request, one commentator stated 

that the regulations could provide, for 

example, that the reliance period could 

apply to taxpayers whose facts and 

circumstances have not changed 

materially from the time the service was 

most recently established as a covered 

service. 

The Treasury Department and IRS did 

not adopt this proposal. Because there 

may be significant differences among 

services across different businesses, a 

standardized, IRS-developed 

comparables set would not be feasible 

and would conflict with the fact 

intensive nature of an appropriately 

robust transfer pricing analysis. For 

similar reasons, the Treasury 

Department and the IRS did not adopt 

the proposal to specify the frequency or 

timing of transfer pricing analyses to 

support taxpayer positions. To do so 

would be inconsistent with a proper 

comparability analysis, including 

consideration of the time at which 

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transactions were undertaken, as well as 

other relevant economic circumstances. 

One other commentator requested that 

the midpoint should be used in 

measuring a comparable markup on 

total services costs for purposes of low 

margin covered services. While it may 

be true that, in some cases, the midpoint 

could be used depending on the 

statistical method used, the interquartile 

range ordinarily provides an acceptable 

measure of an arm’s length range. See 

§ 1.482–1(e)(2)(iii)(B). Therefore, the 

Treasury Department and the IRS 

believe that the interquartile range of 

the comparable median markup is an 

appropriate measure. 

d. Excluded Activities 

One commentator requested that 

engineering be removed from the list of 

services that are ineligible for the SCM 

in § 1.482–9T(b)(3) of the 2006 

temporary regulations. This comment 

was not adopted, since, in the view of 

the Treasury Department and the IRS, 

intragroup engineering services 

generally should be subject to a robust 

transfer pricing analysis. 

e. Business Judgment Rule 

Several commentators expressed 

concern over how the business 

judgment rule would be administered. 

Some commentators requested that 

statements in the preamble about the 

business judgment rule in the 2006 

temporary regulations be incorporated 

in final regulations. Other commentators 

suggested that the business judgment 

rule should be applied by reference to 

one or more trades or business of the 

controlled group rather than of the 

renderer, recipient, or both. These 

commentators claimed that the business 

judgment rule may yield incorrect 

results in some cases, for example, 

where a headquarters services company 

or other legal entity is established solely 

to provide centralized support services. 

The activities performed by such an 

entity would potentially be ineligible for 

the SCM under the business judgment 

rule because they would constitute the 

entity’s core capability. 

The Treasury Department and the IRS 

agree that the business judgment rule 

should be determined on a controlled 

group basis and expressed this view in 

Notice 2007–5. The final regulations 

clarify that the business judgment rule 

is determined by reference to a trade or 

business of the controlled group. 

Section 3.04 of Notice 2007–5 

clarified that the business judgment rule 

‘‘is satisfied by a reasonable exercise of 

the taxpayer’s business judgment, not a 

reasonable exercise of the IRS’s 

judgment in examining the taxpayer.’’ 

The Treasury Department and the IRS 

reiterate that the final regulations 

incorporate a high threshold for 

application of the business judgment 

rule to exclude services otherwise 

eligible for the SCM. Section 1.482– 

9(b)(5) provides that the rule is based on 

a taxpayer’s reasonable conclusion in its 

business judgment that the rule is 

satisfied. It has come to the attention of 

the Treasury Department and the IRS 

that the clarification in the notice of the 

business judgment rule has been 

misconstrued as creating a nonrebuttable presumption that a taxpayer’s 

determination under the business 

judgment rule is always correct. This 

construction of the clarification was not 

intended and is not supported by the 

plain language of the business judgment 

rule. The business judgment rule 

requires a reasonable conclusion by the 

taxpayer. Thus, the taxpayer’s business 

judgment is only the starting point of 

the analysis, and the taxpayer must 

make a reasonable conclusion in that 

regard. Whether the taxpayer’s 

conclusion is reasonable may be subject 

to examination by the IRS in the course 

of an audit. 

One commentator suggested that the 

regulations adopt a ‘‘principal activity’’ 

test similar to the test described in the 

Organisation for Economic Cooperation 

and Development Transfer Pricing 

Guidelines for Multinational Enterprises 

and Tax Administrations (OECD 

Guidelines) in place of the business 

judgment rule. The Treasury 

Department and the IRS decline to 

adopt this suggestion. Another 

commentator pointed out that the 

examples illustrating the business 

judgment rule more accurately describe 

a high value service or intangible 

property, rather than a covered service. 

The Treasury Department and the IRS 

agree that some of the examples in the 

temporary regulations could be read as 

describing transfers of intangible 

property rather than provisions of 

services involving the intangible 

property. Some examples have been 

edited to improve clarity, including to 

ensure that they cannot be read as 

describing transfers of intangible 

property. 

Commentators also raised questions 

concerning how to evidence the 

necessary business judgment; for 

example, whether an executive’s 

representation must be preferred to the 

tax director’s. The business judgment 

rule is applied on a case-by-case basis 

and takes into account the taxpayer’s 

facts and circumstances. 

One other commentator requested that 

the business judgment rule take into 

account whether a particular activity, 

such as that of a corporate tax 

department, contributes to the operating 

profit (as defined in § 1.482–5(d)(3)) of 

one or more controlled parties. Notice 

2007–5 provided several clarifications 

to the business judgment rule, including 

a clarification that the business 

judgment rule should take into account 

whether a particular activity contributes 

to the operating profit of one or more 

controlled parties. After further 

consideration, the Treasury Department 

and the IRS decided not to add an 

operating profit consideration to the 

business judgment rule because the 

operating profit concept is broader than 

the intended rule and because it would 

implicitly require taxpayers to do the 

type of economic analysis (and create 

the attendant administrative burden for 

taxpayers) that the business judgment 

rule is intended to eliminate. 

The Treasury Department and the IRS 

continue to believe, however, that the 

conclusion in Notice 2007–5 is correct— 

that activities such as back office tax 

services should not fail the business 

judgment rule because they may affect 

net income by reducing domestic or 

foreign income taxes. Depending on the 

facts and circumstances, tax services 

may or may not satisfy the business 

judgment rule. 

f. Reorganization of the SCM 

Section 1.482–9T(b) of the 2006 

temporary regulations contains several 

requirements, all of which have to be 

satisfied in order for the SCM to be 

applicable. In other words, the 

requirements under § 1.482–9T(b) are 

conjunctive; failure to satisfy one of the 

requirements renders a service ineligible 

for SCM treatment regardless of whether 

any of the other requirements is 

satisfied. The Treasury Department and 

the IRS are aware that the rules under 

§ 1.482–9T(b) have been misinterpreted 

as disjunctive such that satisfaction of 

only one of the requirements renders a 

service eligible for the SCM. This view 

is unsupported by the plain language of 

§ 1.482–9T(b). To improve clarity, the 

requirements for the SCM are 

reorganized in the final regulations. 

Section § 1.482–9(b)(2) lists the 

conditions necessary for a service to be 

eligible for the SCM and provides a 

cross-reference to the paragraph in 

§ 1.482–9(b) that corresponds to each 

condition. In summary, to be eligible for 

the SCM, a service must be a covered 

service, the service cannot be an 

excluded activity, the service cannot be 

precluded from constituting a covered 

service by reason of the business 

judgment rule, and adequate books and 

records must be maintained with 

respect to the service. The 

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reorganization does not substantively 

change the SCM rules. 

Modifications have also been made to 

the list of excluded activities to 

harmonize it with Rev. Proc. 2007–13. 

In particular, instead of referring to 

‘‘excluded transactions,’’ the regulations 

now refer to ‘‘excluded activities.’’ 

g. Shared Services Arrangements 

In general, commentators supported 

the shared services arrangement (SSA) 

provision in the 2006 temporary 

regulations as a useful mechanism for 

allocation of costs from shared or 

centralized services. Commentators 

called into question, however, the 

restriction of SSAs to covered services 

priced under the SCM. In response, 

Notice 2007–5 provided that a SSA may 

be used for controlled services 

transactions outside of the SCM context. 

Specifically, Notice 2007–5 states: ‘‘This 

Notice confirms that taxpayers may also 

make allocations of arm’s length charges 

for services ineligible for the SCM that 

yield a benefit to multiple members of 

a controlled group. In such a case, 

however, the flexible rules under the 

SCM for establishing the joint benefits 

and selecting the allocation key are 

inapplicable. Instead, the more robust 

analysis under the general transfer 

pricing rules applies for purposes of 

determining the appropriate arm’s 

length charges, benefits, allocation keys, 

etc.’’ The Treasury Department and the 

IRS considered providing additional 

SSA rules to services priced under 

methods other than the SCM, but 

concluded that such rules would be 

unnecessary. In any event, as stated in 

Notice 2007–5, the flexible SSA rules 

for establishing the joint benefits and 

selecting the allocation key are 

inapplicable in the non-SCM context. 

Other commentators requested that a 

SSA should be respected even if a party 

that reasonably anticipates a benefit 

makes a payment equivalent to its share 

under an SSA to the service provider 

pursuant to a different arrangement. For 

example, assume that a controlled 

service provider performs services to ten 

taxpayers that are members of its 

controlled group. Assume further that 

nine of the service recipients agree in a 

single written contract to allocate the 

arm’s length charge based on a 

reasonable allocation basis, but the 

tenth service recipient pays for its share 

of the services pursuant to a separate 

agreement. These comments were not 

adopted because whether an agreement 

constitutes a SSA requires a case-bycase determination based on the facts 

and circumstances. 

Some commentators observed that the 

SSA rules require the allocation of costs 

on the basis that ‘‘most reliably reflects’’ 

the participants’ respective shares of 

reasonably anticipated benefits, but 

some of the examples use the phrase 

‘‘precisely known.’’ This led the 

commentators to question whether the 

SSA rules create an unattainable 

standard or, at least, a higher standard 

than the reasonable standard for 

allocation of costs described in Treas. 

Reg. § 1.482–9T(k) and to suggest a 

change to the examples. The examples 

do not create a standard based on 

precisely known shares of reasonably 

anticipated benefits. Rather, the 

examples use hypothetical, precisely 

known reasonably anticipated benefits 

as a measuring stick to provide an easily 

understood comparative analysis of 

potential allocation keys for illustrative 

purposes. The suggested changes are not 

adopted. 

2. Comparable Uncontrolled Services 

Price Method—Treas. Reg. § 1.482–9(c) 

The comparable uncontrolled services 

price (CUSP) method evaluates whether 

the consideration in a controlled 

services transaction is arm’s length by 

comparison to the price charged in a 

comparable uncontrolled services 

transaction. This method is closely 

analogous to the comparable 

uncontrolled price (CUP) method in 

§ 1.482–3(b). 

One commentator objected to the 

statement in the second sentence of 

§ 1.482–9T(c)(1) of the 2006 temporary 

regulations that, to be evaluated under 

the CUSP method, a controlled service 

ordinarily must be ‘‘identical to or have 

a high degree of similarity’’ to the 

uncontrolled comparable transactions. 

The commentator claimed that such 

language creates a higher standard for 

determining the best method than in the 

rest of the section 482 regulations. For 

example, both § 1.482–1(c)(1) and 

§ 1.482–9T(c)(2)(i) refer to the ‘‘most 

reliable measure of an arm’s length 

result’’ standard. The sentence in 

question was intended merely as a guide 

to when the CUSP method is applicable. 

It was not intended to change the 

standard under the best method rule. To 

avoid further confusion, the sentence is 

removed, but without effecting a 

substantive change. 

The CUSP method in these final 

regulations is substantially similar to 

the corresponding method in the 2006 

temporary regulations. 

3. Cost of Services Plus Method—Treas. 

Reg. § 1.482–9(e) 

The cost of services plus method is 

generally analogous to the cost plus 

method for transfers of tangible property 

in existing § 1.482–3(d). 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. Section 

1.482–9T(e)(3)(ii)(A) provides that, if 

the appropriate gross services profit 

markup is derived from comparable 

uncontrolled services transactions of 

other service providers, then, in 

evaluating comparability, the controlled 

taxpayer must consider the results 

under this method expressed as a 

markup on total services costs of the 

controlled taxpayer because functional 

differences may be reflected in 

differences in service costs other than 

those included in comparable 

transactional costs. 

One commentator objected to the 

required consideration of the results of 

the cost of services plus method 

expressed as a markup on total services 

costs of the controlled taxpayer when 

external comparables are utilized. In the 

commentator’s view, this rule requires a 

confirming analysis under a comparable 

profits method (CPM) and, therefore, 

places an undue burden on the 

taxpayer. The same commentator also 

expressed the concern that the rule 

would create an even greater burden by 

requiring two sets of external 

comparables for application of the two 

methods. 

These comments are not adopted for 

several reasons. First, the restatement of 

the price does not require researching 

two sets of external comparables under 

two different methods. The sole purpose 

of the calculation is to determine 

whether it is necessary to perform 

additional evaluation of functional 

comparability under the cost of services 

plus method. That is, if the price 

indicates a markup on the renderer’s 

total services cost that is either low or 

negative when restated, this may 

indicate differences in functions that 

have not been accounted for under the 

traditional comparability factors under 

the cost of services plus method. Thus, 

a low or negative markup merely 

suggests the need for additional inquiry, 

which may lead to a determination that 

the cost of services plus method is not 

the most reliable measure of an arm’s 

length result under the best method 

rule. 

The cost of services plus method is 

adopted in the final regulations without 

change. 

4. Profit Split Method—Treas. Reg. 

§§ 1.482–9(g) and 1.482–6(c)(3)(i)(B) 

The final regulations provide 

additional guidance concerning 

application of the comparable profit 

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38834 Federal Register / Vol. 74, No. 148 / Tuesday, August 4, 2009 / Rules and Regulations 

split and the residual profit split 

methods to controlled services 

transactions in § 1.482–9(g) and § 1.482– 

6(c)(3)(i)(B). Generally, the comparable 

profit split and the residual profit split 

methods evaluate whether the allocation 

of the combined operating profit or loss 

attributable to one or more controlled 

transactions is arm’s length by reference 

to the relative value of each controlled 

taxpayer’s contributions to the 

combined operating profit or loss. 

The Treasury Department and the IRS 

received several comments on the profit 

split method. One commentator 

requested that § 1.482–8T(b), Example 

12 of the 2006 temporary regulations 

explain why the profit split method is 

preferable to using the financial results 

of a set of publicly-traded companies 

engaged in selling merchandise and 

related promotion and marketing 

activities. Example 12 is revised in the 

final regulations to address this 

comment. 

Another commentator argued that the 

profit split method should not apply to 

a party that does not own valuable 

intangible property or does not use any 

such property in the related party 

transaction being evaluated. The 

commentator noted that other parts of 

the regulations, such as the CPM, CUSP 

method, and costs of services plus 

method reference valuable intangible 

property in the examples. The same 

commentator asserted that the profit 

split method should be limited to 

parties that bear substantial risk in their 

intercompany transactions. The 

Treasury Department and the IRS 

believe that limiting application of the 

profit split method to contributions of 

valuable intangible property or the 

bearing of risks would be inappropriate. 

The changes in the 2006 temporary 

regulations to routine and non-routine 

contributions is an appropriate standard 

and conformed to the changes to 

§ 1.482–6T(c)(3)(i)(B)(1), which defines 

a nonroutine contribution as ‘‘a 

contribution that is not accounted for as 

a routine contribution.’’ In other words, 

a nonroutine contribution is one for 

which the return cannot be determined 

by reference to market benchmarks. 

The 2006 temporary regulations 

provide that the residual profit split 

method ordinarily is used where 

multiple controlled taxpayers make 

significant nonroutine contributions. A 

commentator requested that this 

provision be removed because it 

suggests that the method always applies 

where there are no market benchmarks. 

The provision regarding the residual 

profit split method that the 

commentator requested be removed has 

been changed to conform to language in 

the cost sharing regulations. 

Accordingly, § 1.482–9(g)(1) provides 

that the residual profit split method may 

not be used where only one controlled 

taxpayer makes significant nonroutine 

contributions. The commentator also 

claimed that the residual profit split 

method contains an inconsistency 

because, although the method applies 

when there are no market benchmarks, 

the method includes a market 

benchmark analysis for comparability 

purposes. Compare §§ 1.482–9(g)(1) and 

1.482–6(c)(3)(i)(B)(2). The Treasury 

Department and the IRS do not consider 

that there is an inconsistency. The 

method contemplates the use of market 

benchmarks, if available, to determine 

the profit split that will be applied to 

the return to nonroutine contributions 

already determined under the method. 

The same commentator requested that 

the sentence in § 1.482–6T(c)(2)(ii)(B) of 

the 2006 temporary regulations relating 

to the comparable profit split method 

that states that ‘‘the comparable profit 

split method may not be used if the 

combined operating profit (as a 

percentage of the combined assets) of 

the uncontrolled comparables varies 

significantly from that earned by the 

controlled taxpayers’’ should be deleted. 

These comments are not adopted, since 

the stated condition is fundamental to 

comparability under the method. 

5. Contingent Payments—Treas. Reg. 

§ 1.482–9(i) 

The 2006 temporary regulations 

provide detailed guidance concerning 

contingent-payment contractual terms. 

The rules built on the principle that, in 

structuring controlled transactions, 

taxpayers are free to choose from among 

a wide range of risk allocations. The 

provision acknowledged that 

contingent-payment terms—terms 

requiring compensation to be paid only 

if specified results are obtained—may be 

particularly relevant in the context of 

controlled services transactions. 

Commentators raised several concerns 

about the substance and scope of this 

provision. One commentator said that 

the regulations do not address whether 

a taxpayer may, in the absence of a 

written agreement, present facts to 

demonstrate that a contingent payment 

arrangement best reflects the economic 

substance of the underlying 

transactions. The Treasury Department 

and the IRS do not agree that an 

arrangement may be treated as a 

contingent payment arrangement under 

§ 1.482–9(i)(2) if the arrangement does 

not satisfy the requirements of the 

contingent payment arrangement 

provision, including the written 

contract requirement. However, where 

the Commissioner exercises its authority 

pursuant to § 1.482–1(d)(3)(ii)(B) to 

impute contractual terms, the taxpayer 

may present additional facts to indicate 

if an alternative agreement best reflects 

the economic substance of the 

underlying transaction, consistent with 

the parties’ course of conduct in a 

particular case. See § 1.482– 

1(d)(3)(ii)(C), Examples 4 and 6. 

The same commentator also pointed 

out that the requirement to evaluate 

whether a specified contingency bears a 

direct relationship to the controlled 

services transaction based on all of the 

facts and circumstances should be 

combined with the specified 

contingency requirement. The Treasury 

Department and the IRS agree that the 

language in § 1.482–9(i)(2) should be 

clarified. Accordingly, the regulations 

remove the last sentence in § 1.482– 

9T(i)(2)(i)(C) of the 2006 temporary 

regulations relating to a specified 

contingency and combine it with the 

requirement under § 1.482– 

9T(i)(2)(i)(B). Thus, § 1.482–9(i)(2)(i)(B) 

now requires that the contract state that 

payment for a controlled services 

transaction is contingent (in whole or in 

part) upon the happening of a future 

benefit (within the meaning of § 1.482– 

9(l)(3)) for the recipient directly related 

to the activity or group of activities. For 

this purpose, whether the future benefit 

is directly related to the activity or 

group of activities is evaluated based on 

all the facts and circumstances. 

6. Total Services Costs—Treas. Reg. 

§ 1.482–9(j) 

In the 2006 temporary regulations, 

total services costs include all costs 

directly identified with provision of the 

controlled services, as well as all other 

costs reasonably allocable to such 

services under § 1.482–9(k). ‘‘Costs’’ 

must reflect all resources expended, 

used, or made available to render the 

service. Generally accepted accounting 

principles (GAAP) or Federal income 

tax accounting rules may provide an 

appropriate starting point, but neither 

would necessarily be conclusive in 

evaluating whether an item must be 

included in total services costs. 

Another commentator requested that 

value added costs (that is, labor costs 

and depreciation) should be 

distinguished from total services costs. 

The commentator stated that a markup 

on value added costs may be more 

reliable than a markup on total costs in 

certain instances and that this could be 

a useful measure for any of the transfer 

pricing methods, including the cost of 

services plus method. The regulations 

already provide flexibility in the context 

of the cost of services plus method, 

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which is determined by reference to 

comparable transactional costs, the 

comparable profits method, and 

unspecified methods. Consequently, the 

comment is not adopted. The definition 

of total services costs in these 

regulations is, thus, similar to the 

provisions in the 2006 temporary 

regulations. 

Section 1.482–9T(j) of the 2006 

temporary regulations explicitly states 

that total services costs include stockbased compensation, and Examples 3 

through 6 of § 1.482–9T(f)(3) illustrate 

when stock-based compensation 

constitutes a material difference 

requiring adjustments for comparability 

and reliability purposes. Commentators 

requested further guidance regarding the 

valuation, comparability, and reliability 

considerations for stock-based 

compensation. Other commentators 

objected to the explicit statement that 

stock-based compensation can be a total 

services cost. These final regulations do 

not provide further guidance regarding 

stock-based compensation. The 

Treasury Department and the IRS 

continue to consider technical issues 

involving stock-based compensation in 

the services and other contexts and 

intend to address those issues in a 

subsequent guidance project. 

7. Controlled Services Transactions and 

Shareholder Activities—Treas. Reg. 

§ 1.482–9(l) 

Section 1.482–9(l) sets forth a 

threshold test for determining whether 

an activity constitutes a controlled 

services transaction subject to the 

general framework of § 1.482–9. Section 

1.482–9(l)(3) provides rules for 

determining whether an activity 

provides a benefit. Paragraphs (l)(3)(ii) 

through (v) provide guidelines that 

indicate the presence or absence of a 

benefit. Section 1.482–9T(l)(3)(iv) of the 

2006 temporary regulations provides 

that an activity is a shareholder activity 

if the sole effect of that activity is either 

to protect the renderer’s capital 

investment in the recipient or in other 

members of the controlled group, or to 

facilitate compliance by the renderer 

with reporting, legal, or regulatory 

requirements applicable specifically to 

the renderer, or both. 

The Treasury Department and the IRS 

received comments on shareholder 

activities. Some commentators asserted 

that the ‘‘sole effect’’ language is too 

restrictive and that the language should 

be replaced by a ‘‘primary effect’’ 

standard. Other commentators argued 

that the language appropriately 

encompasses shareholder activities. 

Another commentator requested a 

change to the regulations such that a 

shareholder activity should be 

considered to have a sole effect only if 

the benefits provided to the other 

controlled group members are either (i) 

indirect or remote or (ii) duplicative. 

The Treasury Department and the IRS 

believe that the ‘‘sole effect’’ language is 

appropriate. The ‘‘primary effect’’ 

language in the 2003 proposed 

regulations could inappropriately 

include activities that are not true 

shareholder activities and may even 

consist of substantial activities that are 

non-shareholder activities. An activity 

that is described in § 1.482–9(l)(3)(ii) 

through (iv) does not produce a benefit, 

but the mere fact that an activity is not 

described in § 1.482–9(l)(3)(ii) through 

(iv) does not mean that the activity 

necessarily provides a benefit. An 

activity not described in § 1.482– 

9(l)(3)(ii) through (iv) provides a benefit 

only if it satisfies the incremental value 

standard of § 1.482–9(l)(3)(i). 

Furthermore, for that purpose, it may be 

more reliable, depending on the facts 

and circumstances, to measure 

incremental value on a functional 

aggregate activity, rather than a 

component activity-by-activity basis. 

8. Third Party Costs—Treas. Reg. 

§ 1.482–9(l)(4) 

Under § 1.482–9T(l)(4) of the 2006 

temporary regulations, a controlled 

services transaction may be analyzed as 

a single transaction or as two separate 

transactions depending on which 

approach provides the most reliable 

measure of the arm’s length result under 

the best method rule in existing § 1.482– 

1(c). Two examples are provided 

illustrating different alternatives when a 

controlled services transaction included 

expenses related to a third-party 

contract (third party costs) with a 

controlled taxpayer. In both examples, 

third party costs that could be reliably 

disaggregated could be charged at cost. 

Commentators requested that all third 

party costs be treated as ‘‘pass through’’ 

items that are not subject to a markup 

applicable to costs incurred by the 

renderer in its capacity as service 

provider. 

The Treasury Department and the IRS 

continue to maintain the view that 

whether to consider ‘‘pass through’’ 

items as disaggregated from, or 

aggregated with, other functions and 

costs, depends on which analysis most 

reliably reflects an arm’s length result. 

Therefore, the rules of § 1.482–9(l)(4) are 

adopted without change. 

9. Coordination With Other Transfer 

Pricing Rules—Treas. Reg. § 1.482–9(m) 

and Guarantees 

Section 1.482–9(m) provides 

coordination rules applicable to a 

controlled services transaction that is 

combined with, or includes elements of, 

a non-services transaction. These 

coordination rules rely on the best 

method rule in existing § 1.482–1(c)(1) 

to determine which method or methods 

would provide the most reliable 

measure of an arm’s length result for a 

particular controlled transaction. 

a. Services Subject to a Qualified Cost 

Sharing Arrangement—Treas. Reg. 

§ 1.482–9(m)(3) 

Section 1.482–9T(m)(3) of the 2006 

temporary regulations states that 

services provided by a controlled 

participant under a qualified cost 

sharing arrangement are subject to 

existing § 1.482–7. As part of the 

temporary cost sharing regulations (TD 

9441, 2009–7 I.R.B. 460, 74 FR 340) 

published on January 5, 2009, the 

Treasury Department and the IRS 

replaced the coordination rules with 

new § 1.482–9T(m)(3). Section 1.482– 

9(m)(3) is reserved pending finalization 

of the cost sharing regulations. 

b. Global Dealing Operations 

The Treasury Department and the IRS 

are working on new global dealing 

regulations. The intent of the Treasury 

Department and the IRS is that, when 

final global dealing regulations are 

issued, those regulations will govern the 

evaluation of the activities performed by 

a global dealing operation. Pending the 

issuance of new global dealing 

regulations, taxpayers may rely on the 

proposed global dealing regulations to 

govern financial transactions entered 

into in connection with a global dealing 

operation as defined in proposed 

§ 1.482–8. Thus, the cross-reference 

under proposed § 1.482–9(m)(6) (71 FR 

44247), which provides that a controlled 

services transaction does not include a 

financial transaction entered into in 

connection with a global dealing 

operation as defined in proposed 

§ 1.482–8, remains in proposed form. 

Section 1.482–9(m)(6) in these final 

regulations is reserved pending issuance 

of global dealing regulations. 

c. Guarantees, Including Financial 

Guarantees 

Financial transactions, including 

guarantees, are explicitly excluded from 

eligibility for the SCM by § 1.482– 

9(b)(4)(viii). However, no inference is 

intended that financial transactions 

(including guarantees) would otherwise 

be considered the provision of services 

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38836 Federal Register / Vol. 74, No. 148 / Tuesday, August 4, 2009 / Rules and Regulations 

for transfer pricing purposes. The 

Treasury Department and the IRS intend 

to issue future guidance regarding 

financial guarantees. 

B. Income Attributable to Intangible 

Property—Treas. Reg. § 1.482–4(f)(3) 

and (4) 

Paragraphs (3) and (4) of § 1.482–4(f) 

provide rules for determining the owner 

of intangible property for purposes of 

section 482 and also provide rules for 

determining the arm’s length 

compensation in situations where a 

controlled party other than the owner 

makes contributions to the value of 

intangible property. Section 1.482– 

4(f)(3)(i)(A) provides that the legal 

owner of intangible property pursuant 

to the intellectual property law of the 

relevant jurisdiction, or the holder of 

rights constituting intangible property 

pursuant to contractual terms (such as 

the terms of a license) or other legal 

provision, will be considered the sole 

owner of intangible property for 

purposes of this section unless such 

ownership is inconsistent with the 

economic substance of the underlying 

transactions. Some commentators 

believe that the rules should specify that 

a holder of bare legal title to intangible 

property should not be presumed to be 

the owner when other parties have all 

of the other benefits and burdens of 

ownership. After considering the public 

comments, the Treasury Department 

and the IRS continue to believe that the 

legal ownership standard as set forth in 

§ 1.482–4(f)(3)(i)(A) is the appropriate 

framework for determining ownership 

of intangible property under section 

482. 

The provisions of § 1.482–4(f)(3) and 

(4) are adopted without change. 

C. Economic Substance 

A number of commentators expressed 

similar and sometimes interrelated 

concerns regarding economic substance 

considerations, imputation of 

contractual terms, the realistic 

alternatives principle, and the rules for 

income attributable to intangible 

property. The common thread running 

through these comments is a concern 

that the IRS will inappropriately treat 

taxpayers as having engaged in 

transactions different from those in 

which they actually engaged. 

Section 1.482–4(f)(3)(i)(A) provides 

that, if no owner of intangible property 

is identified under the intellectual 

property law of the relevant jurisdiction, 

or pursuant to contractual terms 

(including terms imputed pursuant to 

§ 1.482–1(d)(3)(ii)(B)) or other legal 

provision, then the controlled taxpayer 

that has control of intangible property, 

based on all the facts and 

circumstances, will be considered the 

sole owner of intangible property for 

purposes of this section. One 

commentator believes that the control 

rule for determining ownership of nonlegally protected intangibles allows the 

IRS to attribute ownership of intangible 

property in a manner that is 

inconsistent with economic substance. 

Accordingly, the comment suggests that 

such control determinations must be 

consistent with economic substance in 

all cases. In the context of the control 

rule in § 1.482–4(f)(3)(i)(A), this is 

already reflected in the language 

‘‘including terms imputed pursuant to 

§ 1.482–1(d)(3)(ii)(B).’’ 

Section 1.482–9T(h) of the 2006 

temporary regulations provides that, 

consistent with the specified methods, 

an unspecified method should take into 

account the general principle that 

uncontrolled taxpayers compare the 

terms of a particular transaction to the 

realistic alternatives to that transaction, 

including economically similar 

transactions structured as other than 

services transactions, and only enter 

into a transaction if none of the 

alternatives is preferable to it. The 

realistic alternatives concept was 

imported from § 1.482–1(f)(2)(ii) to be 

consistent with the general aim to 

coordinate the analyses under the 

various sections of the regulations under 

section 482. This provision allows 

flexibility to consider non-services 

alternatives to a services transaction, for 

example, a transfer or license of 

intangible property, if such an approach 

provides the most reliable measure of an 

arm’s length result. 

Commentators suggested that the 

realistic alternative principle be 

clarified so that only transactions 

actually engaged in by the controlled 

taxpayer can constitute realistic 

alternatives or that the principle be 

removed altogether on the grounds that 

it inappropriately treats taxpayers as 

engaging in transactions other than 

those they chose. The Treasury 

Department and the IRS do not agree 

with the assertion that consideration of 

realistic alternatives improperly 

disregards a taxpayer’s chosen 

arrangement and that the realistic 

alternative principle is limited to 

internal comparables. It is a 

longstanding principle under § 1.482– 

1(f)(2)(ii)(A) and in the valuation field, 

generally, that, although the 

Commissioner will evaluate the results 

of a transaction as actually structured by 

the taxpayer unless it lacks economic 

substance, the Commissioner may 

consider alternatives available in 

determining the arm’s length valuation 

of the controlled transaction. The 

realistic alternatives principle does not 

recast the transaction. Rather, it assumes 

that taxpayers are rational and will not 

choose to price an arrangement in a 

manner that makes them worse off 

economically than another available 

alternative. Thus, if the price associated 

with a realistic alternative appears 

preferable in comparison with the price 

associated with the chosen arrangement, 

the logical implication is that the actual 

arrangement has been priced incorrectly 

through a flawed application of the best 

method rule. This is further reflected in 

the example in § 1.482–9T(h), which 

illustrates when realistic alternatives 

may be considered to evaluate the arm’s 

length consideration, and explicitly 

states that the best method rule of 

§ 1.482–1(c) governs the analysis. 

The unspecified method provisions in 

these final regulations are adopted 

without change. 

Section 1.482–9(i)(3) provides that, 

consistent with the authority in § 1.482– 

1(d)(3)(ii)(B), the Commissioner may 

impute contingent-payment contractual 

terms in a controlled services 

transaction if the economic substance of 

the transaction is consistent with the 

existence of such terms. When the 2003 

proposed regulations were issued, 

commentators expressed concerns with 

the rule for imputing contingent 

payment terms to the extent that it 

permits the IRS to recast arrangements 

if there is a disagreement about the 

pricing of a service. The temporary 

regulations responded to this concern 

by providing a new Example 5 in 

§ 1.482–1T(d)(3)(ii)(C) to illustrate that 

if a taxpayer’s pricing is outside of the 

arm’s length range, that fact alone 

would not support imputation of 

additional contractual terms based on 

economic substance grounds. 

Commentators responded, however, that 

the last sentence of Example 5 

perpetuated the same problem of 

allowing the IRS to recast arrangements 

if there were pricing disputes between 

a taxpayer and the IRS. 

The Treasury Department and the IRS 

agree that the last sentence of Example 

5 in § 1.482–1T(d)(3)(ii)(C) did not 

clearly convey its intended meaning, 

which is that a transfer pricing method 

and the price derived from the 

application of that method do not 

inform the terms of the transaction or 

the risks borne by the entities. Rather, 

the selection and application of a 

transfer pricing method should be based 

on a comparability analysis of the 

transaction, which must consider the 

risks borne by each entity in the 

transaction. Thus, the last sentence in 

§ 1.482–1T(d)(3)(ii)(C) Example 5, 

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paragraph (iv), was intended to explain 

that the IRS is not required to accept the 

transfer pricing method and form of 

payment terms of a transaction as 

represented by a taxpayer if they are 

inconsistent with the conduct of the 

entities and the economic substance of 

the transaction. Because this sentence 

caused confusion, it has been removed. 

However, the Treasury Department and 

the IRS affirm that the IRS may impute 

contingent-payment terms where the 

economic substance of the transaction is 

consistent with the existence of such 

terms. 

D. Stewardship Expenses—§ 1.861–8 

The regulations under § 1.861–8(e)(4) 

conform to, and are consistent with, the 

language relating to controlled services 

transactions as set forth in § 1.482–9(l). 

The regulations under § 1.861–8(e)(4) 

are applicable for taxable years 

beginning after December 31, 2006. 

E. Effective/Applicability Date—§ 1.482– 

9(n) 

These regulations are applicable for 

taxable years beginning after July 31, 

2009. Controlled taxpayers may elect to 

apply retroactively all of the provisions 

of these regulations to any taxable year 

beginning after September 10, 2003. 

Such election will be effective for the 

year of the election and all subsequent 

taxable years. 

Special Analyses 

It has been determined that this 

Treasury decision is not a significant 

regulatory action as defined in 

Executive Order 12866. Therefore, a 

regulatory assessment is not required. It 

also has been determined that section 

553(b) of the Administrative Procedure 

Act (5 U.S.C. chapter 5) does not apply 

to this regulation. It is hereby certified 

that the collections of information in 

this regulation will not have a 

significant economic impact on a 

substantial number of small entities. 

This certification is based on the fact 

that the collections of information are 

related to elective provisions for 

determining taxable income that 

simplify and reduce compliance 

burdens in connection with controlled 

services transactions. When collection 

of information is required, it is expected 

to take taxpayers approximately 2 hours 

to comply, and the administrative and 

economic costs will be nominal in 

comparison with the resulting 

simplification and reduction of 

compliance burdens. Thus, the 

economic impact of the collections of 

information will not be significant. 

Similarly, while some small entities 

may be subject to the collections of 

information if they elect one of the 

provisions, the collections of 

information are not expected to affect a 

substantial number of small entities. 

Accordingly, a regulatory flexibility 

analysis under the Regulatory 

Flexibility Act (5 U.S.C. chapter 6) is 

not required. Pursuant to section 7805(f) 

of the Internal Revenue Code, the notice 

of proposed rulemaking preceding these 

regulations was submitted to the Small 

Business Administration for comment 

on its impact on small business. 

Drafting Information 

The principal authors of these 

regulations are Carol B. Tan and Gregory 

A. Spring, Office of Associate Chief 

Counsel (International) for matters 

relating to section 482, and Richard L. 

Chewning, Office of Associate Chief 

Counsel (International) for matters 

relating to stewardship expenses. 

List of Subjects 

26 CFR Part 1 

Income taxes, Reporting and 

recordkeeping requirements. 

26 CFR Part 31 

Employment taxes, Income taxes, 

Penalties, Pensions, Railroad retirement, 

Reporting and recordkeeping 

requirements, Social Security and 

Unemployment compensation. 

26 CFR Part 602 

Reporting and recordkeeping 

requirements. 

Adoption of Amendments to the 

Regulations 

■ Accordingly, 26 CFR parts 1, 31, and 

602 are amended as follows: 

PART 1—INCOME TAXES 

■ Paragraph 1. The authority citation 

for part 1 is amended by adding an entry 

in numerical order to read in part as 

follows: 

Authority: 26 U.S.C. 7805 * * *. 

Section 1.482–9 also issued under 26 

U.S.C. 482. * * * 

■ Par. 2. Section 1.482–0 is amended as 

follows: 

■ 1. The introductory text is revised. 

■ 2. The entries for § 1.482–1(a)(1), 

(d)(3)(ii)(C), (d)(3)(v), (f)(2)(ii)(A), 

(f)(2)(iii)(B), (g)(4)(iii), (i) and (j) are 

revised. 

■ 3. The entries for § 1.482–2(b), (e) and 

(f) are revised. 

■ 4. The entries for § 1.482–4(f)(3), (f)(4), 

(g), and (h) are revised. 

■ 5. The entry for § 1.482–4(f)(7) is 

removed. 

■ 6. The entries for § 1.482– 

6(c)(2)(ii)(B)(1), (c)(2)(ii)(D), (c)(3)(i)(A), 

(c)(3)(i)(B), (c)(3)(ii)(D), and (d) are 

revised 

■ 7. The entry for § 1.482–8(c) is added. 

■ 8. The entries for § 1.482–9 are 

revised. 

The addition and revisions read as 

follows: 

§ 1.482–0 Outline of regulations under 

section 482. 

This section contains major captions 

for §§ 1.482–1 through 1.482–9. 

§ 1.482–1 Allocation of income and 

deductions among taxpayers. 

(a) * * * 

(1) Purpose and scope. 

* * * * * 

(d) * * * 

(3) * * * 

(ii) * * * 

(C) Examples. 

* * * * * 

(v) Property or services. 

* * * * * 

(f) * * * 

(2) * * * 

(ii) * * * 

(A) In general. 

* * * * * 

(iii) * * * 

(A) * * * 

(B) Circumstances warranting 

consideration of multiple year data. 

* * * * * 

(g) * * * 

(4) * * * 

(iii) Examples. 

* * * * * 

(i) Definitions. 

(j) Effective/applicability date. 

§ 1.482–2 Determination of taxable income 

in specific situations. 

* * * * * 

(b) Rendering of services. 

* * * * * 

(e) [Reserved]. For further guidance, 

see § 1.482–0T, the entry for § 1.482– 

2T(e). 

(f) Effective/applicability date. 

* * * * * 

§ 1.482–4 Methods to determine taxable 

income in connection with a transfer of 

intangible property. 

* * * * * 

(f) * * * 

(3) Ownership of intangible property. 

(i) Identification of owner. 

(A) In general. 

(B) [Reserved]. For further guidance, 

see § 1.482–0T, the entry for § 1.482– 

4T(f)(3)(i)(B). 

(ii) Examples. 

(4) Contribution to the value of 

intangible property owned by another. 

(i) In general. 

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(ii) Examples. 

* * * * * 

(g) [Reserved]. For further guidance, 

see § 1.482–0T, the entry for § 1.482– 

4T(g). 

(h) Effective/applicability date. 

* * * * * 

§ 1.482–6 Profit split method. 

* * * * * 

(c) * * * 

(2) * * * 

(ii) * * * 

(B) * * *. 

(1) In general. 

* * * * * 

(D) Other factors affecting reliability. 

* * * * * 

(3) * * * 

(i) * * * 

(A) Allocate income to routine 

contributions. 

(B) Allocate residual profit. 

(1) Nonroutine contributions 

generally. 

(2) Nonroutine contributions of 

intangible property. 

(ii) * * * 

(D) Other factors affecting reliability. 

* * * * * 

(d) Effective/applicability date. 

§ 1.482–8 Examples of the best method 

rule. 

* * * * * 

(c) Effective/applicability date. 

§ 1.482–9 Methods to determine taxable 

income in connection with a controlled 

services transaction. 

(a) In general. 

(b) Services cost method. 

(1) In general. 

(2) Eligibility for the services cost 

method. 

(3) Covered services. 

(i) Specified covered services. 

(ii) Low margin covered services. 

(4) Excluded activities. 

(5) Not services that contribute 

significantly to fundamental risks of 

business success or failure. 

(6) Adequate books and records. 

(7) Shared services arrangement. 

(i) In general. 

(ii) Requirements for shared services 

arrangement. 

(A) Eligibility. 

(B) Allocation. 

(C) Documentation. 

(iii) Definitions and special rules. 

(A) Participant. 

(B) Aggregation. 

(C) Coordination with cost sharing 

arrangements. 

(8) Examples. 

(c) Comparable uncontrolled services 

price method. 

(1) In general. 

(2) Comparability and reliability 

considerations. 

(i) In general. 

(ii) Comparability. 

(A) In general. 

(B) Adjustments for differences 

between controlled and uncontrolled 

transactions. 

(iii) Data and assumptions. 

(3) Arm’s length range. 

(4) Examples. 

(5) Indirect evidence of the price of a 

comparable uncontrolled services 

transaction. 

(i) In general. 

(ii) Example. 

(d) Gross services margin method. 

(1) In general. 

(2) Determination of arm’s length 

price. 

(i) In general. 

(ii) Relevant uncontrolled transaction. 

(iii) Applicable uncontrolled price. 

(iv) Appropriate gross services profit. 

(v) Arm’s length range. 

(3) Comparability and reliability 

considerations. 

(i) In general. 

(ii) Comparability. 

(A) Functional comparability. 

(B) Other comparability factors. 

(C) Adjustments for differences 

between controlled and uncontrolled 

transactions. 

(D) Buy-sell distributor. 

(iii) Data and assumptions. 

(A) In general. 

(B) Consistency in accounting. 

(4) Examples. 

(e) Cost of services plus method. 

(1) In general. 

(2) Determination of arm’s length 

price. 

(i) In general. 

(ii) Appropriate gross services profit. 

(iii) Comparable transactional costs. 

(iv) Arm’s length range. 

(3) Comparability and reliability 

considerations. 

(i) In general. 

(ii) Comparability. 

(A) Functional comparability. 

(B) Other comparability factors. 

(C) Adjustments for differences 

between the controlled and 

uncontrolled transactions. 

(iii) Data and assumptions. 

(A) In general. 

(B) Consistency in accounting. 

(4) Examples. 

(f) Comparable profits method. 

(1) In general. 

(2) Determination of arm’s length 

result. 

(i) Tested party. 

(ii) Profit level indicators. 

(iii) Comparability and reliability 

considerations—Data and 

assumptions—Consistency 

in accounting. 

(3) Examples. 

(g) Profit split method. 

(1) In general. 

(2) Examples. 

(h) Unspecified methods. 

(i) Contingent-payment contractual 

terms for services. 

(1) Contingent-payment contractual 

terms recognized in general. 

(2) Contingent-payment arrangement. 

(i) General requirements. 

(A) Written contract. 

(B) Specified contingency. 

(C) Basis for payment. 

(ii) Economic substance and conduct. 

(3) Commissioner’s authority to 

impute contingent-payment terms. 

(4) Evaluation of arm’s length charge. 

(5) Examples. 

(j) Total services costs. 

(k) Allocation of costs. 

(1) In general. 

(2) Appropriate method of allocation 

and apportionment. 

(i) Reasonable method standard. 

(ii) Use of general practices. 

(3) Examples. 

(l) Controlled services transaction. 

(1) In general. 

(2) Activity. 

(3) Benefit. 

(i) In general. 

(ii) Indirect or remote benefit. 

(iii) Duplicative activities. 

(iv) Shareholder activities. 

(v) Passive association. 

(4) Disaggregation of transactions. 

(5) Examples. 

(m) Coordination with transfer pricing 

rules for other transactions. 

(1) Services transactions that include 

other types of transactions. 

(2) Services transactions that effect a 

transfer of intangible property. 

(3) [Reserved]. For further guidance, 

see § 1.482–0T, the entry for § 1.482– 

9T(m)(3). 

(4) Other types of transactions that 

include controlled services transactions. 

(5) Examples. 

(n) Effective/applicability date. 

(1) In general. 

(2) Election to apply regulations to 

earlier taxable years. 

■ Par. 3. Section 1.482–0T is amended 

as follows: 

■ 1. Revise the section heading and 

introductory text. 

■ 2. Revise the section headings for 

§§ 1.482–1T, 1.482–4T and 1.482.9T and 

the entries for §§ 1.482–1T, 1.482–2T, 

1.482–4T and 1.482.9T. 

■ 3. Remove the entries for § 1.482–6T. 

The revisions read as follows: 

§ 1.482–0T Outline of regulations under 

section 482 (temporary). 

This section contains major captions 

for §§ 1.482–1T, 1.482–2T, 1.482–4T, 

1.482–7T, 1.482–8T, and 1.482–9T. 

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Federal Register / Vol. 74, No. 148 / Tuesday, August 4, 2009 / Rules and Regulations 38839 

§ 1.482–1T Allocation of income and 

deductions among taxpayers (temporary). 

(a) through (b)(2) [Reserved]. For 

further guidance, see § 1.482–0, the 

entries for § 1.482–1(a) through (b)(2). 

(i) Methods. 

(ii) [Reserved]. For further guidance, 

see § 1.482–0, the entry for § 1.482– 

1(b)(2)(ii). 

(iii) Coordination of methods 

applicable to certain intangible 

development arrangements. 

(c) through (i) [Reserved]. For further 

guidance, see § 1.482–0, the entries for 

§ 1.482–1(c) through (i). 

(j) Effective/applicability date. 

(k) Expiration date. 

§ 1.482–2T Determination of taxable 

income in specific situations (temporary). 

(a) through (d) [Reserved]. For further 

guidance, see § 1.482–0, the entries for 

§ 1.482–2(a) through (d). 

(e) Cost sharing arrangement. 

(f) Effective/applicability date. 

(1) In general. 

(2) Election to apply regulation to 

earlier taxable years. 

(3) Expiration date. 

§ 1.482–4T Methods to determine taxable 

income in connection with a transfer of 

intangible property (temporary). 

(a) through (f)(3)(i)(A) [Reserved]. For 

further guidance, see § 1.482–0, the 

entries for § 1.482–4(a) through 

(f)(3)(i)(A). 

(B) Cost sharing arrangements. 

(f)(3)(ii) through (f)(6) [Reserved]. For 

further guidance, see § 1.482–0, the 

entries for § 1.482–4(f)(3)(ii) through 

(f)(6). 

(g) Coordination with rules governing 

cost sharing arrangements. 

(h) Effective/applicability date. 

(i) Expiration date. 

* * * * * 

§ 1.482–9T Methods to determine taxable 

income in connection with a controlled 

services transaction (temporary). 

(a) through (m)(2) [Reserved]. For 

further guidance, see § 1.482–0, the 

entries for § 1.482–9(a) through (m)(2). 

(3) Coordination with rules governing 

cost sharing arrangements. 

(n) Effective/applicability dates. 

(o) Expiration date. 

■ Par. 4. Section 1.482–1 is amended by 

revising paragraphs (a)(1), (d)(3)(ii)(C) 

Examples 3, 4, 5, and 6, (d)(3)(v), 

(f)(2)(ii)(A), (f)(2)(iii)(B), (g)(4)(i), 

(g)(4)(iii) Example 1, (i), and (j)(6) to 

read as follows: 

§ 1.482–1 Allocation of income and 

deductions among taxpayers. 

(a) In general—(1) Purpose and scope. 

The purpose of section 482 is to ensure 

that taxpayers clearly reflect income 

attributable to controlled transactions 

and to prevent the avoidance of taxes 

with respect to such transactions. 

Section 482 places a controlled taxpayer 

on a tax parity with an uncontrolled 

taxpayer by determining the true taxable 

income of the controlled taxpayer. This 

section sets forth general principles and 

guidelines to be followed under section 

482. Section 1.482–2 provides rules for 

the determination of the true taxable 

income of controlled taxpayers in 

specific situations, including controlled 

transactions involving loans or advances 

or the use of tangible property. Sections 

1.482–3 through 1.482–6 provide rules 

for the determination of the true taxable 

income of controlled taxpayers in cases 

involving the transfer of property. 

Section 1.482–7T sets forth the cost 

sharing provisions applicable to taxable 

years beginning on or after January 5, 

2009. Section 1.482–8 provides 

examples illustrating the application of 

the best method rule. Finally, § 1.482– 

9 provides rules for the determination of 

the true taxable income of controlled 

taxpayers in cases involving the 

performance of services. 

* * * * * 

(d) * * * 

(3) * * * 

(ii) * * * 

(C) * * * 

Example 3. Contractual terms imputed 

from economic substance. (i) FP, a foreign 

producer of wristwatches, is the registered 

holder of the YY trademark in the United 

States and in other countries worldwide. In 

year 1, FP enters the United States market by 

selling YY wristwatches to its newly 

organized United States subsidiary, USSub, 

for distribution in the United States market. 

USSub pays FP a fixed price per wristwatch. 

USSub and FP undertake, without separate 

compensation, marketing activities to 

establish the YY trademark in the United 

States market. Unrelated foreign producers of 

trademarked wristwatches and their 

authorized United States distributors 

respectively undertake similar marketing 

activities in independent arrangements 

involving distribution of trademarked 

wristwatches in the United States market. In 

years 1 through 6, USSub markets and sells 

YY wristwatches in the United States. 

Further, in years 1 through 6, USSub 

undertakes incremental marketing activities 

in addition to the activities similar to those 

observed in the independent distribution 

transactions in the United States market. FP 

does not directly or indirectly compensate 

USSub for performing these incremental 

activities during years 1 through 6. Assume 

that, aside from these incremental activities, 

and after any adjustments are made to 

improve the reliability of the comparison, the 

price paid per wristwatch by the 

independent, authorized distributors of 

wristwatches would provide the most 

reliable measure of the arm’s length price 

paid per YY wristwatch by USSub. 

(ii) By year 7, the wristwatches with the 

YY trademark generate a premium return in 

the United States market, as compared to 

wristwatches marketed by the independent 

distributors. In year 7, substantially all the 

premium return from the YY trademark in 

the United States market is attributed to FP, 

for example through an increase in the price 

paid per watch by USSub, or by some other 

means. 

(iii) In determining whether an allocation 

of income is appropriate in year 7, the 

Commissioner may consider the economic 

substance of the arrangements between 

USSub and FP, and the parties’ course of 

conduct throughout their relationship. Based 

on this analysis, the Commissioner 

determines that it is unlikely that, ex ante, 

an uncontrolled taxpayer operating at arm’s 

length would engage in the incremental 

marketing activities to develop or enhance 

intangible property owned by another party 

unless it received contemporaneous 

compensation or otherwise had a reasonable 

anticipation of receiving a future benefit from 

those activities. In this case, USSub’s 

undertaking the incremental marketing 

activities in years 1 through 6 is a course of 

conduct that is inconsistent with the parties’ 

attribution to FP in year 7 of substantially all 

the premium return from the enhanced YY 

trademark in the United States market. 

Therefore, the Commissioner may impute 

one or more agreements between USSub and 

FP, consistent with the economic substance 

of their course of conduct, which would 

afford USSub an appropriate portion of the 

premium return from the YY trademark 

wristwatches. For example, the 

Commissioner may impute a separate 

services agreement that affords USSub 

contingent-payment compensation for its 

incremental marketing activities in years 1 

through 6, which benefited FP by 

contributing to the value of the trademark 

owned by FP. In the alternative, the 

Commissioner may impute a long-term, 

exclusive agreement to exploit the YY 

trademark in the United States that allows 

USSub to benefit from the incremental 

marketing activities it performed. As another 

alternative, the Commissioner may require 

FP to compensate USSub for terminating 

USSub’s imputed long-term, exclusive 

agreement to exploit the YY trademark in the 

United States, an agreement that USSub 

made more valuable at its own expense and 

risk. The taxpayer may present additional 

facts that could indicate which of these or 

other alternative agreements best reflects the 

economic substance of the underlying 

transactions, consistent with the parties’ 

course of conduct in the particular case. 

Example 4. Contractual terms imputed 

from economic substance. (i) FP, a foreign 

producer of athletic gear, is the registered 

holder of the AA trademark in the United 

States and in other countries worldwide. In 

year 1, FP enters into a licensing agreement 

that affords its newly organized United States 

subsidiary, USSub, exclusive rights to certain 

manufacturing and marketing intangible 

property (including the AA trademark) for 

purposes of manufacturing and marketing 

athletic gear in the United States under the 

AA trademark. The contractual terms of this 

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agreement obligate USSub to pay FP a royalty 

based on sales, and also obligate both FP and 

USSub to undertake without separate 

compensation specified types and levels of 

marketing activities. Unrelated foreign 

businesses license independent United States 

businesses to manufacture and market 

athletic gear in the United States, using 

trademarks owned by the unrelated foreign 

businesses. The contractual terms of these 

uncontrolled transactions require the 

licensees to pay royalties based on sales of 

the merchandise, and obligate the licensors 

and licensees to undertake without separate 

compensation specified types and levels of 

marketing activities. In years 1 through 6, 

USSub manufactures and sells athletic gear 

under the AA trademark in the United States. 

Assume that, after adjustments are made to 

improve the reliability of the comparison for 

any material differences relating to marketing 

activities, manufacturing or marketing 

intangible property, and other comparability 

factors, the royalties paid by independent 

licensees would provide the most reliable 

measure of the arm’s length royalty owed by 

USSub to FP, apart from the additional facts 

in paragraph (ii) of this Example 4. 

(ii) In years 1 through 6, USSub performs 

incremental marketing activities with respect 

to the AA trademark athletic gear, in addition 

to the activities required under the terms of 

the license agreement with FP, that are also 

incremental as compared to those observed 

in the comparables. FP does not directly or 

indirectly compensate USSub for performing 

these incremental activities during years 1 

through 6. By year 7, AA trademark athletic 

gear generates a premium return in the 

United States, as compared to similar athletic 

gear marketed by independent licensees. In 

year 7, USSub and FP enter into a separate 

services agreement under which FP agrees to 

compensate USSub on a cost basis for the 

incremental marketing activities that USSub 

performed during years 1 through 6, and to 

compensate USSub on a cost basis for any 

incremental marketing activities it may 

perform in year 7 and subsequent years. In 

addition, the parties revise the license 

agreement executed in year 1, and increase 

the royalty to a level that attributes to FP 

substantially all the premium return from 

sales of the AA trademark athletic gear in the 

United States. 

(iii) In determining whether an allocation 

of income is appropriate in year 7, the 

Commissioner may consider the economic 

substance of the arrangements between 

USSub and FP and the parties’ course of 

conduct throughout their relationship. Based 

on this analysis, the Commissioner 

determines that it is unlikely that, ex ante, an 

uncontrolled taxpayer operating at arm’s 

length would engage in the incremental 

marketing activities to develop or enhance 

intangible property owned by another party 

unless it received contemporaneous 

compensation or otherwise had a reasonable 

anticipation of a future benefit. In this case, 

USSub’s undertaking the incremental 

marketing activities in years 1 through 6 is 

a course of conduct that is inconsistent with 

the parties’ adoption in year 7 of contractual 

terms by which FP compensates USSub on a 

cost basis for the incremental marketing 

activities that it performed. Therefore, the 

Commissioner may impute one or more 

agreements between USSub and FP, 

consistent with the economic substance of 

their course of conduct, which would afford 

USSub an appropriate portion of the 

premium return from the AA trademark 

athletic gear. For example, the Commissioner 

may impute a separate services agreement 

that affords USSub contingent-payment 

compensation for the incremental activities it 

performed during years 1 through 6, which 

benefited FP by contributing to the value of 

the trademark owned by FP. In the 

alternative, the Commissioner may impute a 

long-term, exclusive United States license 

agreement that allows USSub to benefit from 

the incremental activities. As another 

alternative, the Commissioner may require 

FP to compensate USSub for terminating 

USSub’s imputed long-term United States 

license agreement, a license that USSub 

made more valuable at its own expense and 

risk. The taxpayer may present additional 

facts that could indicate which of these or 

other alternative agreements best reflects the 

economic substance of the underlying 

transactions, consistent with the parties’ 

course of conduct in this particular case. 

Example 5. Non-arm’s length 

compensation. (i) The facts are the same as 

in paragraph (i) of Example 4. As in Example 

4, assume that, after adjustments are made to 

improve the reliability of the comparison for 

any material differences relating to marketing 

activities, manufacturing or marketing 

intangible property, and other comparability 

factors, the royalties paid by independent 

licensees would provide the most reliable 

measure of the arm’s length royalty owed by 

USSub to FP, apart from the additional facts 

described in paragraph (ii) of this Example 5. 

(ii) In years 1 through 4, USSub performs 

certain incremental marketing activities with 

respect to the AA trademark athletic gear, in 

addition to the activities required under the 

terms of the basic license agreement, that are 

also incremental as compared with those 

activities observed in the comparables. At the 

start of year 1, FP enters into a separate 

services agreement with USSub, which states 

that FP will compensate USSub quarterly, in 

an amount equal to specified costs plus X%, 

for these incremental marketing functions. 

Further, these written agreements reflect the 

intent of the parties that USSub receive such 

compensation from FP throughout the term 

of the agreement, without regard to the 

success or failure of the promotional 

activities. During years 1 through 4, USSub 

performs marketing activities pursuant to the 

separate services agreement and in each year 

USSub receives the specified compensation 

from FP on a cost of services plus basis. 

(iii) In evaluating year 4, the Commissioner 

performs an analysis of independent parties 

that perform promotional activities 

comparable to those performed by USSub 

and that receive separately-stated 

compensation on a current basis without 

contingency. The Commissioner determines 

that the magnitude of the specified cost plus 

X% is outside the arm’s length range in each 

of years 1 through 4. Based on an evaluation 

of all the facts and circumstances, the 

Commissioner makes an allocation to require 

payment of compensation to USSub for the 

promotional activities performed in year 4, 

based on the median of the interquartile 

range of the arm’s length markups charged by 

the uncontrolled comparables described in 

paragraph (e)(3) of this section. 

(iv) Given that based on facts and 

circumstances, the terms agreed by the 

controlled parties were that FP would bear 

all risks associated with the promotional 

activities performed by USSub to promote 

the AA trademark product in the United 

States market, and given that the parties’ 

conduct during the years examined was 

consistent with this allocation of risk, the fact 

that the cost of services plus markup on 

USSub’s services was outside the arm’s 

length range does not, without more, support 

imputation of additional contractual terms 

based on alternative views of the economic 

substance of the transaction, such as terms 

indicating that USSub, rather than FP, bore 

the risk associated with these activities. 

Example 6. Contractual terms imputed 

from economic substance. (i) Company X is 

a member of a controlled group that has been 

in operation in the pharmaceutical sector for 

many years. In years 1 through 4, Company 

X undertakes research and development 

activities. As a result of those activities, 

Company X developed a compound that may 

be more effective than existing medications 

in the treatment of certain conditions. 

(ii) Company Y is acquired in year 4 by the 

controlled group that includes Company X. 

Once Company Y is acquired, Company X 

makes available to Company Y a large 

amount of technical data concerning the new 

compound, which Company Y uses to 

register patent rights with respect to the 

compound in several jurisdictions, making 

Company Y the legal owner of such patents. 

Company Y then enters into licensing 

agreements with group members that afford 

Company Y 100% of the premium return 

attributable to use of the intangible property 

by its subsidiaries. 

(iii) In determining whether an allocation 

is appropriate in year 4, the Commissioner 

may consider the economic substance of the 

arrangements between Company X and 

Company Y, and the parties’ course of 

conduct throughout their relationship. Based 

on this analysis, the Commissioner 

determines that it is unlikely that an 

uncontrolled taxpayer operating at arm’s 

length would make available the results of its 

research and development or perform 

services that resulted in transfer of valuable 

know how to another party unless it received 

contemporaneous compensation or otherwise 

had a reasonable anticipation of receiving a 

future benefit from those activities. In this 

case, Company X’s undertaking the research 

and development activities and then 

providing technical data and know-how to 

Company Y in year 4 is inconsistent with the 

registration and subsequent exploitation of 

the patent by Company Y. Therefore, the 

Commissioner may impute one or more 

agreements between Company X and 

Company Y consistent with the economic 

substance of their course of conduct, which 

would afford Company X an appropriate 

portion of the premium return from the 

patent rights. For example, the Commissioner 

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Federal Register / Vol. 74, No. 148 / Tuesday, August 4, 2009 / Rules and Regulations 38841 

may impute a separate services agreement 

that affords Company X contingent-payment 

compensation for its services in year 4 for the 

benefit of Company Y, consisting of making 

available to Company Y technical data, 

know-how, and other fruits of research and 

development conducted in previous years. 

These services benefited Company Y by 

giving rise to and contributing to the value 

of the patent rights that were ultimately 

registered by Company Y. In the alternative, 

the Commissioner may impute a transfer of 

patentable intangible property rights from 

Company X to Company Y immediately 

preceding the registration of patent rights by 

Company Y. The taxpayer may present 

additional facts that could indicate which of 

these or other alternative agreements best 

reflects the economic substance of the 

underlying transactions, consistent with the 

parties’ course of conduct in the particular 

case. 

* * * * * 

(v) Property or services. Evaluating the 

degree of comparability between 

controlled and uncontrolled 

transactions requires a comparison of 

the property or services transferred in 

the transactions. This comparison may 

include any intangible property that is 

embedded in tangible property or 

services being transferred (embedded 

intangibles). The comparability of the 

embedded intangibles will be analyzed 

using the factors listed in § 1.482– 

4(c)(2)(iii)(B)(1) (comparable intangible 

property). The relevance of product 

comparability in evaluating the relative 

reliability of the results will depend on 

the method applied. For guidance 

concerning the specific comparability 

considerations applicable to transfers of 

tangible and intangible property and 

performance of services, see §§ 1.482–3 

through 1.482–6 and § 1.482–9; see also 

§§ 1.482–3(f), 1.482–4(f)(4), and 1.482– 

9(m), dealing with the coordination of 

the intangible and tangible property and 

performance of services rules. 

* * * * * 

(f) * * * 

(2) * * * 

(ii) Allocation based on taxpayer’s 

actual transactions–(A) In general. The 

Commissioner will evaluate the results 

of a transaction as actually structured by 

the taxpayer unless its structure lacks 

economic substance. However, the 

Commissioner may consider the 

alternatives available to the taxpayer in 

determining whether the terms of the 

controlled transaction would be 

acceptable to an uncontrolled taxpayer 

faced with the same alternatives and 

operating under comparable 

circumstances. In such cases the 

Commissioner may adjust the 

consideration charged in the controlled 

transaction based on the cost or profit of 

an alternative as adjusted to account for 

material differences between the 

alternative and the controlled 

transaction, but will not restructure the 

transaction as if the alternative had been 

adopted by the taxpayer. See paragraph 

(d)(3) of this section (factors for 

determining comparability; contractual 

terms and risk); §§ 1.482–3(e), 1.482– 

4(d), and 1.482–9(h) (unspecified 

methods). 

* * * * * 

(iii) * * * 

(B) Circumstances warranting 

consideration of multiple year data. The 

extent to which it is appropriate to 

consider multiple year data depends on 

the method being applied and the issue 

being addressed. Circumstances that 

may warrant consideration of data from 

multiple years include the extent to 

which complete and accurate data are 

available for the taxable year under 

review, the effect of business cycles in 

the controlled taxpayer’s industry, or 

the effects of life cycles of the product 

or intangible property being examined. 

Data from one or more years before or 

after the taxable year under review must 

ordinarily be considered for purposes of 

applying the provisions of paragraph 

(d)(3)(iii) of this section (risk), 

paragraph (d)(4)(i) of this section 

(market share strategy), § 1.482–4(f)(2) 

(periodic adjustments), § 1.482–5 

(comparable profits method), § 1.482– 

9(f) (comparable profits method for 

services), and § 1.482–9(i) (contingentpayment contractual terms for services). 

On the other hand, multiple year data 

ordinarily will not be considered for 

purposes of applying the comparable 

uncontrolled price method of § 1.482– 

3(b) or the comparable uncontrolled 

services price method of § 1.482–9(c) 

(except to the extent that risk or market 

share strategy issues are present). 

* * * * * 

(g) * * * 

(4) Setoffs—(i) In general. If an 

allocation is made under section 482 

with respect to a transaction between 

controlled taxpayers, the Commissioner 

will take into account the effect of any 

other non-arm’s length transaction 

between the same controlled taxpayers 

in the same taxable year which will 

result in a setoff against the original 

section 482 allocation. Such setoff, 

however, will be taken into account 

only if the requirements of paragraph 

(g)(4)(ii) of this section are satisfied. If 

the effect of the setoff is to change the 

characterization or source of the income 

or deductions, or otherwise distort 

taxable income, in such a manner as to 

affect the U.S. tax liability of any 

member, adjustments will be made to 

reflect the correct amount of each 

category of income or deductions. For 

purposes of this setoff provision, the 

term arm’s length refers to the amount 

defined in paragraph (b) of this section 

(arm’s length standard), without regard 

to the rules in § 1.482–2(a) that treat 

certain interest rates as arm’s length 

rates of interest. 

* * * * * 

(iii) * * * 

Example 1. P, a U.S. corporation, renders 

construction services to S, its foreign 

subsidiary in Country Y, in connection with 

the construction of S’s factory. An arm’s 

length charge for such services determined 

under § 1.482–9 would be $100,000. During 

the same taxable year P makes available to S 

the use of a machine to be used in the 

construction of the factory, and the arm’s 

length rental value of the machine is $25,000. 

P bills S $125,000 for the services, but does 

not charge S for the use of the machine. No 

allocation will be made with respect to the 

undercharge for the machine if P notifies the 

district director of the basis of the claimed 

setoff within 30 days after the date of the 

letter from the district director transmitting 

the examination report notifying P of the 

proposed adjustment, establishes that the 

excess amount charged for services was equal 

to an arm’s length charge for the use of the 

machine and that the taxable income and 

income tax liabilities of P are not distorted, 

and documents the correlative allocations 

resulting from the proposed setoff. 

* * * * * 

(i) Definitions. The definitions set 

forth in paragraphs (i)(1) through (i)(10) 

of this section apply to this section and 

§§ 1.482–2 through 1.482–9. 

* * * * * 

(j) * * * 

(6)(i) The provisions of paragraphs 

(a)(1), (d)(3)(ii)(C) Example 3, Example 

4, Example 5, and Example 6, (d)(3)(v), 

(f)(2)(ii)(A), (f)(2)(iii)(B), (g)(4)(i), 

(g)(4)(iii), and (i) of this section are 

generally applicable for taxable years 

beginning after July 31, 2009. 

(ii) A person may elect to apply the 

provisions of paragraphs (a)(1), (b)(2)(i), 

(d)(3)(ii)(C) Example 3, Example 4, 

Example 5, and Example 6, (d)(3)(v), 

(f)(2)(ii)(A), (f)(2)(iii)(B), (g)(4)(i), 

(g)(4)(iii), and (i) of this section to 

earlier taxable years in accordance with 

the rules set forth in § 1.482–9(n)(2). 

■ Par. 5. Section 1.482–1T is amended 

by revising paragraphs (a), (b)(1), the 

first sentence in paragraph (b)(2)(i), 

(b)(2)(ii), the second sentence in 

paragraph (b)(2)(iii), (c), (d), (e), (f), (g), 

(h), (i), and (j) to read as follows: 

§ 1.482–1T Allocation of income and 

deductions among taxpayers (temporary). 

(a) through (b)(1) [Reserved]. For 

further guidance, see § 1.482–1(a) 

through (b)(1). 

(b)(2) * * * (i) * * * Sections 1.482– 

2 through 1.482–6, 1.482–7T and 1.482– 

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38842 Federal Register / Vol. 74, No. 148 / Tuesday, August 4, 2009 / Rules and Regulations 

9 provide specific methods to be used 

to evaluate whether transactions 

between or among members of the 

controlled group satisfy the arm’s length 

standard, and if they do not, to 

determine the arm’s length result. * * * 

(ii) [Reserved]. For further guidance, 

see § 1.482–1(b)(2)(ii). 

(iii) * * * Sections 1.482–4 and 

1.482–9, as appropriate, provide the 

specific methods to be used to 

determine arm’s length results of 

arrangements, including partnerships, 

for sharing the costs and risks of 

developing intangible property, other 

that a cost sharing arrangement covered 

by § 1.482–7T. * * * 

(c) through (j)(5) [Reserved]. For 

further guidance, see § 1.482–1(c) 

through (j)(5). 

(j)(6)(i) The provisions of paragraphs 

(b)(2)(i) and (b)(2)(iii) of this section are 

generally applicable on January 5, 2009. 

(ii) [Reserved]. For further guidance, 

see § 1.482–1(j)(6)(ii). 

(iii) The applicability of paragraphs 

(b)(2)(i) and (b)(2)(iii) of this section 

expires on or before December 30, 2011. 

■ Par. 6. Section 1.482–2 is amended by 

revising paragraph (b), (e), and adding 

paragraph (f) to read as follows: 

§ 1.482–2 Determination of taxable income 

in specific situations. 

* * * * * 

(b) Rendering of services. For rules 

governing allocations under section 482 

to reflect an arm’s length charge for 

controlled transactions involving the 

rendering of services, see § 1.482–9. 

* * * * * 

(e) [Reserved]. For further guidance, 

see § 1.482–2T(e). 

(f) Effective/applicability date—(1) In 

general. The provision of paragraph (b) 

of this section is generally applicable for 

taxable years beginning after July 31, 

2009. 

(2) Election to apply regulation to 

earlier taxable years. A person may elect 

to apply the provisions of paragraph (b) 

of this section to earlier taxable years in 

accordance with the rules set forth in 

§ 1.482–9(n)(2). 

■ Par. 7. Section 1.482–2T is amended 

as follows: 

■ 1. Revise paragraphs (a), (b), (c), (d), 

and (f)(2). 

■ 2. Remove the first sentence in both 

paragraphs (f)(1) and (f)(3). 

The revisions read as follows: 

§ 1.482–2T Determination of taxable 

income in specific situations (temporary). 

(a) through (d) [Reserved]. For further 

guidance, see § 1.482–2(a) through (d). 

* * * * * 

(f) * * * 

(2) [Reserved]. For further guidance, 

see § 1.482–2(f)(2). 

* * * * * 

■ Par. 8. Section 1.482–4 is amended as 

follows: 

■ 1. Revise paragraphs (f)(3) and (f)(4). 

■ 2. Add paragraphs (g) and (h). 

The revisions and addition read as 

follows: 

§ 1.482–4 Methods to determine taxable 

income in connection with a transfer of 

intangible property. 

* * * * * 

(f) * * * 

(3) Ownership of intangible 

property—(i) Identification of owner— 

(A) In general. The legal owner of 

intangible property pursuant to the 

intellectual property law of the relevant 

jurisdiction, or the holder of rights 

constituting an intangible property 

pursuant to contractual terms (such as 

the terms of a license) or other legal 

provision, will be considered the sole 

owner of the respective intangible 

property for purposes of this section 

unless such ownership is inconsistent 

with the economic substance of the 

underlying transactions. See § 1.482– 

1(d)(3)(ii)(B) (identifying contractual 

terms). If no owner of the respective 

intangible property is identified under 

the intellectual property law of the 

relevant jurisdiction, or pursuant to 

contractual terms (including terms 

imputed pursuant to § 1.482– 

1(d)(3)(ii)(B)) or other legal provision, 

then the controlled taxpayer who has 

control of the intangible property, based 

on all the facts and circumstances, will 

be considered the sole owner of the 

intangible property for purposes of this 

section. 

(B) [Reserved]. For further guidance, 

see § 1.482–4T(f)(3)(i)(B). 

(ii) Examples. The principles of this 

paragraph (f)(3) are illustrated by the 

following examples: 

Example 1. FP, a foreign corporation, is the 

registered holder of the AA trademark in the 

United States. FP licenses to its U.S. 

subsidiary, USSub, the exclusive rights to 

manufacture and market products in the 

United States under the AA trademark. FP is 

the owner of the trademark pursuant to 

intellectual property law. USSub is the 

owner of the license pursuant to the terms of 

the license, but is not the owner of the 

trademark. See paragraphs (b)(3) and (4) of 

this section (defining an intangible as, among 

other things, a trademark or a license). 

Example 2. The facts are the same as in 

Example 1. As a result of its sales and 

marketing activities, USSub develops a list of 

several hundred creditworthy customers that 

regularly purchase AA trademarked 

products. Neither the terms of the contract 

between FP and USSub nor the relevant 

intellectual property law specify which party 

owns the customer list. Because USSub has 

knowledge of the contents of the list, and has 

practical control over its use and 

dissemination, USSub is considered the sole 

owner of the customer list for purposes of 

this paragraph (f)(3). 

(4) Contribution to the value of 

intangible property owned by another— 

(i) In general. The arm’s length 

consideration for a contribution by one 

controlled taxpayer that develops or 

enhances the value, or may be 

reasonably anticipated to develop or 

enhance the value, of intangible 

property owned by another controlled 

taxpayer will be determined in 

accordance with the applicable rules 

under section 482. If the consideration 

for such a contribution is embedded 

within the contractual terms for a 

controlled transaction that involves 

such intangible property, then 

ordinarily no separate allocation will be 

made with respect to such contribution. 

In such cases, pursuant to § 1.482– 

1(d)(3), the contribution must be 

accounted for in evaluating the 

comparability of the controlled 

transaction to uncontrolled 

comparables, and accordingly in 

determining the arm’s length 

consideration in the controlled 

transaction. 

(ii) Examples. The principles of this 

paragraph (f)(4) are illustrated by the 

following examples: 

Example 1. A, a member of a controlled 

group, allows B, another member of the 

controlled group, to use tangible property, 

such as laboratory equipment, in connection 

with B’s development of an intangible that B 

owns. By furnishing tangible property, A 

makes a contribution to the development of 

intangible property owned by another 

controlled taxpayer, B. Pursuant to paragraph 

(f)(4)(i) of this section, the arm’s length 

charge for A’s furnishing of tangible property 

will be determined under the rules for use of 

tangible property in § 1.482–2(c). 

Example 2. (i) Facts. FP, a foreign producer 

of wristwatches, is the registered holder of 

the YY trademark in the United States and 

in other countries worldwide. FP enters into 

an exclusive, five-year, renewable agreement 

with its newly organized U.S. subsidiary, 

USSub. The contractual terms of the 

agreement grant USSub the exclusive right to 

re-sell YY trademark wristwatches in the 

United States, obligate USSub to pay a fixed 

price per wristwatch throughout the entire 

term of the contract, and obligate both FP and 

USSub to undertake without separate 

compensation specified types and levels of 

marketing activities. 

(ii) The consideration for FP’s and USSub’s 

marketing activities, as well as the 

consideration for the exclusive right to re-sell 

YY trademarked merchandise in the United 

States, are embedded in the transfer price 

paid for the wristwatches. Accordingly, 

pursuant to paragraph (f)(4)(i) of this section, 

ordinarily no separate allocation would be 

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Federal Register / Vol. 74, No. 148 / Tuesday, August 4, 2009 / Rules and Regulations 38843 

appropriate with respect to these embedded 

contributions. 

(iii) Whether an allocation is warranted 

with respect to the transfer price for the 

wristwatches is determined under §§ 1.482– 

1, 1.482–3, and this section through § 1.482– 

6. The comparability analysis would include 

consideration of all relevant factors, 

including the nature of the intangible 

property embedded in the wristwatches and 

the nature of the marketing activities 

required under the agreement. This analysis 

would also take into account that the 

compensation for the activities performed by 

USSub and FP, as well as the consideration 

for USSub’s use of the YY trademark, is 

embedded in the transfer price for the 

wristwatches, rather than provided for in 

separate agreements. See §§ 1.482–3(f) and 

1.482–9(m)(4). 

Example 3. (i) Facts. FP, a foreign producer 

of athletic gear, is the registered holder of the 

AA trademark in the United States and in 

other countries. In year 1, FP licenses to a 

newly organized U.S. subsidiary, USSub, the 

exclusive rights to use certain manufacturing 

and marketing intangible property to 

manufacture and market athletic gear in the 

United States under the AA trademark. The 

license agreement obligates USSub to pay a 

royalty based on sales of trademarked 

merchandise. The license agreement also 

obligates FP and USSub to perform without 

separate compensation specified types and 

levels of marketing activities. In year 1, 

USSub manufactures and sells athletic gear 

under the AA trademark in the United States. 

(ii) The consideration for FP’s and USSub’s 

respective marketing activities is embedded 

in the contractual terms of the license for the 

AA trademark. Accordingly, pursuant to 

paragraph (f)(4)(i) of this section, ordinarily 

no separate allocation would be appropriate 

with respect to the embedded contributions 

in year 1. See § 1.482–9(m)(4). 

(iii) Whether an allocation is warranted 

with respect to the royalty under the license 

agreement would be analyzed under § 1.482– 

1, and this section through § 1.482–6. The 

comparability analysis would include 

consideration of all relevant factors, such as 

the term and geographical exclusivity of the 

license, the nature of the intangible property 

subject to the license, and the nature of the 

marketing activities required to be 

undertaken pursuant to the license. Pursuant 

to paragraph (f)(4)(i) of this section, the 

analysis would also take into account the fact 

that the compensation for the marketing 

services is embedded in the royalty paid for 

use of the AA trademark, rather than 

provided for in a separate services agreement. 

For illustrations of application of the best 

method rule, see § 1.482–8 Examples 10, 11, 

and 12. 

Example 4. (i) Facts. The year 1 facts are 

the same as in Example 3, with the following 

exceptions. In year 2, USSub undertakes 

certain incremental marketing activities in 

addition to those required by the contractual 

terms of the license for the AA trademark 

executed in year 1. The parties do not 

execute a separate agreement with respect to 

these incremental marketing activities 

performed by USSub. The license agreement 

executed in year 1 is of sufficient duration 

that it is reasonable to anticipate that USSub 

will obtain the benefit of its incremental 

activities, in the form of increased sales or 

revenues of trademarked products in the U.S. 

market. 

(ii) To the extent that it was reasonable to 

anticipate that USSub’s incremental 

marketing activities would increase the value 

only of USSub’s intangible property (that is, 

USSub’s license to use the AA trademark for 

a specified term), and not the value of the AA 

trademark owned by FP, USSub’s 

incremental activities do not constitute a 

contribution for which an allocation is 

warranted under paragraph (f)(4)(i) of this 

section. 

Example 5. (i) Facts. The year 1 facts are 

the same as in Example 3. In year 2, FP and 

USSub enter into a separate services 

agreement that obligates USSub to perform 

certain incremental marketing activities to 

promote AA trademark athletic gear in the 

United States, above and beyond the 

activities specified in the license agreement 

executed in year 1. In year 2, USSub begins 

to perform these incremental activities, 

pursuant to the separate services agreement 

with FP. 

(ii) Whether an allocation is warranted 

with respect to USSub’s incremental 

marketing activities covered by the separate 

services agreement would be evaluated under 

§§ 1.482–1 and 1.482–9, including a 

comparison of the compensation provided for 

the services with the results obtained under 

a method pursuant to § 1.482–9, selected and 

applied in accordance with the best method 

rule of § 1.482–1(c). 

(iii) Whether an allocation is warranted 

with respect to the royalty under the license 

agreement is determined under § 1.482–1, 

and this section through § 1.482–6. The 

comparability analysis would include 

consideration of all relevant factors, such as 

the term and geographical exclusivity of the 

license, the nature of the intangible property 

subject to the license, and the nature of the 

marketing activities required to be 

undertaken pursuant to the license. The 

comparability analysis would take into 

account that the compensation for the 

incremental activities by USSub is provided 

for in the separate services agreement, rather 

than embedded in the royalty paid for use of 

the AA trademark. For illustrations of 

application of the best method rule, see 

§ 1.482–8 Examples 10, 11, and 12. 

Example 6. (i) Facts. The year 1 facts are 

the same as in Example 3. In year 2, FP and 

USSub enter into a separate services 

agreement that obligates FP to perform 

incremental marketing activities, not 

specified in the year 1 license, by advertising 

AA trademarked athletic gear in selected 

international sporting events, such as the 

Olympics and the soccer World Cup. FP’s 

corporate advertising department develops 

and coordinates these special promotions. 

The separate services agreement obligates 

USSub to pay an amount to FP for the benefit 

to USSub that may reasonably be anticipated 

as the result of FP’s incremental activities. 

The separate services agreement is not a 

qualified cost sharing arrangement under 

§ 1.482–7T. FP begins to perform the 

incremental activities in year 2 pursuant to 

the separate services agreement. 

(ii) Whether an allocation is warranted 

with respect to the incremental marketing 

activities performed by FP under the separate 

services agreement would be evaluated under 

§ 1.482–9. Under the circumstances, it is 

reasonable to anticipate that FP’s activities 

would increase the value of USSub’s license 

as well as the value of FP’s trademark. 

Accordingly, the incremental activities by FP 

may constitute in part a controlled services 

transaction for which USSub must 

compensate FP. The analysis of whether an 

allocation is warranted would include a 

comparison of the compensation provided for 

the services with the results obtained under 

a method pursuant to § 1.482–9, selected and 

applied in accordance with the best method 

rule of § 1.482–1(c). 

(iii) Whether an allocation is appropriate 

with respect to the royalty under the license 

agreement would be evaluated under 

§§ 1.482–1 through 1.482–3, this section, and 

§§ 1.482–5 and 1.482–6. The comparability 

analysis would include consideration of all 

relevant factors, such as the term and 

geographical exclusivity of USSub’s license, 

the nature of the intangible property subject 

to the license, and the marketing activities 

required to be undertaken by both FP and 

USSub pursuant to the license. This 

comparability analysis would take into 

account that the compensation for the 

incremental activities performed by FP was 

provided for in the separate services 

agreement, rather than embedded in the 

royalty paid for use of the AA trademark. For 

illustrations of application of the best method 

rule, see § 1.482–8, Example 10, Example 11, 

and Example 12. 

* * * * * 

(g) [Reserved]. For further guidance, 

see § 1.482–4T(g). 

(h) Effective/applicability date—(1) In 

general. The provisions of paragraphs 

(f)(3)(i)(A), (f)(3)(ii), and (f)(4) of this 

section are generally applicable for 

taxable years beginning after July 31, 

2009. 

(2) Election to apply regulation to 

earlier taxable years. A person may elect 

to apply the provisions of paragraphs 

(f)(3)(i)(A), (f)(3)(ii), and (f)(4) of this 

section to earlier taxable years in 

accordance with the rules set forth in 

§ 1.482–9(n)(2). 

■ Par. 9. Section 1.482–4T is amended 

as follows: 

■ 1. Revise paragraphs (a), (b), (c), (d), 

(e), (f)(1), (f)(2), (f)(3)(i)(A), (f)(3)(ii), 

(f)(4), (f)(5), (f)(6), and (h)(3). 

■ 2. Redesignate paragraph (h)(1) as 

paragraph (h), revise the heading and 

remove the first sentence in newlydesignated paragraph (h). 

■ 3. Remove paragraph (h)(2). 

■ 4. Redesignate paragraph (h)(3) as 

paragraph (i). 

The revisions read as follows: 

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38844 Federal Register / Vol. 74, No. 148 / Tuesday, August 4, 2009 / Rules and Regulations 

§ 1.482–4T Methods to determine taxable 

income in connection with a transfer of 

intangible property (temporary). 

(a) through (f)(3)(i)(A) [Reserved]. For 

further guidance, see § 1.482–4(a) 

through (f)(3)(i)(A). 

(B) * * * 

(f)(3)(ii) through (f)(6) [Reserved]. For 

further guidance, see § 1.482–4(f)(3)(ii) 

through (f)(6) 

(g) * * * 

(h) Effective/applicability date. * * * 

* * * * * 

■ Par. 10. Section 1.482–6 is amended 

by revising paragraphs (c)(2)(ii)(B)(1), 

(c)(2)(ii)(D), (c)(3)(i)(A), (c)(3)(i)(B), 

(c)(3)(ii)(D), and adding paragraph (d) to 

read as follows: 

§ 1.482–6 Profit split method. 

* * * * * 

(c) * * * 

(2) * * * 

(ii) * * * 

(B) Comparability—(1) In general. The 

degree of comparability between the 

controlled and uncontrolled taxpayers is 

determined by applying the 

comparability provisions of § 1.482– 

1(d). The comparable profit split 

compares the division of operating 

profits among the controlled taxpayers 

to the division of operating profits 

among uncontrolled taxpayers engaged 

in similar activities under similar 

circumstances. Although all of the 

factors described in § 1.482–1(d)(3) must 

be considered, comparability under this 

method is particularly dependent on the 

considerations described under the 

comparable profits method in § 1.482– 

5(c)(2) or § 1.482–9(f)(2)(iii) because this 

method is based on a comparison of the 

operating profit of the controlled and 

uncontrolled taxpayers. In addition, 

because the contractual terms of the 

relationship among the participants in 

the relevant business activity will be a 

principal determinant of the allocation 

of functions and risks among them, 

comparability under this method also 

depends particularly on the degree of 

similarity of the contractual terms of the 

controlled and uncontrolled taxpayers. 

Finally, the comparable profit split may 

not be used if the combined operating 

profit (as a percentage of the combined 

assets) of the uncontrolled comparables 

varies significantly from that earned by 

the controlled taxpayers. 

* * * * * 

(D) Other factors affecting reliability. 

Like the methods described in §§ 1.482– 

3, 1.482–4, 1.482–5, and 1.482–9, the 

comparable profit split relies 

exclusively on external market 

benchmarks. As indicated in § 1.482– 

1(c)(2)(i), as the degree of comparability 

between the controlled and 

uncontrolled transactions increases, the 

relative weight accorded the analysis 

under this method will increase. In 

addition, the reliability of the analysis 

under this method may be enhanced by 

the fact that all parties to the controlled 

transaction are evaluated under the 

comparable profit split. However, the 

reliability of the results of an analysis 

based on information from all parties to 

a transaction is affected by the 

reliability of the data and the 

assumptions pertaining to each party to 

the controlled transaction. Thus, if the 

data and assumptions are significantly 

more reliable with respect to one of the 

parties than with respect to the others, 

a different method, focusing solely on 

the results of that party, may yield more 

reliable results. 

* * * * * 

(3) * * * 

(i) * * * 

(A) Allocate income to routine 

contributions. The first step allocates 

operating income to each party to the 

controlled transactions to provide a 

market return for its routine 

contributions to the relevant business 

activity. Routine contributions are 

contributions of the same or a similar 

kind to those made by uncontrolled 

taxpayers involved in similar business 

activities for which it is possible to 

identify market returns. Routine 

contributions ordinarily include 

contributions of tangible property, 

services and intangible property that are 

generally owned by uncontrolled 

taxpayers engaged in similar activities. 

A functional analysis is required to 

identify these contributions according to 

the functions performed, risks assumed, 

and resources employed by each of the 

controlled taxpayers. Market returns for 

the routine contributions should be 

determined by reference to the returns 

achieved by uncontrolled taxpayers 

engaged in similar activities, consistent 

with the methods described in §§ 1.482– 

3, 1.482–4, 1.482–5 and 1.482–9. 

(B) Allocate residual profit—(1) 

Nonroutine contributions generally. The 

allocation of income to the controlled 

taxpayer’s routine contributions will not 

reflect profits attributable to each 

controlled taxpayer’s contributions to 

the relevant business activity that are 

not routine (nonroutine contributions). 

A nonroutine contribution is a 

contribution that is not accounted for as 

a routine contribution. Thus, in cases 

where such nonroutine contributions 

are present there normally will be an 

unallocated residual profit after the 

allocation of income described in 

paragraph (c)(3)(i)(A) of this section. 

Under this second step, the residual 

profit generally should be divided 

among the controlled taxpayers based 

upon the relative value of their 

nonroutine contributions to the relevant 

business activity. The relative value of 

the nonroutine contributions of each 

taxpayer should be measured in a 

manner that most reliably reflects each 

nonroutine contribution made to the 

controlled transaction and each 

controlled taxpayer’s role in the 

nonroutine contributions. If the 

nonroutine contribution by one of the 

controlled taxpayers is also used in 

other business activities (such as 

transactions with other controlled 

taxpayers), an appropriate allocation of 

the value of the nonroutine contribution 

must be made among all the business 

activities in which it is used. 

(2) Nonroutine contributions of 

intangible property. In many cases, 

nonroutine contributions of a taxpayer 

to the relevant business activity may be 

contributions of intangible property. For 

purposes of paragraph (c)(3)(i)(B)(1) of 

this section, the relative value of 

nonroutine intangible property 

contributed by taxpayers may be 

measured by external market 

benchmarks that reflect the fair market 

value of such intangible property. 

Alternatively, the relative value of 

nonroutine intangible property 

contributions may be estimated by the 

capitalized cost of developing the 

intangible property and all related 

improvements and updates, less an 

appropriate amount of amortization 

based on the useful life of each 

intangible property. Finally, if the 

intangible property development 

expenditures of the parties are relatively 

constant over time and the useful life of 

the intangible property contributed by 

all parties is approximately the same, 

the amount of actual expenditures in 

recent years may be used to estimate the 

relative value of nonroutine intangible 

property contributions. 

* * * * * 

(ii) * * * 

(D) Other factors affecting reliability. 

Like the methods described in §§ 1.482– 

3, 1.482–4, 1.482–5, and 1.482–9, the 

first step of the residual profit split 

relies exclusively on external market 

benchmarks. As indicated in § 1.482– 

1(c)(2)(i), as the degree of comparability 

between the controlled and 

uncontrolled transactions increases, the 

relative weight accorded the analysis 

under this method will increase. In 

addition, to the extent the allocation of 

profits in the second step is not based 

on external market benchmarks, the 

reliability of the analysis will be 

decreased in relation to an analysis 

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Federal Register / Vol. 74, No. 148 / Tuesday, August 4, 2009 / Rules and Regulations 38845 

under a method that relies on market 

benchmarks. Finally, the reliability of 

the analysis under this method may be 

enhanced by the fact that all parties to 

the controlled transaction are evaluated 

under the residual profit split. However, 

the reliability of the results of an 

analysis based on information from all 

parties to a transaction is affected by the 

reliability of the data and the 

assumptions pertaining to each party to 

the controlled transaction. Thus, if the 

data and assumptions are significantly 

more reliable with respect to one of the 

parties than with respect to the others, 

a different method, focusing solely on 

the results of that party, may yield more 

reliable results. 

* * * * * 

(d) Effective/applicability date—(1) In 

general. The provisions of paragraphs 

(c)(2)(ii)(B)(1) and (D), (c)(3)(i)(A) and 

(B), and (c)(3)(ii)(D) of this section are 

generally applicable for taxable years 

beginning after July 31, 2009. 

(2) Election to apply regulation to 

earlier taxable years. A person may elect 

to apply the provisions of paragraphs 

(c)(2)(ii)(B)(1) and (D), (c)(3)(i)(A) and 

(B), and (c)(3)(ii)(D) of this section to 

earlier taxable years in accordance with 

the rules set forth in § 1.482–9(n)(2). 

§ 1.482–6T [Removed] 

■ Par. 11. Section 1.482–6T is removed. 

■ Par. 12. Section 1.482–8 is amended 

by revising paragraph (b) Examples 10, 

11, 12, 13, 14, 15, 16, 17 and 18, and 

adding paragraph (c) to read as follows: 

§ 1.482–8 Examples of the best method 

rule. 

* * * * * 

(b) * * * 

Example 10. Cost of services plus method 

preferred to other methods. (i) FP designs 

and manufactures consumer electronic 

devices that incorporate advanced 

technology. In year 1, FP introduces Product 

X, an entertainment device targeted primarily 

at the youth market. FP’s wholly-owned, 

exclusive U.S. distributor, USSub, sells 

Product X in the U.S. market. USSub hires 

an independent marketing firm, Agency A, to 

promote Product X in the U.S. market. 

Agency A has successfully promoted other 

electronic products on behalf of other 

uncontrolled parties. USSub executes a oneyear, renewable contract with Agency A that 

requires it to develop the market for Product 

X, within an annual budget set by USSub. In 

years 1 through 3, Agency A develops 

advertising, buys media, and sponsors events 

featuring Product X. Agency A receives a 

markup of 25% on all expenses of promoting 

Product X, with the exception of media buys, 

which are reimbursed at cost. During year 3, 

sales of Product X decrease sharply, as 

Product X is displaced by competitors’ 

products. At the end of year 3, sales of 

Product X are discontinued. 

(ii) Prior to the start of year 4, FP develops 

a new entertainment device, Product Y. Like 

Product X, Product Y is intended for sale to 

the youth market, but it is marketed under a 

new trademark distinct from that used for 

Product X. USSub decides to perform all U.S. 

market promotion for Product Y. USSub hires 

key Agency A staff members who handled 

the successful Product X campaign. To 

promote Product Y, USSub intends to use 

methods similar to those used successfully 

by Agency A to promote Product X (print 

advertising, media, event sponsorship, etc.). 

FP and USSub enter into a one-year, 

renewable agreement concerning promotion 

of Product Y in the U.S. market. Under the 

agreement, FP compensates USSub for 

promoting Product Y, based on a cost of 

services plus markup of A%. Third-party 

media buys by USSub in connection with 

Product Y are reimbursed at cost. 

(iii) Assume that under the contractual 

arrangements between FP and USSub, the 

arm’s length consideration for Product Y and 

the trademark or other intangible property 

may be determined reliably under one or 

more transfer pricing methods. At issue in 

this example is the separate evaluation of the 

arm’s length compensation for the year 4 

promotional activities performed by USSub 

pursuant to its contract with FP. 

(iv) USSub’s accounting records contain 

reliable data that separately state the costs 

incurred to promote Product Y. A functional 

analysis indicates that USSub’s activities to 

promote Product Y in year 4 are similar to 

activities performed by Agency A during 

years 1 through 3 under the contract with FP. 

In other respects, no material differences 

exist in the market conditions or the 

promotional activities performed in year 4, as 

compared to those in years 1 through 3. 

(v) It is possible to identify uncontrolled 

distributors or licensees of electronic 

products that perform, as one component of 

their business activities, promotional 

activities similar to those performed by 

USSub. However, it is unlikely that publicly 

available accounting data from these 

companies would allow computation of the 

comparable transactional costs or total 

services costs associated with the marketing 

or promotional activities that these entities 

perform, as one component of business 

activities. If that were possible, the 

comparable profits method for services might 

provide a reliable measure of an arm’s length 

result. The functional analysis of the 

marketing activities performed by USSub in 

year 4 indicates that they are similar to the 

activities performed by Agency A in years 1 

through 3 for Product X. Because reliable 

information is available concerning the 

markup on costs charged in a comparable 

uncontrolled transaction, the most reliable 

measure of an arm’s length price is the cost 

of services plus method in § 1.482–9(e). 

Example 11. CPM for services preferred to 

other methods. (i) FP manufactures furniture 

and accessories for residential use. FP sells 

its products to retailers in Europe under the 

trademark, ‘‘Moda.’’ FP holds all worldwide 

rights to the trademark, including in the 

United States. USSub is FP’s wholly-owned 

subsidiary in the U.S. market and the 

exclusive U.S. distributor of FP’s 

merchandise. Historically, USSub dealt only 

with specialized designers in the U.S. market 

and advertised in trade publications targeted 

to this market. Although items sold in the 

U.S. and Europe are physically identical, 

USSub’s U.S. customers generally resell the 

merchandise as non-branded merchandise. 

(ii) FP retains an independent firm to 

evaluate the feasibility of selling FP’s 

trademarked merchandise in the general 

wholesale and retail market in the United 

States. The study concludes that this segment 

of the U.S. market, which is not exploited by 

USSub, may generate substantial profits. 

Based on this study, FP enters into a separate 

agreement with USSub, which provides that 

USSub will develop this market in the 

United States for the benefit of FP. USSub 

separately accounts for personnel expenses, 

overhead, and out-of-pocket costs attributable 

to the initial stage of the marketing campaign 

(Phase I). USSub receives as compensation its 

costs, plus a markup of X%, for activities in 

Phase I. At the end of Phase I, FP will 

evaluate the program. If success appears 

likely, USSub will begin full-scale 

distribution of trademarked merchandise in 

the new market segment, pursuant to 

agreements negotiated with FP at that time. 

(iii) Assume that under the contractual 

arrangements in effect between FP and 

USSub, the arm’s length consideration for the 

merchandise and the trademark or other 

intangible property may be determined 

reliably under one or more transfer pricing 

methods. At issue in this example is the 

separate evaluation of the arm’s length 

compensation for the marketing activities 

conducted by USSub in years 1 and 

following. 

(iv) A functional analysis reveals that 

USSub’s activities consist primarily of 

modifying the promotional materials created 

by FP, negotiating media buys, and arranging 

promotional events. FP separately 

compensates USSub for all Phase I activities, 

and detailed accounting information is 

available regarding the costs of these 

activities. The Phase I activities of USSub are 

similar to those of uncontrolled companies 

that perform, as their primary business 

activity, a range of advertising and media 

relations activities on a contract basis for 

uncontrolled parties. 

(v) No information is available concerning 

the comparable uncontrolled prices for 

services in transactions similar to those 

engaged in by FP and USSub. Nor is any 

information available concerning 

uncontrolled transactions that would allow 

application of the cost of services plus 

method. It is possible to identify 

uncontrolled distributors or licensees of 

home furnishings that perform, as one 

component of their business activities, 

promotional activities similar to those 

performed by USSub. However, it is unlikely 

that publicly available accounting data from 

these companies would allow computation of 

the comparable transactional costs or total 

services costs associated with the marketing 

or promotional activities that these entities 

performed, as one component of their 

business activities. On the other hand, it is 

possible to identify uncontrolled advertising 

and media relations companies, the principal 

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business activities of which are similar to the 

Phase I activities of USSub. Under these 

circumstances, the most reliable measure of 

an arm’s length price is the comparable 

profits method of § 1.482–9(f). The 

uncontrolled advertising comparables’ 

treatment of material items, such as 

classification of items as cost of goods sold 

or selling, general, and administrative 

expenses, may differ from that of USSub. 

Such inconsistencies in accounting treatment 

between the uncontrolled comparables and 

the tested party, or among the comparables, 

are less important when using the ratio of 

operating profit to total services costs under 

the comparable profits method for services in 

§ 1.482–9(f). Under this method, the 

operating profit of USSub from the Phase I 

activities is compared to the operating profit 

of uncontrolled parties that perform general 

advertising and media relations as their 

primary business activity. 

Example 12. Residual profit split preferred 

to other methods. (i) USP is a manufacturer 

of athletic apparel sold under the AA 

trademark, to which FP owns the worldwide 

rights. USP sells AA trademark apparel in 

countries throughout the world, but prior to 

year 1, USP did not sell its merchandise in 

Country X. In year 1, USP acquires an 

uncontrolled Country X company which 

becomes its wholly-owned subsidiary, XSub. 

USP enters into an exclusive distribution 

arrangement with XSub in Country X. Before 

being acquired by USP in year 1, XSub 

distributed athletic apparel purchased from 

uncontrolled suppliers and resold that 

merchandise to retailers. After being acquired 

by USP in year 1, XSub continues to 

distribute merchandise from uncontrolled 

suppliers and also begins to distribute AA 

trademark apparel. Under a separate 

agreement with USP, XSub uses its best 

efforts to promote the AA trademark in 

Country X, with the goal of maximizing sales 

volume and revenues from AA merchandise. 

(ii) Prior to year 1, USP executed long-term 

endorsement contracts with several 

prominent professional athletes. These 

contracts give USP the right to use the names 

and likenesses of the athletes in any country 

in which AA merchandise is sold during the 

term of the contract. These contracts remain 

in effect for five years, starting in year 1. 

Before being acquired by USP, XSub renewed 

a long-term agreement with SportMart, an 

uncontrolled company that owns a 

nationwide chain of sporting goods retailers 

in Country X. XSub has been SportMart’s 

primary supplier from the time that 

SportMart began operations. Under the 

agreement, SportMart will provide AA 

merchandise preferred shelf-space and will 

feature AA merchandise at no charge in its 

print ads and seasonal promotions. In 

consideration for these commitments, USP 

and XSub grant SportMart advance access to 

new products and the right to use the 

professional athletes under contract with 

USP in SportMart advertisements featuring 

AA merchandise (subject to approval of 

content by USP). 

(iii) Assume that it is possible to segregate 

all transactions by XSub that involve 

distribution of merchandise acquired from 

uncontrolled distributors (non-controlled 

transactions). In addition, assume that, apart 

from the activities undertaken by USP and 

XSub to promote AA apparel in Country X, 

the arm’s length compensation for other 

functions performed by USP and XSub in the 

Country X market in years 1 and following 

can be reliably determined. At issue in this 

Example 12 is the application of the residual 

profit split analysis to determine the 

appropriate division between USP and XSub 

of the balance of the operating profits from 

the Country X market, that is the portion 

attributable to nonroutine contributions to 

the marketing and promotional activities. 

(iv) A functional analysis of the marketing 

and promotional activities conducted in the 

Country X market, as described in this 

example, indicates that both USP and XSub 

made nonroutine contributions to the 

business activity. USP contributed the longterm endorsement contracts with 

professional athletes. XSub contributed its 

long-term contractual rights with SportMart, 

which were made more valuable by its 

successful, long-term relationship with 

SportMart. 

(v) Based on the facts and circumstances, 

including the fact that both USP and XSub 

made valuable nonroutine contributions to 

the marketing and promotional activities and 

an analysis of the availability (or lack thereof) 

of comparable and reliable market 

benchmarks, the Commissioner determines 

that the most reliable measure of an arm’s 

length result is the residual profit split 

method in § 1.482–9(g). The residual profit 

split analysis would take into account both 

routine and nonroutine contributions by USP 

and XSub, in order to determine an 

appropriate allocation of the combined 

operating profits in the Country X market 

from the sale of AA merchandise and from 

related promotional and marketing activities. 

Examples 13 through 18. [Reserved]. 

For further guidance, see § 1.482–8T(b) 

Examples 13 through 18. 

(c) Effective/applicability date—(1) In 

general. The provisions of paragraph (b) 

Examples 10, 11, and 12 of this section 

are generally applicable for taxable 

years beginning after July 31, 2009. 

(2) Election to apply regulation to 

earlier taxable years. A person may elect 

to apply the provisions of paragraph (b) 

Examples 10, 11, and 12 of this section 

to earlier taxable years in accordance 

with the rules set forth in § 1.482– 

9(n)(2). 

■ Par. 13. Section 1.482–8T is amended 

as follows: 

■ 1. Revise paragraph (b) Examples 1, 2, 

3, 4, 5, 6, 7, 8, 9, 10, 11 and 12. 

■ 2. Redesignate paragraph (c)(1) as 

paragraph (c), revise the heading and 

remove the first sentence in newlydesignated paragraph (c). 

■ 3. Remove paragraph (c)(2). 

■ 4. Redesignate paragraph (c)(3) as 

paragraph (d) and remove the first 

sentence. 

The revisions read as follows: 

§ 1.482–8T Examples of the best method 

rule (temporary). 

* * * * * 

(b) Examples 1 through 12. 

[Reserved]. For further guidance, see 

§ 1.482–8(b) Examples 1 through 12. 

* * * * * 

(c) Effective/applicability date. * * * 

* * * * * 

■ Par. 14. Section 1.482–9 is added to 

read as follows: 

§ 1.482–9 Methods to determine taxable 

income in connection with a controlled 

services transaction. 

(a) In general. The arm’s length 

amount charged in a controlled services 

transaction must be determined under 

one of the methods provided for in this 

section. Each method must be applied 

in accordance with the provisions of 

§ 1.482–1, including the best method 

rule of § 1.482–1(c), the comparability 

analysis of § 1.482–1(d), and the arm’s 

length range of § 1.482–1(e), except as 

those provisions are modified in this 

section. The methods are— 

(1) The services cost method, 

described in paragraph (b) of this 

section; 

(2) The comparable uncontrolled 

services price method, described in 

paragraph (c) of this section; 

(3) The gross services margin method, 

described in paragraph (d) of this 

section; 

(4) The cost of services plus method, 

described in paragraph (e) of this 

section; 

(5) The comparable profits method, 

described in § 1.482–5 and in paragraph 

(f) of this section; 

(6) The profit split method, described 

in § 1.482–6 and in paragraph (g) of this 

section; and 

(7) Unspecified methods, described in 

paragraph (h) of this section. 

(b) Services cost method—(1) In 

general. The services cost method 

evaluates whether the amount charged 

for certain services is arm’s length by 

reference to the total services costs (as 

defined in paragraph (j) of this section) 

with no markup. If a taxpayer applies 

the services cost method in accordance 

with the rules of this paragraph (b), then 

it will be considered the best method for 

purposes of § 1.482–1(c), and the 

Commissioner’s allocations will be 

limited to adjusting the amount charged 

for such services to the properly 

determined amount of such total 

services costs. 

(2) Eligibility for the services cost 

method. To apply the services cost 

method to a service in accordance with 

the rules of this paragraph (b), all of the 

following requirements must be 

satisfied with respect to the service— 

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(i) The service is a covered service as 

defined in paragraph (b)(3) of this 

section; 

(ii) The service is not an excluded 

activity as defined in paragraph (b)(4) of 

this section; 

(iii) The service is not precluded from 

constituting a covered service by the 

business judgment rule described in 

paragraph (b)(5) of this section; and 

(iv) Adequate books and records are 

maintained as described in paragraph 

(b)(6) of this section. 

(3) Covered services. For purposes of 

this paragraph (b), covered services 

consist of a controlled service 

transaction or a group of controlled 

service transactions (see § 1.482– 

1(f)(2)(i) (aggregation of transactions)) 

that meet the definition of specified 

covered services or low margin covered 

services. 

(i) Specified covered services. 

Specified covered services are 

controlled services transactions that the 

Commissioner specifies by revenue 

procedure. Services will be included in 

such revenue procedure based upon the 

Commissioner’s determination that the 

specified covered services are support 

services common among taxpayers 

across industry sectors and generally do 

not involve a significant median 

comparable markup on total services 

costs. For the definition of the median 

comparable markup on total services 

costs, see paragraph (b)(3)(ii) of this 

section. The Commissioner may add to, 

subtract from, or otherwise revise the 

specified covered services described in 

the revenue procedure by subsequent 

revenue procedure, which amendments 

will ordinarily be prospective only in 

effect. 

(ii) Low margin covered services. Low 

margin covered services are controlled 

services transactions for which the 

median comparable markup on total 

services costs is less than or equal to 

seven percent. For purposes of this 

paragraph (b), the median comparable 

markup on total services costs means 

the excess of the arm’s length price of 

the controlled services transaction 

determined under the general section 

482 regulations without regard to this 

paragraph (b), using the interquartile 

range described in § 1.482–1(e)(2)(iii)(C) 

and as necessary adjusting to the 

median of such interquartile range, over 

total services costs, expressed as a 

percentage of total services costs. 

(4) Excluded activity. The following 

types of activities are excluded 

activities: 

(i) Manufacturing. 

(ii) Production. 

(iii) Extraction, exploration, or 

processing of natural resources. 

(iv) Construction. 

(v) Reselling, distribution, acting as a 

sales or purchasing agent, or acting 

under a commission or other similar 

arrangement. 

(vi) Research, development, or 

experimentation. 

(vii) Engineering or scientific. 

(viii) Financial transactions, including 

guarantees. 

(ix) Insurance or reinsurance. 

(5) Not services that contribute 

significantly to fundamental risks of 

business success or failure. A service 

cannot constitute a covered service 

unless the taxpayer reasonably 

concludes in its business judgment that 

the service does not contribute 

significantly to key competitive 

advantages, core capabilities, or 

fundamental risks of success or failure 

in one or more trades or businesses of 

the controlled group, as defined in 

§ 1.482–1(i)(6). In evaluating the 

reasonableness of the conclusion 

required by this paragraph (b)(5), 

consideration will be given to all the 

facts and circumstances. 

(6) Adequate books and records. 

Permanent books of account and records 

are maintained for as long as the costs 

with respect to the covered services are 

incurred by the renderer. Such books 

and records must include a statement 

evidencing the taxpayer’s intention to 

apply the services cost method to 

evaluate the arm’s length charge for 

such services. Such books and records 

must be adequate to permit verification 

by the Commissioner of the total 

services costs incurred by the renderer, 

including a description of the services 

in question, identification of the 

renderer and the recipient of such 

services, and sufficient documentation 

to allow verification of the methods 

used to allocate and apportion such 

costs to the services in question in 

accordance with paragraph (k) of this 

section. 

(7) Shared services arrangement—(i) 

In general. If the services cost method is 

used to evaluate the amount charged for 

covered services, and such services are 

the subject of a shared services 

arrangement, then the arm’s length 

charge to each participant for such 

services will be the portion of the total 

costs of the services otherwise 

determined under the services cost 

method of this paragraph (b) that is 

properly allocated to such participant 

pursuant to the arrangement. 

(ii) Requirements for shared services 

arrangement. A shared services 

arrangement must meet the 

requirements described in this 

paragraph (b)(7). 

(A) Eligibility. To be eligible for 

treatment under this paragraph (b)(7), a 

shared services arrangement must— 

(1) Include two or more participants; 

(2) Include as participants all 

controlled taxpayers that reasonably 

anticipate a benefit (as defined under 

paragraph (l)(3)(i) of this section) from 

one or more covered services specified 

in the shared services arrangement; and 

(3) Be structured such that each 

covered service (or each reasonable 

aggregation of services within the 

meaning of paragraph (b)(7)(iii)(B) of 

this section) confers a benefit on at least 

one participant in the shared services 

arrangement. 

(B) Allocation. The costs for covered 

services must be allocated among the 

participants based on their respective 

shares of the reasonably anticipated 

benefits from those services, without 

regard to whether the anticipated 

benefits are in fact realized. Reasonably 

anticipated benefits are benefits as 

defined in paragraph (l)(3)(i) of this 

section. The allocation of costs must 

provide the most reliable measure of the 

participants’ respective shares of the 

reasonably anticipated benefits under 

the principles of the best method rule. 

See § 1.482–1(c). The allocation must be 

applied on a consistent basis for all 

participants and services. The allocation 

to each participant in each taxable year 

must reasonably reflect that 

participant’s respective share of 

reasonably anticipated benefits for such 

taxable year. If the taxpayer reasonably 

concluded that the shared services 

arrangement (including any aggregation 

pursuant to paragraph (b)(7)(iii)(B) of 

this section) allocated costs for covered 

services on a basis that most reliably 

reflects the participants’ respective 

shares of the reasonably anticipated 

benefits attributable to such services, as 

provided for in this paragraph (b)(7), 

then the Commissioner may not adjust 

such allocation basis. 

(C) Documentation. The taxpayer 

must maintain sufficient documentation 

to establish that the requirements of this 

paragraph (b)(7) are satisfied, and 

include— 

(1) A statement evidencing the 

taxpayer’s intention to apply the 

services cost method to evaluate the 

arm’s length charge for covered services 

pursuant to a shared services 

arrangement; 

(2) A list of the participants and the 

renderer or renderers of covered 

services under the shared services 

arrangement; 

(3) A description of the basis of 

allocation to all participants, consistent 

with the participants’ respective shares 

of reasonably anticipated benefits; and 

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38848 Federal Register / Vol. 74, No. 148 / Tuesday, August 4, 2009 / Rules and Regulations 

(4) A description of any aggregation of 

covered services for purposes of the 

shared services arrangement, and an 

indication whether this aggregation (if 

any) differs from the aggregation used to 

evaluate the median comparable 

markup for any low margin covered 

services described in paragraph (b)(3)(ii) 

of this section. 

(iii) Definitions and special rules—(A) 

Participant. A participant is a controlled 

taxpayer that reasonably anticipates 

benefits from covered services subject to 

a shared services arrangement that 

substantially complies with the 

requirements described in this 

paragraph (b)(7). 

(B) Aggregation. Two or more covered 

services may be aggregated in a 

reasonable manner taking into account 

all the facts and circumstances, 

including whether the relative 

magnitude of reasonably anticipated 

benefits of the participants sharing the 

costs of such aggregated services may be 

reasonably reflected by the allocation 

basis employed pursuant to paragraph 

(b)(7)(ii)(B) of this section. The 

aggregation of services under a shared 

services arrangement may differ from 

the aggregation used to evaluate the 

median comparable markup for any low 

margin covered services described in 

paragraph (b)(3)(ii) of this section, 

provided that such alternative 

aggregation can be implemented on a 

reasonable basis, including 

appropriately identifying and isolating 

relevant costs, as necessary. 

(C) Coordination with cost sharing 

arrangements. To the extent that an 

allocation is made to a participant in a 

shared services arrangement that is also 

a participant in a cost sharing 

arrangement subject to § 1.482–7T, such 

amount with respect to covered services 

is first allocated pursuant to the shared 

services arrangement under this 

paragraph (b)(7). Costs allocated 

pursuant to a shared services 

arrangement may (if applicable) be 

further allocated between the intangible 

property development activity under 

§ 1.482–7T and other activities of the 

participant. 

(8) Examples. The application of this 

section is illustrated by the following 

examples. No inference is intended 

whether the presence or absence of one 

or more facts is determinative of the 

conclusion in any example. For 

purposes of Examples 1 through 14, 

assume that Company P and its 

subsidiaries, Company Q and Company 

R, are corporations and members of the 

same group of controlled entities (PQR 

Controlled Group). For purposes of 

Example 15, assume that Company P 

and its subsidiary, Company S, are 

corporations and members of the same 

group of controlled entities (PS 

Controlled Group). For purposes of 

Examples 16 through 24, assume that 

Company P and its subsidiaries, 

Company X, Company Y, and Company 

Z, are corporations and members of the 

same group of controlled entities (PXYZ 

Group) and that Company P and its 

subsidiaries satisfy all of the 

requirements for a shared services 

arrangement specified in paragraphs 

(b)(7)(ii) and (iii) of this section. 

Example 1. Data entry services. (i) 

Company P, Company Q, and Company R 

own and operate hospitals. Each owns an 

electronic database of medical information 

gathered by doctors and nurses during 

interviews and treatment of its patients. All 

three databases are maintained and updated 

by Company P’s administrative support 

employees who perform data entry activities 

by entering medical information from the 

paper records of Company P, Company Q, 

and Company R into their respective 

databases. 

(ii) Assume that these services relating to 

data entry are specified covered services 

within the meaning of paragraph (b)(3)(i) of 

this section. Under the facts and 

circumstances of the business of the PQR 

Controlled Group, the taxpayer could 

reasonably conclude that these services do 

not contribute significantly to the controlled 

group’s key competitive advantages, core 

capabilities, or fundamental risks of success 

or failure in the group’s business. If these 

services meet the other requirements of this 

paragraph (b), Company P will be eligible to 

charge these services to Company Q and 

Company R in accordance with the services 

cost method. 

Example 2. Data entry services. (i) 

Company P, Company Q, and Company R 

specialize in data entry, data processing, and 

data conversion. Company Q and Company 

R’s data entry activities involve converting 

medical information data contained in paper 

records to a digital format. Company P 

specializes in data entry activities. This 

specialization reflects, in part, proprietary 

quality control systems and specially trained 

data entry experts used to ensure the highest 

degree of accuracy of data entry services. 

Company P is engaged by Company Q and 

Company R to perform these data entry 

activities for them. Company Q and Company 

R then charge their customers for the data 

entry activities performed by Company P. 

(ii) Assume that these services performed 

by Company P relating to data entry are 

specified covered services within the 

meaning of paragraph (b)(3)(i) of this section. 

Under the facts and circumstances, the 

taxpayer is unable to reasonably conclude 

that these services do not contribute 

significantly to the controlled group’s key 

competitive advantages, core capabilities, or 

fundamental risks of success or failure in the 

group’s business. Company P is not eligible 

to charge these services to Company Q and 

Company R in accordance with the services 

cost method. 

Example 3. Recruiting services. (i) 

Company P, Company Q, and Company R are 

manufacturing companies that sell their 

products to unrelated retail establishments. 

Company P’s human resources department 

recruits mid-level managers and engineers for 

itself as well as for Company Q and Company 

R by attending job fairs and other recruitment 

events. For recruiting higher-level managers 

and engineers, each of these companies uses 

recruiters from unrelated executive search 

firms. 

(ii) Assume that these services relating to 

recruiting are specified covered services 

within the meaning of paragraph (b)(3)(i) of 

this section. Under the facts and 

circumstances of the business of the PQR 

Controlled Group, the taxpayer could 

reasonably conclude that these services do 

not contribute significantly to the controlled 

group’s key competitive advantages, core 

capabilities, or fundamental risks of success 

or failure in the group’s business. If these 

services meet the other requirements of this 

paragraph (b), Company P will be eligible to 

charge these services to Company Q and 

Company R in accordance with the services 

cost method. 

Example 4. Recruiting services. (i) 

Company Q and Company R are executive 

recruiting service companies that are hired 

by other companies to recruit professionals. 

Company P is a recruiting agency that is 

engaged by Company Q and Company R to 

perform recruiting activities on their behalf 

in certain geographic areas. 

(ii) Assume that the services performed by 

Company P are specified covered services 

within the meaning of paragraph (b)(3)(i) of 

this section. Under the facts and 

circumstances, the taxpayer is unable to 

reasonably conclude that these services do 

not contribute significantly to the controlled 

group’s key competitive advantages, core 

capabilities, or fundamental risks of success 

or failure in the group’s business. Company 

P is not eligible to charge these services to 

Company Q and Company R in accordance 

with the services cost method. 

Example 5. Credit analysis services. (i) 

Company P is a manufacturer and distributor 

of clothing for retail stores. Company Q and 

Company R are distributors of clothing for 

retail stores. As part of its operations, 

personnel in Company P perform credit 

analysis on its customers. Most of the 

customers have a history of purchases from 

Company P, and the credit analysis involves 

a review of the recent payment history of the 

customer’s account. For new customers, the 

personnel in Company P perform a basic 

credit check of the customer using reports 

from a credit reporting agency. On behalf of 

Company Q and Company R, Company P 

performs credit analysis on customers who 

order clothing from Company Q and 

Company R using the same method as 

Company P uses for itself. 

(ii) Assume that these services relating to 

credit analysis are specified covered services 

within the meaning of paragraph (b)(3)(i) of 

this section. Under the facts and 

circumstances of the business of the PQR 

Controlled Group, the taxpayer could 

reasonably conclude that these services do 

not contribute significantly to the controlled 

group’s key competitive advantages, core 

capabilities, or fundamental risks of success 

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or failure in the group’s business. If these 

services meet the other requirements of this 

paragraph (b), Company P will be eligible to 

charge these services to Company Q and 

Company R in accordance with the services 

cost method. 

Example 6. Credit analysis services. (i) 

Company P, Company Q, and Company R 

lease furniture to retail customers who 

present a significant credit risk and are 

generally unable to lease furniture from other 

providers. As part of its leasing operations, 

personnel in Company P perform credit 

analysis on each of the potential lessees. The 

personnel have developed special expertise 

in determining whether a particular customer 

who presents a significant credit risk (as 

indicated by credit reporting agencies) will 

be likely to make the requisite lease 

payments on a timely basis. Also, as part of 

its operations, Company P performs similar 

credit analysis services for Company Q and 

Company R, which charge correspondingly 

high monthly lease payments. 

(ii) Assume that these services relating to 

credit analysis are specified covered services 

within the meaning of paragraph (b)(3)(i) of 

this section. Under the facts and 

circumstances, the taxpayer is unable to 

reasonably conclude that these services do 

not contribute significantly to the controlled 

group’s key competitive advantages, core 

capabilities, or fundamental risks of success 

or failure in the group’s business. Company 

P is not eligible to charge these services to 

Company Q and Company R in accordance 

with the services cost method. 

Example 7. Credit analysis services. (i) 

Company P is a large full-service bank, which 

provides products and services to corporate 

and consumer markets, including unsecured 

loans, secured loans, lines of credit, letters of 

credit, conversion of foreign currency, 

consumer loans, trust services, and sales of 

certificates of deposit. Company Q makes 

routine consumer loans to individuals, such 

as auto loans and home equity loans. 

Company R makes only business loans to 

small businesses. 

(ii) Company P performs credit analysis 

and prepares credit reports for itself, as well 

as for Company Q and Company R. Company 

P, Company Q and Company R regularly 

employ these credit reports in the ordinary 

course of business in making decisions 

regarding extensions of credit to potential 

customers (including whether to lend, rate of 

interest, and loan terms). 

(iii) Assume that these services relating to 

credit analysis are specified covered services 

within the meaning of paragraph (b)(3)(i) of 

this section. Under the facts and 

circumstances, the credit analysis services 

constitute part of a ‘‘financial transaction’’ 

described in paragraph (b)(4)(viii) of this 

section. Company P is not eligible to charge 

these services to Company Q and Company 

R in accordance with the services cost 

method. 

Example 8. Data verification services. (i) 

Company P, Company Q and Company R are 

manufacturers of industrial supplies. 

Company P’s accounting department 

performs periodic reviews of the accounts 

payable information of Company P, Company 

Q and Company R, and identifies any 

inaccuracies in the records, such as doublepayments and double-charges. 

(ii) Assume that these services relating to 

verification of data are specified covered 

services within the meaning of paragraph 

(b)(3)(i) of this section. Under the facts and 

circumstances of the business of the PQR 

Controlled Group, the taxpayer could 

reasonably conclude that these services do 

not contribute significantly to the controlled 

group’s key competitive advantages, core 

capabilities, or fundamental risks of success 

or failure in the group’s business. If these 

services meet the other requirements of this 

paragraph (b), Company P will be eligible to 

charge these services to Company Q and 

Company R in accordance with the services 

cost method. 

Example 9. Data verification services. (i) 

Company P gathers and inputs information 

regarding accounts payable and accounts 

receivable from unrelated parties and utilizes 

its own computer system to analyze that 

information for purposes of identifying errors 

in payment and receipts (data mining). 

Company P is compensated for these services 

based on a fee that reflects a percentage of 

amounts collected by customers as a result of 

the data mining services. These activities 

constitute a significant portion of Company 

P’s business. Company P performs similar 

activities for Company Q and Company R by 

analyzing their accounts payable and 

accounts receivable records. 

(ii) Assume that these services relating to 

data mining are specified covered services 

within the meaning of paragraph (b)(3)(i) of 

this section. Under the facts and 

circumstances, the taxpayer is unable to 

reasonably conclude that these services do 

not contribute significantly to the controlled 

group’s key competitive advantages, core 

capabilities, or fundamental risks of success 

or failure in the group’s business. Company 

P is not eligible to charge these services to 

Company Q and Company R in accordance 

with the services cost method. 

Example 10. Legal services. (i) Company P 

is a domestic corporation with two whollyowned foreign subsidiaries, Company Q and 

Company R. Company P and its subsidiaries 

manufacture and distribute equipment used 

by industrial customers. Company P 

maintains an in-house legal department 

consisting of attorneys experienced in a wide 

range of business and commercial matters. 

Company Q and Company R maintain small 

legal departments, consisting of attorneys 

experienced in matters that most frequently 

arise in the normal course of business of 

Company Q and Company R in their 

respective jurisdictions. 

(ii) Company P seeks to maintain in-house 

legal staff with the ability to address the 

majority of legal matters that arise in the 

United States with respect to the operations 

of Company P, as well as any U.S. reporting 

or compliance obligations of Company Q or 

Company R. These include the preparation 

and review of corporate contracts relating to, 

for example, product sales, equipment 

purchases and leases, business liability 

insurance, real estate, employee salaries and 

benefits. Company P relies on outside 

attorneys for major business transactions and 

highly technical matters such as patent 

licenses. The in-house legal staffs of 

Company Q and Company R are much more 

limited. It is necessary for Company P to 

retain several local law firms to handle 

litigation and business disputes arising from 

the activities of Company Q and Company R. 

Although Company Q and Company R pay 

the fees of these law firms, the hiring 

authority and general oversight of the firms’ 

representation is in the legal department of 

Company P. 

(iii) In determining what portion of the 

legal expenses of Company P may be 

allocated to Company Q and Company R, 

Company P first excludes any expenses 

relating to legal services that constitute 

shareholder activities and other items that 

are not properly analyzed as controlled 

services. Assume that the remaining services 

relating to general legal functions performed 

by in-house legal counsel are specified 

covered services within the meaning of 

paragraph (b)(3)(i) of this section. Under the 

facts and circumstances of the business of the 

PQR Controlled Group, the taxpayer could 

reasonably conclude that these latter services 

do not contribute significantly to the 

controlled group’s key competitive 

advantages, core capabilities, or fundamental 

risks of success or failure in the group’s 

business. If these services meet the other 

requirements of this paragraph (b), Company 

P will be eligible to charge these services to 

Company Q and Company R in accordance 

with the services cost method. 

Example 11. Legal services. (i) Company P 

is a domestic holding company whose 

operating companies, Company Q and 

Company R, generate electric power for 

consumers by operating nuclear plants. 

Assume that, although Company P owns 

100% of the stock of Companies Q and R, the 

companies do not elect to file a consolidated 

Federal income tax return with Company P. 

(ii) Company P maintains an in-house legal 

department that includes attorneys who are 

experts in the areas of Federal utilities 

regulation, Federal labor and environmental 

law, and securities law. Companies Q and R 

maintain their own, smaller in-house legal 

staffs comprising experienced attorneys in 

the areas of state and local utilities 

regulation, state labor and employment law, 

and general commercial law. The legal 

department of Company P performs general 

oversight of the legal affairs of the company 

and determines whether a particular matter 

would be more efficiently handled by the 

Company P legal department, by the legal 

staffs in the operating companies, or in rare 

cases, by retained outside counsel. In general, 

Company P has succeeded in minimizing 

duplication and overlap of functions between 

the legal staffs of the various companies or 

by retained outside counsel. 

(iii) The domestic nuclear power plant 

operations of Companies Q and R are subject 

to extensive regulation by the U.S. Nuclear 

Regulatory Commission (NRC). Operators are 

required to obtain pre-construction approval, 

operating licenses, and, at the end of the 

operational life of the nuclear reactor, 

nuclear decommissioning certificates. 

Company P files consolidated financial 

statements on behalf of itself, as well as 

Companies Q and R, with the United States 

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Securities and Exchange Commission (SEC). 

In these SEC filings, Company P discloses 

that failure to obtain any of these licenses 

(and the related periodic renewals) or 

agreeing to licenses on terms less favorable 

than those granted to competitors would 

have a material adverse impact on the 

operations of Company Q or Company R. 

Company Q and Company R do not have inhouse legal staff with experience in the NRC 

area. Company P maintains a group of inhouse attorneys with specialized expertise in 

the NRC area that exclusively represents 

Company Q and Company R before the NRC. 

Although Company P occasionally hires an 

outside law firm or industry expert to assist 

on particular NRC matters, the majority of the 

work is performed by the specialized legal 

staff of Company P. 

(iv) Certain of the legal services performed 

by Company P constitute duplicative or 

shareholder activities that do not confer a 

benefit on the other companies and therefore 

do not need to be allocated to the other 

companies, while certain other legal services 

are eligible to be charged to Company Q and 

Company R in accordance with the services 

cost method. 

(v) Assume that the specialized legal 

services relating to nuclear licenses 

performed by in-house legal counsel of 

Company P are specified covered services 

within the meaning of paragraph (b)(3)(i) of 

this section. Under the facts and 

circumstances, the taxpayer is unable to 

reasonably conclude that these services do 

not contribute significantly to the controlled 

group’s key competitive advantages, core 

capabilities, or fundamental risks of success 

or failure in the group’s business. Company 

P is not eligible to charge these services to 

Company Q and Company R in accordance 

with the services cost method. 

Example 12. Group of services. (i) 

Company P, Company Q, and Company R are 

manufacturing companies that sell their 

products to unrelated retail establishments. 

Company P has an enterprise resource 

planning (ERP) system that maintains data 

relating to accounts payable and accounts 

receivable information for all three 

companies. Company P’s personnel perform 

the daily operations on this ERP system such 

as inputting data relating to accounts payable 

and accounts receivable into the system and 

extracting data relating to accounts receivable 

and accounts payable in the form of reports 

or electronic media and providing those data 

to all three companies. Periodically, 

Company P’s computer specialists also 

modify the ERP system to adapt to changing 

business functions in all three companies. 

Company P’s computer specialists make 

these changes by either modifying the 

underlying software program or by 

purchasing additional software or hardware 

from unrelated third party vendors. 

(ii) Assume that the services relating to 

accounts payable and accounts receivable are 

specified covered services within the 

meaning of paragraph (b)(3)(i) of this section. 

Under the facts and circumstances of the 

business of the PQR Controlled Group, the 

taxpayer could reasonably conclude that 

these services do not contribute significantly 

to the controlled group’s key competitive 

advantages, core capabilities, or fundamental 

risks of success or failure in the group’s 

business. If these services meet the other 

requirements of this paragraph (b), Company 

P will be eligible to charge these services to 

Company Q and Company R in accordance 

with the services cost method. 

(iii) Assume that the services performed by 

Company P’s computer specialists that relate 

to modifying the ERP system are specifically 

excluded from the services described in a 

revenue procedure referenced in paragraph 

(b)(3) of this section as developing hardware 

or software solutions (such as systems 

integration, Web site design, writing 

computer programs, modifying general 

applications software, or recommending the 

purchase of commercially available hardware 

or software). If these services do not 

constitute low margin covered services 

within the meaning of paragraph (b)(3)(ii) of 

this section, then Company P is not eligible 

to charge these services to Company Q and 

Company R in accordance with the services 

cost method. 

Example 13. Group of services. (i) 

Company P manufactures and sells widgets 

under an exclusive contract to Customer 1. 

Company Q and Company R sell widgets 

under exclusive contracts to Customer 2 and 

Customer 3, respectively. At least one year in 

advance, each of these customers can 

accurately forecast its need for widgets. 

Using these forecasts, each customer over the 

course of the year places orders for widgets 

with the appropriate company, Company P, 

Company Q, or Company R. A customer’s 

actual need for widgets seldom deviates from 

that customer’s forecasted need. 

(ii) It is most efficient for the PQR 

Controlled Group companies to manufacture 

and store an inventory of widgets in advance 

of delivery. Although all three companies sell 

widgets, only Company P maintains a 

centralized warehouse for widgets. Pursuant 

to a contract, Company P provides storage of 

these widgets to Company Q and Company 

R at an arm’s length price. 

(iii) Company P’s personnel also obtain 

orders from all three companies’ customers to 

draw up purchase orders for widgets as well 

as make payment to suppliers for widget 

replacement parts. In addition, Company P’s 

personnel use data entry to input information 

regarding orders and sales of widgets and 

replacement parts for all three companies 

into a centralized computer system. 

Company P’s personnel also maintain the 

centralized computer system and extract data 

for all three companies when necessary. 

(iv) Assume that these services relating to 

tracking purchases and sales of inventory are 

specified covered services within the 

meaning of paragraph (b)(3)(i) of this section. 

Under the facts and circumstances of the 

business of the PQR Controlled Group, the 

taxpayer could reasonably conclude that 

these services do not contribute significantly 

to the controlled group’s key competitive 

advantages, core capabilities, or fundamental 

risks of success or failure in the group’s 

business. If these services meet the other 

requirements of this paragraph (b), Company 

P will be eligible to charge these services to 

Company Q and Company R in accordance 

with the services cost method. 

Example 14. Group of services. (i) 

Company P, Company Q, and Company R 

assemble and sell gadgets to unrelated 

customers. Each of these companies 

purchases the components necessary for 

assembly of the gadgets from unrelated 

suppliers. As a service to its subsidiaries, 

Company P’s personnel obtain orders for 

components from all three companies, 

prepare purchase orders, and make payment 

to unrelated suppliers for the components. In 

addition, Company P’s personnel use data 

entry to input information regarding orders 

and sales of gadgets for all three companies 

into a centralized computer. Company P’s 

personnel also maintain the centralized 

computer system and extract data for all 

three companies on an as-needed basis. The 

services provided by Company P personnel, 

in conjunction with the centralized computer 

system, constitute a state-of-the-art inventory 

management system that allows Company P 

to order components necessary for assembly 

of the gadgets on a ‘‘just-in-time’’ basis. 

(ii) Unrelated suppliers deliver the 

components directly to Company P, 

Company Q and Company R. Each company 

stores the components in its own facilities for 

use in filling specific customer orders. The 

companies do not maintain any inventory 

that is not identified in specific customer 

orders. Because of the efficiencies associated 

with services provided by personnel of 

Company P, all three companies are able to 

significantly reduce their inventory-related 

costs. Company P’s Chief Executive Officer 

makes a statement in one of its press 

conferences with industry analysts that its 

inventory management system is critical to 

the company’s success. 

(iii) Assume that these services relating to 

tracking purchases and sales of inventory are 

specified covered services within the 

meaning of paragraph (b)(3)(i) of this section. 

Under the facts and circumstances, the 

taxpayer is unable to reasonably conclude 

that these services do not contribute 

significantly to the controlled group’s key 

competitive advantages, core capabilities, or 

fundamental risks of success or failure in the 

group’s business. Company P is not eligible 

to charge these services to Company Q and 

Company R in accordance with the services 

cost method. 

Example 15. Low margin covered services. 

Company P renders certain accounting 

services to Company S. Company P uses the 

services cost method for the accounting 

services, and determines the amount charged 

as its total cost of rendering the services, with 

no markup. Based on an application of the 

section 482 regulations without regard to this 

paragraph (b), the interquartile range of arm’s 

length markups on total services costs for 

these accounting services is between 3% and 

9%, and the median is 6%. Because the 

median comparable markup on total services 

costs is 6%, which is less than 7%, the 

accounting services constitute low margin 

covered services within the meaning of 

paragraph (b)(3)(ii) of this section. 

Example 16. Shared services arrangement 

and reliable measure of reasonably 

anticipated benefit (allocation key). (i) 

Company P operates a centralized data 

processing facility that performs automated 

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invoice processing and order generation for 

all of its subsidiaries, Companies X, Y, Z, 

pursuant to a shared services arrangement. 

(ii) In evaluating the shares of reasonably 

anticipated benefits from the centralized data 

processing services, the total value of the 

merchandise on the invoices and orders may 

not provide the most reliable measure of 

reasonably anticipated benefits shares, 

because value of merchandise sold does not 

bear a relationship to the anticipated benefits 

from the underlying covered services. 

(iii) The total volume of orders and 

invoices processed may provide a more 

reliable basis for evaluating the shares of 

reasonably anticipated benefits from the data 

processing services. Alternatively, depending 

on the facts and circumstances, total central 

processing unit time attributable to the 

transactions of each subsidiary may provide 

a more reliable basis on which to evaluate the 

shares of reasonably anticipated benefits. 

Example 17. Shared services arrangement 

and reliable measure of reasonably 

anticipated benefit (allocation key). (i) 

Company P operates a centralized center that 

performs human resources functions, such as 

administration of pension, retirement, and 

health insurance plans that are made 

available to employees of its subsidiaries, 

Companies X, Y, Z, pursuant to a shared 

services arrangement. 

(ii) In evaluating the shares of reasonably 

anticipated benefits from these centralized 

services, the total revenues of each subsidiary 

may not provide the most reliable measure of 

reasonably anticipated benefit shares, 

because total revenues do not bear a 

relationship to the shares of reasonably 

anticipated benefits from the underlying 

services. 

(iii) Employee headcount or total 

compensation paid to employees may 

provide a more reliable basis for evaluating 

the shares of reasonably anticipated benefits 

from the covered services. 

Example 18. Shared services arrangement 

and reliable measure of reasonably 

anticipated benefit (allocation key). (i) 

Company P performs human resource 

services (service A) on behalf of the PXYZ 

Group that qualify for the services cost 

method. Under that method, Company P 

determines the amount charged for these 

services pursuant to a shared services 

arrangement based on an application of 

paragraph (b)(7) of this section. Service A 

constitutes a specified covered service 

described in a revenue procedure pursuant to 

paragraph (b)(3)(i) of this section. The total 

services costs for service A otherwise 

determined under the services cost method is 

300. 

(ii) Companies X, Y and Z reasonably 

anticipate benefits from service A. Company 

P does not reasonably anticipate benefits 

from service A. Assume that if relative 

reasonably anticipated benefits were 

precisely known, the appropriate allocation 

of charges pursuant to paragraph (k) of this 

section to Company X, Y and Z for service 

A is as follows: 

SERVICE A 

[Total cost 300] 

Company 

X ........................................... 150 

Y ........................................... 75 

Z ............................................ 75 

(iii) The total number of employees 

(employee headcount) in each company is as 

follows: 

Company X—600 employees. 

Company Y—250 employees. 

Company Z—250 employees. 

(iv) Company P allocates the 300 total 

services costs of service A based on employee 

headcount as follows: 

SERVICE A 

[Total cost 300] 

Allocation 

key 

Company 

Headcount Amount 

X ............... 600 164 

Y ............... 250 68 

Z ................ 250 68 

(v) Based on these facts, Company P 

may reasonably conclude that the 

employee headcount allocation basis 

most reliably reflects the participants’ 

respective shares of the reasonably 

anticipated benefits attributable to 

service A. 

Example 19. Shared services arrangement 

and reliable measure of reasonably 

anticipated benefit (allocation key). (i) 

Company P performs accounts payable 

services (service B) on behalf of the PXYZ 

Group and determines the amount charged 

for the services under such method pursuant 

to a shared services arrangement based on an 

application of paragraph (b)(7) of this section. 

Service B is a specified covered service 

described in a revenue procedure pursuant to 

paragraph (b)(3)(i) of this section. The total 

services costs for service B otherwise 

determined under the services cost method is 

500. 

(ii) Companies X, Y and Z reasonably 

anticipate benefits from service B. 

Company P does not reasonably 

anticipate benefits from service B. 

Assume that if relative reasonably 

anticipated benefits were precisely 

known, the appropriate allocation of 

charges pursuant to paragraph (k) of this 

section to Companies X, Y and Z for 

service B is as follows: 

SERVICE B 

[Total cost 500] 

Company 

X ........................................... 125 

Y ........................................... 205 

Z ............................................ 170 

(iii) The total number of employees 

(employee headcount) in each company 

is as follows: 

Company X—600. 

Company Y—200. 

Company Z—200. 

(iv) The total number of transactions 

(transaction volume) with uncontrolled 

customers by each company is as 

follows: 

Company X—2,000. 

Company Y—4,000. 

Company Z—3,500. 

(v) If Company P allocated the 500 

total services costs of service B based on 

employee headcount, the resulting 

allocation would be as follows: 

SERVICE B 

[Total cost 500] 

Allocation 

key 

Company 

Headcount Amount 

X ............... 600 300 

Y ............... 200 100 

Z ................ 200 100 

(vi) In contrast, if Company P used 

volume of transactions with 

uncontrolled customers as the allocation 

basis under the shared services 

arrangement, the allocation would be as 

follows: 

SERVICE B 

[Total cost 500] 

Allocation 

key 

Company 

Transaction 

Volume Amount 

X ............... 2,000 105 

Y ............... 4,000 211 

Z ................ 3,500 184 

(vii) Based on these facts, Company P 

may reasonably conclude that the 

transaction volume, but not the 

employee headcount, allocation basis 

most reliably reflects the participants’ 

respective shares of the reasonably 

anticipated benefits attributable to 

service B. 

Example 20. Shared services arrangement 

and aggregation. (i) Company P performs 

human resource services (service A) and 

accounts payable services (service B) on 

behalf of the PXYZ Group that qualify for the 

services cost method. Company P determines 

the amount charged for these services under 

such method pursuant to a shared services 

arrangement based on an application of 

paragraph (b)(7) of this section. Service A 

and service B are specified covered services 

described in a revenue procedure pursuant to 

paragraph (b)(3)(i) of this section. The total 

services costs otherwise determined under 

the services cost method for service A is 300 

and for service B is 500; total services costs 

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for services A and B are 800. Company P 

determines that aggregation of services A and 

B for purposes of the arrangement is 

appropriate. 

(ii) Companies X, Y and Z reasonably 

anticipate benefits from services A and 

B. Company P does not reasonably 

anticipate benefits from services A and 

B. Assume that if relative reasonably 

anticipated benefits were precisely 

known, the appropriate allocation of 

total charges pursuant to paragraph (k) 

of this section to Companies X, Y and 

Z for services A and B is as follows: 

SERVICES A AND B 

[Total cost 800] 

Company 

X ........................................... 350 

Y ........................................... 100 

Z ............................................ 350 

(iii) The total volume of transactions 

with uncontrolled customers in each 

company is as follows: 

Company X—2,000. 

Company Y—4,000. 

Company Z—4,000. 

(iv) The total number of employees in 

each company is as follows: 

Company X—600. 

Company Y—200. 

Company Z—200. 

(v) If Company P allocated the 800 

total services costs of services A and B 

based on transaction volume or 

employee headcount, the resulting 

allocation would be as follows: 

AGGREGATED SERVICES AB 

[Total cost 800] 

Company 

Allocation key Allocation key 

Transaction 

volume Amount Headcount Amount 

X ....................................................................................................................... 2,000 160 600 480 

Y ....................................................................................................................... 4,000 320 200 160 

Z ....................................................................................................................... 4,000 320 200 160 

(vi) In contrast, if aggregated services 

AB were allocated by reference to the 

total U.S. dollar value of sales to 

uncontrolled parties (trade sales) by 

each company, the following results 

would obtain: 

AGGREGATED SERVICES AB 

[Total costs 800] 

Company 

Allocation key 

Trade sales 

(millions) Amount 

X ............... $400 314 

Y ............... 120 94 

Z ................ 500 392 

(vii) Based on these facts, Company P 

may reasonably conclude that the trade 

sales, but not the transaction volume or 

the employee headcount, allocation 

basis most reliably reflects the 

participants’ respective shares of the 

reasonably anticipated benefits 

attributable to services AB. 

Example 21. Shared services arrangement 

and aggregation. (i) Company P performs 

services A through P on behalf of the PXYZ 

Group that qualify for the services cost 

method. Company P determines the amount 

charged for these services under such method 

pursuant to a shared services arrangement 

based on an application of paragraph (b)(7) 

of this section. All of these services A 

through P constitute either specified covered 

services or low margin covered services 

described in paragraph (b)(3) of this section. 

The total services costs for services A 

through P otherwise determined under the 

services cost method is 500. Company P 

determines that aggregation of services A 

through P for purposes of the arrangement is 

appropriate. 

(ii) Companies X and Y reasonably 

anticipate benefits from services A through P 

and Company Z reasonably anticipates 

benefits from services A through M but not 

from services N through P (Company Z 

performs services similar to services N 

through P on its own behalf). Company P 

does not reasonably anticipate benefits from 

services A through P. Assume that if relative 

reasonably anticipated benefits were 

precisely known, the appropriate allocation 

of total charges pursuant to paragraph (k) of 

this section to Company X, Y, and Z for 

services A through P is as follows: 

Company Services A–M 

(cost 490) 

Services N–P 

(cost 10) 

Services A–P 

(total cost 500) 

X ........................................................................................................................... 90 5 95 

Y ........................................................................................................................... 240 5 245 

Z ........................................................................................................................... 160 ................................ 160 

(iii) The total volume of transactions with 

uncontrolled customers in each company is 

as follows: 

Company X—2,000. 

Company Y—4,500. 

Company Z—3,500. 

(iv) Company P allocates the 500 total 

services costs of services A through P based 

on transaction volume as follows: 

AGGREGATED SERVICES A–Z 

[Total costs 500] 

Company 

Allocation key 

Transaction 

volume Amount 

X ............... 2,000 100 

Y ............... 4,500 225 

Z ................ 3,500 175 

(v) Based on these facts, Company P may 

reasonably conclude that the transaction 

volume allocation basis most reliably reflects 

the participants’ respective shares of the 

reasonably anticipated benefits attributable to 

services A through P. 

Example 22. Renderer reasonably 

anticipates benefits. (i) Company P renders 

services on behalf of the PXYZ Group that 

qualify for the services cost method. 

Company P determines the amount charged 

for these services under such method. 

Company P’s share of reasonably anticipated 

benefits from services A, B, C, and D is 20% 

of the total reasonably anticipated benefits of 

all participants. Company P’s total services 

cost for services A, B, C, and D charged 

within the Group is 100. 

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(ii) Based on an application of paragraph 

(b)(7) of this section, Company P charges 80 

which is allocated among Companies X, Y, 

and Z. No charge is made to Company P 

under the shared services arrangement for 

activities that it performs on its own behalf. 

Example 23. Coordination with cost 

sharing arrangement. (i) Company P 

performs human resource services (service A) 

on behalf of the PXYZ Group that qualify for 

the services cost method. Company P 

determines the amount charged for these 

services under such method pursuant to a 

shared services arrangement based on an 

application of paragraph (b)(7) of this section. 

Service A constitutes a specified covered 

service described in a revenue procedure 

pursuant to paragraph (b)(3)(i) of this section. 

The total services costs for service A 

otherwise determined under the services cost 

method is 300. 

(ii) Company X, Y, Z, and P reasonably 

anticipate benefits from service A. Using a 

basis of allocation that is consistent with the 

controlled participants’ respective shares of 

the reasonably anticipated benefits from the 

shared services, the total charge of 300 is 

allocated as follows: 

X—100. 

Y—50. 

Z—25. 

P—125. 

(ii) In addition to performing services, P 

undertakes 500 of R&D and incurs 

manufacturing and other costs of 1,000. 

(iii) Companies P and X enter into a cost 

sharing arrangement in accordance with 

§ 1.482–7T. Under the arrangement, 

Company P will undertake all intangible 

property development activities. All of 

Company P’s research and development 

(R&D) activity is devoted to the intangible 

property development activity under the cost 

sharing arrangement. Company P will 

manufacture, market, and otherwise exploit 

the product in its defined territory. 

Companies P and X will share intangible 

property development costs in accordance 

with their reasonably anticipated benefits 

from the intangible property, and Company 

X will make payments to Company P as 

required under § 1.482–7T. Company X will 

manufacture, market, and otherwise exploit 

the product in the rest of the world. 

(iv) A portion of the charge under the 

shared services arrangement is in turn 

allocable to the intangible property 

development activity undertaken by 

Company P. The most reliable estimate of the 

proportion allocable to the intangible 

property development activity is determined 

to be 500 (Company P’s R&D expenses) 

divided by 1,500 (Company P’s total noncovered services costs), or one-third. 

Accordingly, one-third of Company P’s 

charge of 125, or 42, is allocated to the 

intangible property development activity. 

Companies P and X must share the intangible 

property development costs of the cost 

shared intangible property (including the 

charge of 42 that is allocated under the 

shared services arrangement) in proportion to 

their respective shares of reasonably 

anticipated benefits under the cost sharing 

arrangement. That is, the reasonably 

anticipated benefit shares under the cost 

sharing arrangement are determined 

separately from reasonably anticipated 

benefit shares under the shared services 

arrangement. 

Example 24. Coordination with cost 

sharing arrangement. (i) The facts and 

analysis are the same as in Example 25, 

except that Company X also performs 

intangible property development activities 

related to the cost sharing arrangement. 

Using a basis of allocation that is consistent 

with the controlled participants’ respective 

shares of the reasonably anticipated benefits 

from the shared services, the 300 of service 

costs is allocated as follows: 

X—100. 

Y—50. 

Z—25. 

P—125. 

(ii) In addition to performing services, 

Company P undertakes 500 of R&D and 

incurs manufacturing and other costs of 

1,000. Company X undertakes 400 of R&D 

and incurs manufacturing and other costs of 

600. 

(iii) Companies P and X enter into a cost 

sharing arrangement in accordance with 

§ 1.482–7T. Under the arrangement, both 

Companies P and X will undertake intangible 

property development activities. All of the 

research and development activity conducted 

by Companies P and X is devoted to the 

intangible property development activity 

under the cost sharing arrangement. Both 

Companies P and X will manufacture, 

market, and otherwise exploit the product in 

their respective territories and will share 

intangible property development costs in 

accordance with their reasonably anticipated 

benefits from the intangible property, and 

both will make payments as required under 

§ 1.482–7T. 

(iv) A portion of the charge under the 

shared services arrangement is in turn 

allocable to the intangible property 

development activities undertaken by 

Companies P and X. The most reliable 

estimate of the portion allocable to Company 

P’s intangible property development activity 

is determined to be 500 (Company P’s R&D 

expenses) divided by 1,500 (P’s total noncovered services costs), or one-third. 

Accordingly, one-third of Company P’s 

allocated services cost method charge of 125, 

or 42, is allocated to its intangible property 

development activity. 

(v) In addition, it is necessary to determine 

the portion of the charge under the shared 

services arrangement to Company X that 

should be further allocated to Company X’s 

intangible property development activities 

under the cost sharing arrangement. The 

most reliable estimate of the portion allocable 

to Company X’s intangible property 

development activity is 400 (Company X’s 

R&D expenses) divided by 1,000 (Company 

X’s costs), or 40%. Accordingly, 40% of the 

100 that was allocated to Company X, or 40, 

is allocated in turn to Company X’s 

intangible property development activities. 

Company X makes a payment to Company P 

of 100 under the shared services arrangement 

and includes 40 of services cost method 

charges in the pool of intangible property 

development costs. 

(vi) The parties’ respective contributions to 

intangible property development costs under 

the cost sharing arrangement are as follows: 

P: 500 + (0.333 * 125) = 542 

X: 400 + (0.40 * 100) = 440 

(c) Comparable uncontrolled services 

price method—(1) In general. The 

comparable uncontrolled services price 

method evaluates whether the amount 

charged in a controlled services 

transaction is arm’s length by reference 

to the amount charged in a comparable 

uncontrolled services transaction. 

(2) Comparability and reliability 

considerations—(i) In general. Whether 

results derived from application of this 

method are the most reliable measure of 

the arm’s length result must be 

determined using the factors described 

under the best method rule in § 1.482– 

1(c). The application of these factors 

under the comparable uncontrolled 

services price method is discussed in 

paragraphs (c)(2)(ii) and (iii) of this 

section. 

(ii) Comparability—(A) In general. 

The degree of comparability between 

controlled and uncontrolled 

transactions is determined by applying 

the provisions of § 1.482–1(d). Although 

all of the factors described in § 1.482– 

1(d)(3) must be considered, similarity of 

the services rendered, and of the 

intangible property (if any) used in 

performing the services, generally will 

have the greatest effects on 

comparability under this method. In 

addition, because even minor 

differences in contractual terms or 

economic conditions could materially 

affect the amount charged in an 

uncontrolled transaction, comparability 

under this method depends on close 

similarity with respect to these factors, 

or adjustments to account for any 

differences. The results derived from 

applying the comparable uncontrolled 

services price method generally will be 

the most direct and reliable measure of 

an arm’s length price for the controlled 

transaction if an uncontrolled 

transaction has no differences from the 

controlled transaction that would affect 

the price, or if there are only minor 

differences that have a definite and 

reasonably ascertainable effect on price 

and for which appropriate adjustments 

are made. If such adjustments cannot be 

made, or if there are more than minor 

differences between the controlled and 

uncontrolled transactions, the 

comparable uncontrolled services price 

method may be used, but the reliability 

of the results as a measure of the arm’s 

length price will be reduced. Further, if 

there are material differences for which 

reliable adjustments cannot be made, 

this method ordinarily will not provide 

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a reliable measure of an arm’s length 

result. 

(B) Adjustments for differences 

between controlled and uncontrolled 

transactions. If there are differences 

between the controlled and 

uncontrolled transactions that would 

affect price, adjustments should be 

made to the price of the uncontrolled 

transaction according to the 

comparability provisions of § 1.482– 

1(d)(2). Specific examples of factors that 

may be particularly relevant to 

application of this method include— 

(1) Quality of the services rendered; 

(2) Contractual terms (for example, 

scope and terms of warranties or 

guarantees regarding the services, 

volume, credit and payment terms, 

allocation of risks, including any 

contingent-payment terms and whether 

costs were incurred without a provision 

for current reimbursement); 

(3) Intangible property (if any) used in 

rendering the services; 

(4) Geographic market in which the 

services are rendered or received; 

(5) Risks borne (for example, costs 

incurred to render the services, without 

provision for current reimbursement); 

(6) Duration or quantitative measure 

of services rendered; 

(7) Collateral transactions or ongoing 

business relationships between the 

renderer and the recipient, including 

arrangement for the provision of 

tangible property in connection with the 

services; and 

(8) Alternatives realistically available 

to the renderer and the recipient. 

(iii) Data and assumptions. The 

reliability of the results derived from the 

comparable uncontrolled services price 

method is affected by the completeness 

and accuracy of the data used and the 

reliability of the assumptions made to 

apply the method. See § 1.482–1(c) (best 

method rule). 

(3) Arm’s length range. See § 1.482– 

1(e)(2) for the determination of an arm’s 

length range. 

(4) Examples. The principles of this 

paragraph (c) are illustrated by the 

following examples: 

Example 1. Internal comparable 

uncontrolled services price. Company A, a 

United States corporation, performs 

shipping, stevedoring, and related services 

for controlled and uncontrolled parties on a 

short-term or as-needed basis. Company A 

charges uncontrolled parties in Country X a 

uniform fee of $60 per container to place 

loaded cargo containers in Country X on 

oceangoing vessels for marine transportation. 

Company A also performs identical services 

in Country X for its wholly-owned 

subsidiary, Company B, and there are no 

substantial differences between the 

controlled and uncontrolled transactions. In 

evaluating the appropriate measure of the 

arm’s length price for the container-loading 

services performed for Company B, because 

Company A renders substantially identical 

services in Country X to both controlled and 

uncontrolled parties, it is determined that the 

comparable uncontrolled services price 

constitutes the best method for determining 

the arm’s length price for the controlled 

services transaction. Based on the reliable 

data provided by Company A concerning the 

price charged for services in comparable 

uncontrolled transactions, a loading charge of 

$60 per cargo container will be considered 

the most reliable measure of the arm’s length 

price for the services rendered to Company 

B. See paragraph (c)(2)(ii)(A) of this section. 

Example 2. External comparable 

uncontrolled services price. (i) The facts are 

the same as in Example 1, except that 

Company A performs services for Company 

B, but not for uncontrolled parties. Based on 

information obtained from unrelated parties 

(which is determined to be reliable under the 

comparability standards set forth in 

paragraph (c)(2) of this section), it is 

determined that uncontrolled parties in 

Country X perform services comparable to 

those rendered by Company A to Company 

B, and that such parties charge $60 per cargo 

container. 

(ii) In evaluating the appropriate measure 

of an arm’s length price for the loading 

services that Company A renders to Company 

B, the $60 per cargo container charge is 

considered evidence of a comparable 

uncontrolled services price. See paragraph 

(c)(2)(ii)(A) of this section. 

Example 3. External comparable 

uncontrolled services price. The facts are the 

same as in Example 2, except that 

uncontrolled parties in Country X render 

similar loading and stevedoring services, but 

only under contracts that have a minimum 

term of one year. If the difference in the 

duration of the services has a material effect 

on prices, adjustments to account for these 

differences must be made to the results of the 

uncontrolled transactions according to the 

provisions of § 1.482–1(d)(2), and such 

adjusted results may be used as a measure of 

the arm’s length result. 

Example 4. Use of valuable intangible 

property. (i) Company A, a United States 

corporation in the biotechnology sector, 

renders research and development services 

exclusively to its affiliates. Company B is 

Company A’s wholly-owned subsidiary in 

Country X. Company A renders research and 

development services to Company B. 

(ii) In performing its research and 

development services function, Company A 

uses proprietary software that it developed 

internally. Company A uses the software to 

evaluate certain genetically engineered 

compounds developed by Company B. 

Company A owns the copyright on this 

software and does not license it to 

uncontrolled parties. 

(iii) No uncontrolled parties can be 

identified that perform services identical or 

with a high degree of similarity to those 

performed by Company A. Because there are 

material differences for which reliable 

adjustments cannot be made, the comparable 

uncontrolled services price method is 

unlikely to provide a reliable measure of the 

arm’s length price. See paragraph (c)(2)(ii)(A) 

of this section. 

Example 5. Internal comparable. (i) 

Company A, a United States corporation, and 

its subsidiaries render computer consulting 

services relating to systems integration and 

networking to business clients in various 

countries. Company A and its subsidiaries 

render only consulting services, and do not 

manufacture computer hardware or software 

nor distribute such products. The controlled 

group is organized according to industry 

specialization, with key industry specialists 

working for Company A. These personnel 

typically form the core consulting group that 

teams with consultants from the localcountry subsidiaries to serve clients in the 

subsidiaries’ respective countries. 

(ii) Company A and its subsidiaries 

sometimes undertake engagements directly 

for clients, and sometimes work as 

subcontractors to unrelated parties on more 

extensive supply-chain consulting 

engagements for clients. In undertaking the 

latter engagements with third party 

consultants, Company A typically prices its 

services based on consulting hours worked 

multiplied by a rate determined for each 

category of employee. The company also 

charges, at no markup, for out-of-pocket 

expenses such as travel, lodging, and data 

acquisition charges. The Company has 

established the following schedule of hourly 

rates: 

Category Rate 

Project managers ................. $400 per hour. 

Technical staff ...................... $300 per hour. 

(iii) Thus, for example, a project involving 

100 hours of the time of project managers and 

400 hours of technical staff time would result 

in the following project fees (without regard 

to any out-of-pocket expenses): ([100 hrs. × 

$400/hr.] + [400 hrs. × $300/hr.]) = $40,000 

+ $120,000 = $160,000. 

(iv) Company B, a Country X subsidiary of 

Company A, contracts to perform consulting 

services for a Country X client in the banking 

industry. In undertaking this engagement, 

Company B uses its own consultants and also 

uses Company A project managers and 

technical staff that specialize in the banking 

industry for 75 hours and 380 hours, 

respectively. In determining an arm’s length 

charge, the price that Company A charges for 

consulting services as a subcontractor in 

comparable uncontrolled transactions will be 

considered evidence of a comparable 

uncontrolled services price. Thus, in this 

case, a payment of $144,000, (or [75 hrs. × 

$400/hr.] + [380 hrs. × $300/hr.] = $30,000 

+ $114,000) may be used as a measure of the 

arm’s length price for the work performed by 

Company A project mangers and technical 

staff. In addition, if the comparable 

uncontrolled services price method is used, 

then, consistent with the practices employed 

by the comparables with respect to similar 

types of expenses, Company B must 

reimburse Company A for appropriate out-ofpocket expenses. See paragraph (c)(2)(ii)(A) 

of this section. 

Example 6. Adjustments for differences. (i) 

The facts are the same as in Example 5, 

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except that the engagement is undertaken 

with the client on a fixed fee basis. That is, 

prior to undertaking the engagement 

Company B and Company A estimate the 

resources required to undertake the 

engagement, and, based on hourly fee rates, 

charge the client a single fee for completion 

of the project. Company A’s portion of the 

engagement results in fees of $144,000. 

(ii) The engagement, once undertaken, 

requires 20% more hours by each of 

Companies A and B than originally 

estimated. Nevertheless, the unrelated client 

pays the fixed fee that was agreed upon at the 

start of the engagement. Company B pays 

Company A $144,000, in accordance with the 

fixed fee arrangement. 

(iii) Company A often enters into similar 

fixed fee engagements with clients. In 

addition, Company A’s records for similar 

engagements show that when it experiences 

cost overruns, it does not collect additional 

fees from the client for the difference 

between projected and actual hours. 

Accordingly, in evaluating whether the fees 

paid by Company B to Company A are arm’s 

length, it is determined that no adjustments 

to the intercompany service charge are 

warranted. See § 1.482–1(d)(3)(ii) and 

paragraph (c)(2)(ii)(A) of this section. 

(5) Indirect evidence of the price of a 

comparable uncontrolled services 

transaction—(i) In general. The price of 

a comparable uncontrolled services 

transaction may be derived based on 

indirect measures of the price charged 

in comparable uncontrolled services 

transactions, but only if— 

(A) The data are widely and routinely 

used in the ordinary course of business 

in the particular industry or market 

segment for purposes of determining 

prices actually charged in comparable 

uncontrolled services transactions; 

(B) The data are used to set prices in 

the controlled services transaction in 

the same way they are used to set prices 

in uncontrolled services transactions of 

the controlled taxpayer, or in the same 

way they are used by uncontrolled 

taxpayers to set prices in uncontrolled 

services transactions; and 

(C) The amount charged in the 

controlled services transaction may be 

reliably adjusted to reflect differences in 

quality of the services, contractual 

terms, market conditions, risks borne 

(including contingent-payment terms), 

duration or quantitative measure of 

services rendered, and other factors that 

may affect the price to which 

uncontrolled taxpayers would agree. 

(ii) Example. The following example 

illustrates this paragraph (c)(5): 

Example. Indirect evidence of comparable 

uncontrolled services price. 

(i) Company A is a United States insurance 

company. Company A’s wholly-owned 

Country X subsidiary, Company B, performs 

specialized risk analysis for Company A as 

well as for uncontrolled parties. In 

determining the price actually charged to 

uncontrolled entities for performing such risk 

analysis, Company B uses a proprietary, 

multi-factor computer program, which relies 

on the gross value of the policies in the 

customer’s portfolio, the relative composition 

of those policies, their location, and the 

estimated number of personnel hours 

necessary to complete the project. 

Uncontrolled companies that perform 

comparable risk analysis in the same 

industry or market-segment use similar 

proprietary computer programs to price 

transactions with uncontrolled customers 

(the competitors’ programs may incorporate 

different inputs, or may assign different 

weights or values to individual inputs, in 

arriving at the price). 

(ii) During the taxable year subject to audit, 

Company B performed risk analysis for 

uncontrolled parties as well as for Company 

A. Because prices charged to uncontrolled 

customers reflected the composition of each 

customer’s portfolio together with other 

factors, the prices charged in Company B’s 

uncontrolled transactions do not provide a 

reliable basis for determining the comparable 

uncontrolled services price for the similar 

services rendered to Company A. However, 

in evaluating an arm’s length price for the 

studies performed by Company B for 

Company A, Company B’s proprietary 

computer program may be considered as 

indirect evidence of the comparable 

uncontrolled services price that would be 

charged to perform the services for Company 

A. The reliability of the results obtained by 

application of this internal computer 

program as a measure of an arm’s length 

price for the services will be increased to the 

extent that Company A used the internal 

computer program to generate actual 

transaction prices for risk-analysis studies 

performed for uncontrolled parties during the 

same taxable year under audit; Company A 

used data that are widely and routinely used 

in the ordinary course of business in the 

insurance industry to determine the price 

charged; and Company A reliably adjusted 

the price charged in the controlled services 

transaction to reflect differences that may 

affect the price to which uncontrolled 

taxpayers would agree. 

(d) Gross services margin method—(1) 

In general. The gross services margin 

method evaluates whether the amount 

charged in a controlled services 

transaction is arm’s length by reference 

to the gross profit margin realized in 

comparable uncontrolled transactions. 

This method ordinarily is used in cases 

where a controlled taxpayer performs 

services or functions in connection with 

an uncontrolled transaction between a 

member of the controlled group and an 

uncontrolled taxpayer. This method 

may be used where a controlled 

taxpayer renders services (agent 

services) to another member of the 

controlled group in connection with a 

transaction between that other member 

and an uncontrolled taxpayer. This 

method also may be used in cases where 

a controlled taxpayer contracts to 

provide services to an uncontrolled 

taxpayer (intermediary function) and 

another member of the controlled group 

actually performs a portion of the 

services provided. 

(2) Determination of arm’s length 

price—(i) In general. The gross services 

margin method evaluates whether the 

price charged or amount retained by a 

controlled taxpayer in the controlled 

services transaction in connection with 

the relevant uncontrolled transaction is 

arm’s length by determining the 

appropriate gross profit of the controlled 

taxpayer. 

(ii) Relevant uncontrolled transaction. 

The relevant uncontrolled transaction is 

a transaction between a member of the 

controlled group and an uncontrolled 

taxpayer as to which the controlled 

taxpayer performs agent services or an 

intermediary function. 

(iii) Applicable uncontrolled price. 

The applicable uncontrolled price is the 

price paid or received by the 

uncontrolled taxpayer in the relevant 

uncontrolled transaction. 

(iv) Appropriate gross services profit. 

The appropriate gross services profit is 

computed by multiplying the applicable 

uncontrolled price by the gross services 

profit margin in comparable 

uncontrolled transactions. The 

determination of the appropriate gross 

services profit will take into account 

any functions performed by other 

members of the controlled group, as 

well as any other relevant factors 

described in § 1.482–1(d)(3). The 

comparable gross services profit margin 

may be determined by reference to the 

commission in an uncontrolled 

transaction, where that commission is 

stated as a percentage of the price 

charged in the uncontrolled transaction. 

(v) Arm’s length range. See § 1.482– 

1(e)(2) for determination of the arm’s 

length range. 

(3) Comparability and reliability 

considerations—(i) In general. Whether 

results derived from application of this 

method are the most reliable measure of 

the arm’s length result must be 

determined using the factors described 

under the best method rule in § 1.482– 

1(c). The application of these factors 

under the gross services margin method 

is discussed in paragraphs (d)(3)(ii) and 

(iii) of this section. 

(ii) Comparability—(A) Functional 

comparability. The degree of 

comparability between an uncontrolled 

transaction and a controlled transaction 

is determined by applying the 

comparability provisions of § 1.482– 

1(d). A gross services profit provides 

compensation for services or functions 

that bear a relationship to the relevant 

uncontrolled transaction, including an 

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operating profit in return for the 

investment of capital and the 

assumption of risks by the controlled 

taxpayer performing the services or 

functions under review. Therefore, 

although all of the factors described in 

§ 1.482–1(d)(3) must be considered, 

comparability under this method is 

particularly dependent on similarity of 

services or functions performed, risks 

borne, intangible property (if any) used 

in providing the services or functions, 

and contractual terms, or adjustments to 

account for the effects of any such 

differences. If possible, the appropriate 

gross services profit margin should be 

derived from comparable uncontrolled 

transactions by the controlled taxpayer 

under review, because similar 

characteristics are more likely found 

among different transactions by the 

same controlled taxpayer than among 

transactions by other parties. In the 

absence of comparable uncontrolled 

transactions involving the same 

controlled taxpayer, an appropriate 

gross services profit margin may be 

derived from transactions of 

uncontrolled taxpayers involving 

comparable services or functions with 

respect to similarly related transactions. 

(B) Other comparability factors. 

Comparability under this method is not 

dependent on close similarity of the 

relevant uncontrolled transaction to the 

related transactions involved in the 

uncontrolled comparables. However, 

substantial differences in the nature of 

the relevant uncontrolled transaction 

and the relevant transactions involved 

in the uncontrolled comparables, such 

as differences in the type of property 

transferred or service provided in the 

relevant uncontrolled transaction, may 

indicate significant differences in the 

services or functions performed by the 

controlled and uncontrolled taxpayers 

with respect to their respective relevant 

transactions. Thus, it ordinarily would 

be expected that the services or 

functions performed in the controlled 

and uncontrolled transactions would be 

with respect to relevant transactions 

involving the transfer of property within 

the same product categories or the 

provision of services of the same general 

type (for example, informationtechnology systems design). 

Furthermore, significant differences in 

the intangible property (if any) used by 

the controlled taxpayer in the controlled 

services transaction as distinct from the 

uncontrolled comparables may also 

affect the reliability of the comparison. 

Finally, the reliability of profit measures 

based on gross services profit may be 

adversely affected by factors that have 

less effect on prices. For example, gross 

services profit may be affected by a 

variety of other factors, including cost 

structures or efficiency (for example, 

differences in the level of experience of 

the employees performing the service in 

the controlled and uncontrolled 

transactions). Accordingly, if material 

differences in these factors are 

identified based on objective evidence, 

the reliability of the analysis may be 

affected. 

(C) Adjustments for differences 

between controlled and uncontrolled 

transactions. If there are material 

differences between the controlled and 

uncontrolled transactions that would 

affect the gross services profit margin, 

adjustments should be made to the gross 

services profit margin, according to the 

comparability provisions of § 1.482– 

1(d)(2). For this purpose, consideration 

of the total services costs associated 

with functions performed and risks 

assumed may be necessary because 

differences in functions performed are 

often reflected in these costs. If there are 

differences in functions performed, 

however, the effect on gross services 

profit of such differences is not 

necessarily equal to the differences in 

the amount of related costs. Specific 

examples of factors that may be 

particularly relevant to this method 

include— 

(1) Contractual terms (for example, 

scope and terms of warranties or 

guarantees regarding the services or 

function, volume, credit and payment 

terms, and allocation of risks, including 

any contingent-payment terms); 

(2) Intangible property (if any) used in 

performing the services or function; 

(3) Geographic market in which the 

services or function are performed or in 

which the relevant uncontrolled 

transaction takes place; and 

(4) Risks borne, including, if 

applicable, inventory-type risk. 

(D) Buy-sell distributor. If a controlled 

taxpayer that performs an agent service 

or intermediary function is comparable 

to a distributor that takes title to goods 

and resells them, the gross profit margin 

earned by such distributor on 

uncontrolled sales, stated as a 

percentage of the price for the goods, 

may be used as the comparable gross 

services profit margin. 

(iii) Data and assumptions—(A) In 

general. The reliability of the results 

derived from the gross services margin 

method is affected by the completeness 

and accuracy of the data used and the 

reliability of the assumptions made to 

apply this method. See § 1.482–1(c) 

(best method rule). 

(B) Consistency in accounting. The 

degree of consistency in accounting 

practices between the controlled 

transaction and the uncontrolled 

comparables that materially affect the 

gross services profit margin affects the 

reliability of the results under this 

method. 

(4) Examples. The principles of this 

paragraph (d) are illustrated by the 

following examples: 

Example 1. Agent services. Company A and 

Company B are members of a controlled 

group. Company A is a foreign manufacturer 

of industrial equipment. Company B is a U.S. 

company that acts as a commission agent for 

Company A by arranging for Company A to 

make direct sales of the equipment it 

manufactures to unrelated purchasers in the 

U.S. market. Company B does not take title 

to the equipment but instead receives from 

Company A commissions that are determined 

as a specified percentage of the sales price for 

the equipment that is charged by Company 

A to the unrelated purchaser. Company B 

also arranges for direct sales of similar 

equipment by unrelated foreign 

manufacturers to unrelated purchasers in the 

U.S. market. Company B charges these 

unrelated foreign manufacturers a 

commission fee of 5% of the sales price 

charged by the unrelated foreign 

manufacturers to the unrelated U.S. 

purchasers for the equipment. Information 

regarding the comparable agent services 

provided by Company B to unrelated foreign 

manufacturers is sufficiently complete to 

conclude that it is likely that all material 

differences between the controlled and 

uncontrolled transactions have been 

identified and adjustments for such 

differences have been made. If the 

comparable gross services profit margin is 

5% of the price charged in the relevant 

transactions involved in the uncontrolled 

comparables, then the appropriate gross 

services profit that Company B may earn and 

the arm’s length price that it may charge 

Company A for its agent services is equal to 

5% of the applicable uncontrolled price 

charged by Company A in sales of equipment 

in the relevant uncontrolled transactions. 

Example 2. Agent services. The facts are 

the same as in Example 1, except that 

Company B does not act as a commission 

agent for unrelated parties and it is not 

possible to obtain reliable information 

concerning commission rates charged by 

uncontrolled commission agents that engage 

in comparable transactions with respect to 

relevant sales of property. It is possible, 

however, to obtain reliable information 

regarding the gross profit margins earned by 

unrelated parties that briefly take title to and 

then resell similar property in uncontrolled 

transactions, in which they purchase the 

property from foreign manufacturers and 

resell the property to purchasers in the U.S. 

market. Analysis of the facts and 

circumstances indicates that, aside from 

certain minor differences for which 

adjustments can be made, the uncontrolled 

parties that resell property perform similar 

functions and assume similar risks as 

Company B performs and assumes when it 

acts as a commission agent for Company A’s 

sales of property. Under these circumstances, 

the gross profit margin earned by the 

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unrelated distributors on the purchase and 

resale of property may be used, subject to any 

adjustments for any material differences 

between the controlled and uncontrolled 

transactions, as a comparable gross services 

profit margin. The appropriate gross services 

profit that Company B may earn and the 

arm’s length price that it may charge 

Company A for its agent services is therefore 

equal to this comparable gross services 

margin, multiplied by the applicable 

uncontrolled price charged by Company A in 

its sales of equipment in the relevant 

uncontrolled transactions. 

Example 3. Agent services. (i) Company A 

and Company B are members of a controlled 

group. Company A is a U.S. corporation that 

renders computer consulting services, 

including systems integration and 

networking, to business clients. 

(ii) In undertaking engagements with 

clients, Company A in some cases pays a 

commission of 3% of its total fees to 

unrelated parties that assist Company A in 

obtaining consulting engagements. Typically, 

such fees are paid to non-computer 

consulting firms that provide strategic 

management services for their clients. When 

Company A obtains a consulting engagement 

with a client of a non-computer consulting 

firm, Company A does not subcontract with 

the other consulting firm, nor does the other 

consulting firm play any role in Company A’s 

consulting engagement. 

(iii) Company B, a Country X subsidiary of 

Company A, assists Company A in obtaining 

an engagement to perform computer 

consulting services for a Company B banking 

industry client in Country X. Although 

Company B has an established relationship 

with its Country X client and was 

instrumental in arranging for Company A’s 

engagement with the client, Company A’s 

particular expertise was the primary 

consideration in motivating the client to 

engage Company A. Based on the relative 

contributions of Companies A and B in 

obtaining and undertaking the engagement, 

Company B’s role was primarily to facilitate 

the consulting engagement between 

Company A and the Country X client. 

Information regarding the commissions paid 

by Company A to unrelated parties for 

providing similar services to facilitate 

Company A’s consulting engagements is 

sufficiently complete to conclude that it is 

likely that all material differences between 

these uncontrolled transactions and the 

controlled transaction between Company B 

and Company A have been identified and 

that appropriate adjustments have been made 

for any such differences. If the comparable 

gross services margin earned by unrelated 

parties in providing such agent services is 

3% of total fees charged in the relevant 

transactions involved in the uncontrolled 

comparables, then the appropriate gross 

services profit that Company B may earn and 

the arm’s length price that it may charge 

Company A for its agent services is equal to 

this comparable gross services margin (3%), 

multiplied by the applicable uncontrolled 

price charged by Company A in its relevant 

uncontrolled consulting engagement with 

Company B’s client. 

Example 4. Intermediary function. (i) The 

facts are the same as in Example 3, except 

that Company B contracts directly with its 

Country X client to provide computer 

consulting services and Company A performs 

the consulting services on behalf of Company 

B. Company A does not enter into a 

consulting engagement with Company B’s 

Country X client. Instead, Company B 

charges its Country X client an uncontrolled 

price for the consulting services, and 

Company B pays a portion of the 

uncontrolled price to Company A for 

performing the consulting services on behalf 

of Company B. 

(ii) Analysis of the relative contributions of 

Companies A and B in obtaining and 

undertaking the consulting contract indicates 

that Company B functioned primarily as an 

intermediary contracting party, and the gross 

services margin method is the most reliable 

method for determining the amount that 

Company B may retain as compensation for 

its intermediary function with respect to 

Company A’s consulting services. In this 

case, therefore, because Company B entered 

into the relevant uncontrolled transaction to 

provide services, Company B receives the 

applicable uncontrolled price that is paid by 

the Country X client for the consulting 

services. Company A technically performs 

services for Company B when it performs, on 

behalf of Company B, the consulting services 

Company B contracted to provide to the 

Country X client. The arm’s length amount 

that Company A may charge Company B for 

performing the consulting services on 

Company B’s behalf is equal to the applicable 

uncontrolled price received by Company B in 

the relevant uncontrolled transaction, less 

Company B’s appropriate gross services 

profit, which is the amount that Company B 

may retain as compensation for performing 

the intermediary function. 

(iii) Reliable data concerning the 

commissions that Company A paid to 

uncontrolled parties for assisting it in 

obtaining engagements to provide consulting 

services similar to those it has provided on 

behalf of Company B provide useful 

information in applying the gross services 

margin method. However, consideration 

should be given to whether the third party 

commission data may need to be adjusted to 

account for any additional risk that Company 

B may have assumed as a result of its 

function as an intermediary contracting 

party, compared with the risk it would have 

assumed if it had provided agent services to 

assist Company A in entering into an 

engagement to provide its consulting service 

directly. In this case, the information 

regarding the commissions paid by Company 

A to unrelated parties for providing agent 

services to facilitate its performance of 

consulting services for unrelated parties is 

sufficiently complete to conclude that all 

material differences between these 

uncontrolled transactions and the controlled 

performance of an intermediary function, 

including possible differences in the amount 

of risk assumed in connection with 

performing that function, have been 

identified and that appropriate adjustments 

have been made. If the comparable gross 

services margin earned by unrelated parties 

in providing such agent services is 3% of 

total fees charged in Company B’s relevant 

uncontrolled transactions, then the 

appropriate gross services profit that 

Company B may retain as compensation for 

performing an intermediary function (and the 

amount, therefore, that is deducted from the 

applicable uncontrolled price to arrive at the 

arm’s length price that Company A may 

charge Company B for performing consulting 

services on Company B’s behalf) is equal to 

this comparable gross services margin (3%), 

multiplied by the applicable uncontrolled 

price charged by Company B in its contract 

to provide services to the uncontrolled party. 

Example 5. External comparable. (i) The 

facts are the same as in Example 4, except 

that neither Company A nor Company B 

engages in transactions with third parties that 

facilitate similar consulting engagements. 

(ii) Analysis of the relative contributions of 

Companies A and B in obtaining and 

undertaking the contract indicates that 

Company B’s role was primarily to facilitate 

the consulting arrangement between 

Company A and the Country X client. 

Although no reliable internal data are 

available regarding comparable transactions 

with uncontrolled entities, reliable data exist 

regarding commission rates for similar 

facilitating services between uncontrolled 

parties. These data indicate that a 3% 

commission (3% of total engagement fee) is 

charged in such transactions. Information 

regarding the uncontrolled comparables is 

sufficiently complete to conclude that it is 

likely that all material differences between 

the controlled and uncontrolled transactions 

have been identified and adjusted for. If the 

appropriate gross services profit margin is 

3% of total fees, then an arm’s length result 

of the controlled services transaction is for 

Company B to retain an amount equal to 3% 

of total fees paid to it. 

(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 

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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 § 1.482– 

1(e)(2) for determination of an arm’s 

length range. 

(3) Comparability and reliability 

considerations—(i) In general. Whether 

results derived from the application of 

this method are the most reliable 

measure of the arm’s length result must 

be determined using the factors 

described under the best method rule in 

§ 1.482–1(c). 

(ii) Comparability—(A) Functional 

comparability. The degree of 

comparability between controlled and 

uncontrolled transactions is determined 

by applying the comparability 

provisions of § 1.482–1(d). A service 

renderer’s gross services profit provides 

compensation for performing services 

related to the controlled services 

transaction under review, including an 

operating profit for the service 

renderer’s investment of capital and 

assumptions of risks. Therefore, 

although all of the factors described in 

§ 1.482–1(d)(3) must be considered, 

comparability under this method is 

particularly dependent on similarity of 

services or functions performed, risks 

borne, intangible property (if any) used 

in providing the services or functions, 

and contractual terms, or adjustments to 

account for the effects of any such 

differences. If possible, the appropriate 

gross services profit markup should be 

derived from comparable uncontrolled 

transactions of the same taxpayer 

participating in the controlled services 

transaction because similar 

characteristics are more likely to be 

found among services provided by the 

same service provider than among 

services provided by other service 

providers. In the absence of such 

services transactions, an appropriate 

gross services profit markup may be 

derived from comparable uncontrolled 

services transactions of other service 

providers. If the appropriate gross 

services profit markup is derived from 

comparable uncontrolled services 

transactions of other service providers, 

in evaluating comparability the 

controlled taxpayer must consider the 

results under this method expressed as 

a markup on total services costs of the 

controlled taxpayer, because differences 

in functions performed may be reflected 

in differences in service costs other than 

those included in comparable 

transactional costs. 

(B) Other comparability factors. 

Comparability under this method is less 

dependent on close similarity between 

the services provided than under the 

comparable uncontrolled services price 

method. Substantial differences in the 

services may, however, indicate 

significant functional differences 

between the controlled and 

uncontrolled taxpayers. Thus, it 

ordinarily would be expected that the 

controlled and uncontrolled 

transactions would involve services of 

the same general type (for example, 

information-technology systems design). 

Furthermore, if a significant amount of 

the controlled taxpayer’s comparable 

transactional costs consists of service 

costs incurred in a tax accounting 

period other than the tax accounting 

period under review, the reliability of 

the analysis would be reduced. In 

addition, significant differences in the 

value of the services rendered, due for 

example to the use of valuable 

intangible property, may also affect the 

reliability of the comparison. Finally, 

the reliability of profit measures based 

on gross services profit may be 

adversely affected by factors that have 

less effect on prices. For example, gross 

services profit may be affected by a 

variety of other factors, including cost 

structures or efficiency-related factors 

(for example, differences in the level of 

experience of the employees performing 

the service in the controlled and 

uncontrolled transactions). Accordingly, 

if material differences in these factors 

are identified based on objective 

evidence, the reliability of the analysis 

may be affected. 

(C) Adjustments for differences 

between the controlled and uncontrolled 

transactions. If there are material 

differences between the controlled and 

uncontrolled transactions that would 

affect the gross services profit markup, 

adjustments should be made to the gross 

services profit markup earned in the 

comparable uncontrolled transaction 

according to the provisions of § 1.482– 

1(d)(2). For this purpose, consideration 

of the comparable transactional costs 

associated with the functions performed 

and risks assumed may be necessary, 

because differences in the functions 

performed are often reflected in these 

costs. If there are differences in 

functions performed, however, the effect 

on gross services profit of such 

differences is not necessarily equal to 

the differences in the amount of related 

comparable transactional costs. Specific 

examples of the factors that may be 

particularly relevant to this method 

include— 

(1) The complexity of the services; 

(2) The duration or quantitative 

measure of services; 

(3) Contractual terms (for example, 

scope and terms of warranties or 

guarantees provided, volume, credit and 

payment terms, allocation of risks, 

including any contingent-payment 

terms); 

(4) Economic circumstances; and 

(5) Risks borne. 

(iii) Data and assumptions—(A) In 

general. The reliability of the results 

derived from the cost of services plus 

method is affected by the completeness 

and accuracy of the data used and the 

reliability of the assumptions made to 

apply this method. See § 1.482–1(c) 

(Best method rule). 

(B) Consistency in accounting. The 

degree of consistency in accounting 

practices between the controlled 

transaction and the uncontrolled 

comparables that materially affect the 

gross services profit markup affects the 

reliability of the results under this 

method. Thus, for example, if 

differences in cost accounting practices 

would materially affect the gross 

services profit markup, the ability to 

make reliable adjustments for such 

differences would affect the reliability 

of the results obtained under this 

method. Further, reliability under this 

method depends on the extent to which 

the controlled and uncontrolled 

transactions reflect consistent reporting 

of comparable transactional costs. For 

purposes of this paragraph (e)(3)(iii)(B), 

the term comparable transactional costs 

includes the cost of acquiring tangible 

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property that is transferred (or used) 

with the services, to the extent that the 

arm’s length price of the tangible 

property is not separately evaluated as 

a controlled transaction under another 

provision. 

(4) Examples. The principles of this 

paragraph (e) are illustrated by the 

following examples: 

Example 1. Internal comparable. (i) 

Company A designs and assembles 

information-technology networks and 

systems. When Company A renders services 

for uncontrolled parties, it receives 

compensation based on time and materials as 

well as certain other related costs necessary 

to complete the project. This fee includes the 

cost of hardware and software purchased 

from uncontrolled vendors and incorporated 

in the final network or system, plus a 

reasonable allocation of certain specified 

overhead costs incurred by Company A in 

providing these services. Reliable accounting 

records maintained by Company A indicate 

that Company A earned a gross services 

profit markup of 10% on its time, materials 

and specified overhead in providing design 

services during the year under examination 

on information technology projects for 

uncontrolled entities. 

(ii) Company A designed an informationtechnology network for its Country X 

subsidiary, Company B. The services 

rendered to Company B are similar in scope 

and complexity to services that Company A 

rendered to uncontrolled parties during the 

year under examination. Using Company A’s 

accounting records (which are determined to 

be reliable under paragraph (e)(3) of this 

section), it is possible to identify the 

comparable transactional costs involved in 

the controlled services transaction with 

reference to the costs incurred by Company 

A in rendering similar design services to 

uncontrolled parties. Company A’s records 

indicate that it does not incur any additional 

types of costs in rendering similar services to 

uncontrolled customers. The data available 

are sufficiently complete to conclude that it 

is likely that all material differences between 

the controlled and uncontrolled transactions 

have been identified and adjusted for. Based 

on the gross services profit markup data 

derived from Company A’s uncontrolled 

transactions involving similar design 

services, an arm’s length result for the 

controlled services transaction is equal to the 

price that will allow Company A to earn a 

10% gross services profit markup on its 

comparable transactional costs. 

Example 2. Inability to adjust for 

differences in comparable transactional 

costs. The facts are the same as in Example 

1, except that Company A’s staff that 

rendered the services to Company B 

consisted primarily of engineers in training 

status or on temporary rotation from other 

Company A subsidiaries. In addition, the 

Company B network incorporated innovative 

features, including specially designed 

software suited to Company B’s 

requirements. The use of less-experienced 

personnel and staff on temporary rotation, 

together with the special features of the 

Company B network, significantly increased 

the time and costs associated with the project 

as compared to time and costs associated 

with similar projects completed for 

uncontrolled customers. These factors 

constitute material differences between the 

controlled and the uncontrolled transactions 

that affect the determination of Company A’s 

comparable transactional costs associated 

with the controlled services transaction, as 

well as the gross services profit markup. 

Moreover, it is not possible to perform 

reliable adjustments for these differences on 

the basis of the available accounting data. 

Under these circumstances, the reliability of 

the cost of services plus method as a measure 

of an arm’s length price is substantially 

reduced. 

Example 3. Operating loss by reference to 

total services costs. The facts and analysis are 

the same as in Example 1, except that an 

unrelated Company C, instead of Company 

A, renders similar services to uncontrolled 

parties and publicly available information 

indicates that Company C earned a gross 

services profit markup of 10% on its time, 

materials and certain specified overhead in 

providing those services. As in Example 1, 

Company A still provides services for its 

Country X subsidiary, Company B. In 

accordance with the requirements in 

paragraph (e)(3)(ii) of this section, the 

taxpayer performs additional analysis and 

restates the results of Company A’s 

controlled services transaction with its 

Country X subsidiary, Company B, in the 

form of a markup on Company A’s total 

services costs. This analysis by reference to 

total services costs shows that Company A 

generated an operating loss on the controlled 

services transaction, which indicates that 

functional differences likely exist between 

the controlled services transaction performed 

by Company A and uncontrolled services 

transactions performed by Company C, and 

that these differences may not be reflected in 

the comparable transactional costs. Upon 

further scrutiny, the presence of such 

functional differences between the controlled 

and uncontrolled transactions may indicate 

that the cost of services plus method does not 

provide the most reliable measure of an arm’s 

length result under the facts and 

circumstances. 

Example 4. Internal comparable. (i) 

Company A, a U.S. corporation, and its 

subsidiaries perform computer consulting 

services relating to systems integration and 

networking for business clients in various 

countries. Company A and its subsidiaries 

render only consulting services and do not 

manufacture or distribute computer hardware 

or software to clients. The controlled group 

is organized according to industry 

specialization, with key industry specialists 

working for Company A. These personnel 

typically form the core consulting group that 

teams with consultants from the localcountry subsidiaries to serve clients in the 

subsidiaries’ respective countries. 

(ii) On some occasions, Company A and its 

subsidiaries undertake engagements directly 

for clients. On other occasions, they work as 

subcontractors for uncontrolled parties on 

more extensive consulting engagements for 

clients. In undertaking the latter engagements 

with third-party consultants, Company A 

typically prices its services at four times the 

compensation costs of its consultants, 

defined as the consultants’ base salary plus 

estimated fringe benefits, as defined in this 

table: 

Category Rate 

Project managers .............. $100 per hour. 

Technical staff ................... 75 per hour. 

(iii) In uncontrolled transactions, Company 

A also charges the customer, at no markup, 

for out-of-pocket expenses such as travel, 

lodging, and data acquisition charges. Thus, 

for example, a project involving 100 hours of 

time from project managers, and 400 hours of 

technical staff time would result in total 

compensation costs to Company A of (100 

hrs. × $100/hr.) + (400 hrs. × $75/hr.) = 

$10,000 + $30,000 = $40,000. Applying the 

markup of 300%, the total fee charged would 

thus be (4 × $40,000), or $160,000, plus outof-pocket expenses. 

(iv) Company B, a Country X subsidiary of 

Company A, contracts to render consulting 

services to a Country X client in the banking 

industry. In undertaking this engagement, 

Company B uses its own consultants and also 

uses the services of Company A project 

managers and technical staff that specialize 

in the banking industry for 75 hours and 380 

hours, respectively. The data available are 

sufficiently complete to conclude that it is 

likely that all material differences between 

the controlled and uncontrolled transactions 

have been identified and adjusted for. Based 

on reliable data concerning the compensation 

costs to Company A, an arm’s length result 

for the controlled services transaction is 

equal to $144,000. This is calculated as 

follows: [4 × (75 hrs. × $100/hr.)] + [4 × (380 

hrs. × $75/hr.)] = $30,000 + $114,000 = 

$144,000, reflecting a 300% markup on the 

total compensation costs for Company A 

project managers and technical staff. In 

addition, consistent with Company A’s 

pricing of uncontrolled transactions, 

Company B must reimburse Company A for 

appropriate out-of-pocket expenses incurred 

in performing the services. 

(f) Comparable profits method—(1) In 

general. The comparable profits method 

evaluates whether the amount charged 

in a controlled transaction is arm’s 

length, based on objective measures of 

profitability (profit level indicators) 

derived from uncontrolled taxpayers 

that engage in similar business activities 

under similar circumstances. The rules 

in § 1.482–5 relating to the comparable 

profits method apply to controlled 

services transactions, except as 

modified in this paragraph (f). 

(2) Determination of arm’s length 

result—(i) Tested party. This paragraph 

(f) applies where the relevant business 

activity of the tested party as 

determined under § 1.482–5(b)(2) is the 

rendering of services in a controlled 

services transaction. Where the tested 

party determined under § 1.482–5(b)(2) 

is instead the recipient of the controlled 

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services, the rules under this paragraph 

(f) are not applicable to determine the 

arm’s length result. 

(ii) Profit level indicators. In addition 

to the profit level indicators provided in 

§ 1.482–5(b)(4), a profit level indicator 

that may provide a reliable basis for 

comparing operating profits of the tested 

party involved in a controlled services 

transaction and uncontrolled 

comparables is the ratio of operating 

profit to total services costs (as defined 

in paragraph (j) of this section). 

(iii) Comparability and reliability 

considerations—Data and 

assumptions—Consistency in 

accounting. Consistency in accounting 

practices between the relevant business 

activity of the tested party and the 

uncontrolled service providers is 

particularly important in determining 

the reliability of the results under this 

method, but less than in applying the 

cost of services plus method. 

Adjustments may be appropriate if 

materially different treatment is applied 

to particular cost items related to the 

relevant business activity of the tested 

party and the uncontrolled service 

providers. For example, adjustments 

may be appropriate where the tested 

party and the uncontrolled comparables 

use inconsistent approaches to classify 

similar expenses as ‘‘cost of goods sold’’ 

and ‘‘selling, general, and 

administrative expenses.’’ Although 

distinguishing between these two 

categories may be difficult, the 

distinction is less important to the 

extent that the ratio of operating profit 

to total services costs is used as the 

appropriate profit level indicator. 

Determining whether adjustments are 

necessary under these or similar 

circumstances requires thorough 

analysis of the functions performed and 

consideration of the cost accounting 

practices of the tested party and the 

uncontrolled comparables. Other 

adjustments as provided in § 1.482– 

5(c)(2)(iv) may also be necessary to 

increase the reliability of the results 

under this method. 

(3) Examples. The principles of this 

paragraph (f) are illustrated by the 

following examples: 

Example 1. Ratio of operating profit to total 

services costs as the appropriate profit level 

indicator. (i) A Country T parent firm, 

Company A, and its Country Y subsidiary, 

Company B, both engage in manufacturing as 

their principal business activity. Company A 

also performs certain advertising services for 

itself and its affiliates. In year 1, Company A 

renders advertising services to Company B. 

(ii) Based on the facts and circumstances, 

it is determined that the comparable profits 

method will provide the most reliable 

measure of an arm’s length result. Company 

A is selected as the tested party. No data are 

available for comparable independent 

manufacturing firms that render advertising 

services to third parties. Financial data are 

available, however, for ten independent firms 

that render similar advertising services as 

their principal business activity in Country 

X. The ten firms are determined to be 

comparable under § 1.482–5(c). Neither 

Company A nor the comparable companies 

use valuable intangible property in rendering 

the services. 

(iii) Based on the available financial data 

of the comparable companies, it cannot be 

determined whether these comparable 

companies report costs for financial 

accounting purposes in the same manner as 

the tested party. The publicly available 

financial data of the comparable companies 

segregate total services costs into cost of 

goods sold and sales, general and 

administrative costs, with no further 

segmentation of costs provided. Due to the 

limited information available regarding the 

cost accounting practices used by the 

comparable companies, the ratio of operating 

profits to total services costs is determined to 

be the most appropriate profit level indicator. 

This ratio includes total services costs to 

minimize the effect of any inconsistency in 

accounting practices between Company A 

and the comparable companies. 

Example 2. Application of the operating 

profit to total services costs profit level 

indicator. (i) Company A is a foreign 

subsidiary of Company B, a U.S. corporation. 

Company B is under examination for its year 

1 taxable year. Company B renders 

management consulting services to Company 

A. Company B’s consulting function includes 

analyzing Company A’s operations, 

benchmarking Company A’s financial 

performance against companies in the same 

industry, and to the extent necessary, 

developing a strategy to improve Company 

A’s operational performance. The accounting 

records of Company B allow reliable 

identification of the total services costs of the 

consulting staff associated with the 

management consulting services rendered to 

Company A. Company A reimburses 

Company B for its costs associated with 

rendering the consulting services, with no 

markup. 

(ii) Based on all the facts and 

circumstances, it is determined that the 

comparable profits method will provide the 

most reliable measure of an arm’s length 

result. Company B is selected as the tested 

party, and its rendering of management 

consulting services is identified as the 

relevant business activity. Data are available 

from ten domestic companies that operate in 

the industry segment involving management 

consulting and that perform activities 

comparable to the relevant business activity 

of Company B. These comparables include 

entities that primarily perform management 

consulting services for uncontrolled parties. 

The comparables incur similar risks as 

Company B incurs in performing the 

consulting services and do not make use of 

valuable intangible property or special 

processes. 

(iii) Based on the available financial data 

of the comparables, it cannot be determined 

whether the comparables report their costs 

for financial accounting purposes in the same 

manner as Company B reports its costs in the 

relevant business activity. The available 

financial data for the comparables report only 

an aggregate figure for costs of goods sold and 

operating expenses, and do not segment the 

underlying services costs. Due to this 

limitation, the ratio of operating profits to 

total services costs is determined to be the 

most appropriate profit level indicator. 

(iv) For the taxable years 1 through 3, 

Company B shows the following results for 

the services performed for Company A: 

Year 1 Year 2 Year 3 Average 

Revenues ......................................................................................................... 1,200,000 1,100,000 1,300,000 1,200,000 

Cost of Goods Sold ......................................................................................... 100,000 100,000 N/A 66,667 

Operating Expenses ........................................................................................ 1,100,000 1,000,000 1,300,000 1,133,333 

Operating Profit ................................................................................................ 0 0 0 0 

(v) After adjustments have been made to 

account for identified material differences 

between the relevant business activity of 

Company B and the comparables, the average 

ratio for the taxable years 1 through 3 of 

operating profit to total services costs is 

calculated for each of the uncontrolled 

service providers. Applying each ratio to 

Company B’s average total services costs 

from the relevant business activity for the 

taxable years 1 through 3 would lead to the 

following comparable operating profit (COP) 

for the services rendered by Company B: 

Uncontrolled 

service 

provider 

OP/Total 

service costs 

(percent) 

Company B 

COP 

Company 1 ... 15.75 $189,000 

Company 2 ... 15.00 180,000 

Company 3 ... 14.00 168,000 

Company 4 ... 13.30 159,600 

Uncontrolled 

service 

provider 

OP/Total 

service costs 

(percent) 

Company B 

COP 

Company 5 ... 12.00 144,000 

Company 6 ... 11.30 135,600 

Company 7 ... 11.25 135,000 

Company 8 ... 11.18 134,160 

Company 9 ... 11.11 133,320 

Company 10 10.75 129,000 

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(vi) The available data are not sufficiently 

complete to conclude that it is likely that all 

material differences between the relevant 

business activity of Company B and the 

comparables have been identified. Therefore, 

an arm’s length range can be established only 

pursuant to § 1.482–1(e)(2)(iii)(B). The arm’s 

length range is established by reference to the 

interquartile range of the results as calculated 

under § 1.482–1(e)(2)(iii)(C), which consists 

of the results ranging from $168,000 to 

$134,160. Company B’s reported average 

operating profit of zero ($0) falls outside this 

range. Therefore, an allocation may be 

appropriate. 

(vii) Because Company B reported income 

of zero, to determine the amount, if any, of 

the allocation, Company B’s reported 

operating profit for year 3 is compared to the 

comparable operating profits derived from 

the comparables’ results for year 3. The ratio 

of operating profit to total services costs in 

year 3 is calculated for each of the 

comparables and applied to Company B’s 

year 3 total services costs to derive the 

following results: 

Uncontrolled 

service 

provider 

OP/Total 

service costs 

(for year 3) 

(percent) 

Company B 

COP 

Company 1 ... 15.00 $195,000 

Company 2 ... 14.75 191,750 

Company 3 ... 14.00 182,000 

Company 4 ... 13.50 175,500 

Company 5 ... 12.30 159,900 

Company 6 ... 11.05 143,650 

Company 7 ... 11.03 143,390 

Uncontrolled 

service 

provider 

OP/Total 

service costs 

(for year 3) 

(percent) 

Company B 

COP 

Company 8 ... 11.00 143,000 

Company 9 ... 10.50 136,500 

Company 10 10.25 133,250 

(viii) Based on these results, the median of 

the comparable operating profits for year 3 is 

$151,775. Therefore, Company B’s income for 

year 3 is increased by $151,775, the 

difference between Company B’s reported 

operating profit for year 3 of zero and the 

median of the comparable operating profits 

for year 3. 

Example 3. Material difference in 

accounting for stock-based compensation. (i) 

Taxpayer, a U.S. corporation the stock of 

which is publicly traded, performs controlled 

services for its wholly-owned subsidiaries. 

The arm’s length price of these controlled 

services is evaluated under the comparable 

profits method for services in paragraph (f) of 

this section by reference to the net cost plus 

profit level indicator (PLI). Taxpayer is the 

tested party under paragraph (f)(2)(i) of this 

section. The Commissioner identifies the 

most narrowly identifiable business activity 

of the tested party for which data are 

available that incorporate the controlled 

transaction (the relevant business activity). 

The Commissioner also identifies four 

uncontrolled domestic service providers, 

Companies A, B, C, and D, each of which 

performs exclusively activities similar to the 

relevant business activity of Taxpayer that is 

subject to analysis under paragraph (f) of this 

section. The stock of Companies A, B, C, and 

D is publicly traded on a U.S. stock 

exchange. Assume that Taxpayer makes an 

election to apply these regulations to earlier 

taxable years. 

(ii) Stock options are granted to the 

employees of Taxpayer that engage in the 

relevant business activity. Assume that, as 

determined under a method in accordance 

with U.S. generally accepted accounting 

principles, the fair value of such stock 

options attributable to the employees’ 

performance of the relevant business activity 

is 500 for the taxable year in question. In 

evaluating the controlled services, Taxpayer 

includes salaries, fringe benefits, and related 

compensation of these employees in ‘‘total 

services costs,’’ as defined in paragraph (j) of 

this section. Taxpayer does not include any 

amount attributable to stock options in total 

services costs, nor does it deduct that amount 

in determining ’’reported operating profit’’ 

within the meaning of § 1.482–5(d)(5), for the 

year under examination. 

(iii) Stock options are granted to the 

employees of Companies A, B, C, and D. 

Under a fair value method in accordance 

with U.S. generally accepted accounting 

principles, the comparables include in total 

compensation the value of the stock options 

attributable to the employees’ performance of 

the relevant business activity for the annual 

financial reporting period, and treat this 

amount as an expense in determining 

operating profit for financial accounting 

purposes. The treatment of employee stock 

options is summarized in the following table: 

Salaries and 

other non-option compensation Stock options 

fair value 

Stock options 

expensed 

Taxpayer ...................................................................................................................................... 1,000 500 0 

Company A .................................................................................................................................. 7,000 2,000 2,000 

Company B .................................................................................................................................. 4,300 250 250 

Company C .................................................................................................................................. 12,000 4,500 4,500 

Company D .................................................................................................................................. 15,000 2,000 2,000 

(iv) A material difference in accounting for 

stock-based compensation (within the 

meaning of § 1.482–7T(d)(3)(i)) exists. 

Analysis indicates that this difference would 

materially affect the measure of an arm’s 

length result under this paragraph (f). In 

making an adjustment to improve 

comparability under §§ 1.482–1(d)(2) and 

1.482–5(c)(2)(iv), the Commissioner includes 

in total services costs of the tested party the 

total compensation costs of 1,500 (including 

stock option fair value). In addition, the 

Commissioner calculates the net cost plus 

PLI by reference to the financial-accounting 

data of Companies A, B, C, and D, which take 

into account compensatory stock options. 

Example 4. Material difference in 

utilization of stock-based compensation. 

(i) The facts are the same as in paragraph 

(i) of Example 3. 

(ii) No stock options are granted to the 

employees of Taxpayer that engage in the 

relevant business activity. Thus, no 

deduction for stock options is made in 

determining ‘‘reported operating profit’’ 

(within the meaning of § 1.482–5(d)(5)) for 

the taxable year under examination. 

(iii) Stock options are granted to the 

employees of Companies A, B, C, and D, but 

none of these companies expense stock 

options for financial accounting purposes. 

Under a method in accordance with U.S. 

generally accepted accounting principles, 

however, Companies A, B, C, and D disclose 

the fair value of the stock options for 

financial accounting purposes. The 

utilization and treatment of employee stock 

options is summarized in the following table: 

Salaries and 

other non-option compensation Stock options 

fair value 

Stock options 

expensed 

Taxpayer ...................................................................................................................................... 1,000 0 N/A 

Company A .................................................................................................................................. 7,000 2,000 0 

Company B .................................................................................................................................. 4,300 250 0 

Company C .................................................................................................................................. 12,000 4,500 0 

Company D .................................................................................................................................. 15,000 2,000 0 

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(iv) A material difference in the utilization 

of stock-based compensation (within the 

meaning of § 1.482–7T(d)(3)(i)) exists. 

Analysis indicates that these differences 

would materially affect the measure of an 

arm’s length result under this paragraph (f). 

In evaluating the comparable operating 

profits of the tested party, the Commissioner 

uses Taxpayer’s total services costs, which 

include total compensation costs of 1,000. In 

considering whether an adjustment is 

necessary to improve comparability under 

§§ 1.482–1(d)(2) and 1.482–5(c)(2)(iv), the 

Commissioner recognizes that the total 

compensation provided to employees of 

Taxpayer is comparable to the total 

compensation provided to employees of 

Companies A, B, C, and D. Because 

Companies A, B, C, and D do not expense 

stock-based compensation for financial 

accounting purposes, their reported operating 

profits must be adjusted in order to improve 

comparability with the tested party. The 

Commissioner increases each comparable’s 

total services costs, and also reduces its 

reported operating profit, by the fair value of 

the stock-based compensation incurred by 

the comparable company. 

(v) The adjustments to the data of 

Companies A, B, C, and D described in 

paragraph (iv) of this Example 4 are 

summarized in the following table: 

Salaries and 

other non-option compensation Stock options 

fair value 

Total services 

costs 

(A) 

Operating 

profit 

(B) 

Net cost plus 

PLI 

(B/A) 

(Percent) 

Per financial statements: 

Company A ................................................................... 7,000 2,000 25,000 6,000 24.00 

Company B ................................................................... 4,300 250 12,500 2,500 20.00 

Company C ................................................................... 12,000 4,500 36,000 11,000 30.56 

Company D ................................................................... 15,000 2,000 27,000 7,000 25.93 

As adjusted: 

Company A ................................................................... 7,000 2,000 27,000 4,000 14.81 

Company B ................................................................... 4,300 250 12,750 2,250 17.65 

Company C ................................................................... 12,000 4,500 40,500 6,500 16.05 

Company D ................................................................... 15,000 2,000 29,000 5,000 17.24 

Example 5. Non-material difference in 

utilization of stock-based compensation. 

(i) The facts are the same as in paragraph 

(i) of Example 3. 

(ii) Stock options are granted to the 

employees of Taxpayer that engage in the 

relevant business activity. Assume that, as 

determined under a method in accordance 

with U.S. generally accepted accounting 

principles, the fair value of such stock 

options attributable to the employees’ 

performance of the relevant business activity 

is 50 for the taxable year. Taxpayer includes 

salaries, fringe benefits, and all other 

compensation of these employees (including 

the stock option fair value) in ‘‘total services 

costs,’’ as defined in paragraph (j) of this 

section, and deducts these amounts in 

determining ‘‘reported operating profit’’ 

within the meaning of § 1.482–5(d)(5), for the 

taxable year under examination. 

(iii) Stock options are granted to the 

employees of Companies A, B, C, and D, but 

none of these companies expense stock 

options for financial accounting purposes. 

Under a method in accordance with U.S. 

generally accepted accounting principles, 

however, Companies A, B, C, and D disclose 

the fair value of the stock options for 

financial accounting purposes. The 

utilization and treatment of employee stock 

options is summarized in the following table: 

Salaries and 

other non-option compensation Stock options 

fair value 

Stock options 

expensed 

Taxpayer ...................................................................................................................................... 1,000 50 50 

Company A .................................................................................................................................. 7,000 100 0 

Company B .................................................................................................................................. 4,300 40 0 

Company C .................................................................................................................................. 12,000 130 0 

Company D .................................................................................................................................. 15,000 75 0 

(iv) Analysis of the data reported by 

Companies A, B, C, and D indicates that an 

adjustment for differences in utilization of 

stock-based compensation would not have a 

material effect on the determination of an 

arm’s length result. 

Salaries and 

other non-option compensation Stock options 

fair value 

Total services 

costs 

(A) 

Operating 

profit 

(B) 

Net cost plus 

PLI 

(B/A) 

(percent) 

Per financial statements: 

Company A ................................................................... 7,000 100 25,000 6,000 24.00 

Company B ................................................................... 4,300 40 12,500 2,500 20.00 

Company C ................................................................... 12,000 130 36,000 11,000 30.56 

Company D ................................................................... 15,000 75 27,000 7,000 25.93 

As adjusted: 

Company A ................................................................... 7,000 100 25,100 5,900 23.51 

Company B ................................................................... 4,300 40 12,540 2,460 19.62 

Company C ................................................................... 12,000 130 36,130 10,870 30.09 

Company D ................................................................... 15,000 75 27,075 6,925 25.58 

(v) Under the circumstances, the difference 

in utilization of stock-based compensation 

would not materially affect the determination 

of the arm’s length result under this 

paragraph (f). Accordingly, in calculating the 

net cost plus PLI, no comparability 

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adjustment is made to the data of Companies 

A, B, C, or D pursuant to §§ 1.482–1(d)(2) and 

1.482–5(c)(2)(iv). 

Example 6. Material difference in 

comparables’ accounting for stock-based 

compensation. (i) The facts are the same as 

in paragraph (i) of Example 3. 

(ii) Stock options are granted to the 

employees of Taxpayer that engage in the 

relevant business activity. Assume that, as 

determined under a method in accordance 

with U.S. generally accepted accounting 

principles, the fair value of such stock 

options attributable to employees’ 

performance of the relevant business activity 

is 500 for the taxable year. Taxpayer includes 

salaries, fringe benefits, and all other 

compensation of these employees (including 

the stock option fair value) in ‘‘total services 

costs,’’ as defined in paragraph (j) of this 

section, and deducts these amounts in 

determining ‘‘reported operating profit’’ 

(within the meaning of § 1.482–5(d)(5)) for 

the taxable year under examination. 

(iii) Stock options are granted to the 

employees of Companies A, B, C, and D. 

Companies A and B expense the stock 

options for financial accounting purposes in 

accordance with U.S. generally accepted 

accounting principles. Companies C and D 

do not expense the stock options for financial 

accounting purposes. Under a method in 

accordance with U.S. generally accepted 

accounting principles, however, Companies 

C and D disclose the fair value of these 

options in their financial statements. The 

utilization and accounting treatment of 

options are depicted in the following table: 

Salary and 

other non-option compensation Stock options 

fair value 

Stock options 

expensed 

Taxpayer ...................................................................................................................................... 1,000 500 500 

Company A .................................................................................................................................. 7,000 2,000 2,000 

Company B .................................................................................................................................. 4,300 250 250 

Company C .................................................................................................................................. 12,000 4,500 0 

Company D .................................................................................................................................. 15,000 2,000 0 

(iv) A material difference in accounting for 

stock-based compensation (within the 

meaning of § 1.482–7T(d)(3)(i)) exists. 

Analysis indicates that this difference would 

materially affect the measure of the arm’s 

length result under paragraph (f) of this 

section. In evaluating the comparable 

operating profits of the tested party, the 

Commissioner includes in total services costs 

Taxpayer’s total compensation costs of 1,500 

(including stock option fair value of 500). In 

considering whether an adjustment is 

necessary to improve comparability under 

§§ 1.482–1(d)(2) and 1.482–5(c)(2)(iv), the 

Commissioner recognizes that the total 

employee compensation (including stock 

options provided by Taxpayer and 

Companies A, B, C, and D) provides a reliable 

basis for comparison. Because Companies A 

and B expense stock-based compensation for 

financial accounting purposes, whereas 

Companies C and D do not, an adjustment to 

the comparables’ operating profit is 

necessary. In computing the net cost plus 

PLI, the Commissioner uses the financialaccounting data of Companies A and B, as 

reported. The Commissioner increases the 

total services costs of Companies C and D by 

amounts equal to the fair value of their 

respective stock options, and reduces the 

operating profits of Companies C and D 

accordingly. 

(v) The adjustments described in paragraph 

(iv) of this Example 6 are depicted in the 

following table. For purposes of illustration, 

the unadjusted data of Companies A and B 

are also included. 

Salaries and 

other non-option compensation Stock options 

fair value 

Total services 

costs 

(A) 

Operating 

profit 

(B) 

Net cost plus 

PLI 

(B/A) 

(percent) 

Per financial statements: 

Company A ................................................................... 7,000 2,000 27,000 4,000 14.80 

Company B ................................................................... 4,300 250 12,750 2,250 17.65 

As adjusted: 

Company C ................................................................... 12,000 4,500 40,500 6,500 16.05 

Company D ................................................................... 15,000 2,000 29,000 5,000 17.24 

(g) Profit split method—(1) In general. 

The profit split method evaluates 

whether the allocation of the combined 

operating profit or loss attributable to 

one or more controlled transactions is 

arm’s length by reference to the relative 

value of each controlled taxpayer’s 

contribution to that combined operating 

profit or loss. The relative value of each 

controlled taxpayer’s contribution is 

determined in a manner that reflects the 

functions performed, risks assumed and 

resources employed by such controlled 

taxpayer in the relevant business 

activity. For application of the profit 

split method (both the comparable profit 

split and the residual profit split), see 

§ 1.482–6. The residual profit split 

method may not be used where only one 

controlled taxpayer makes significant 

nonroutine contributions. 

(2) Examples. The principles of this 

paragraph (g) are illustrated by the 

following examples: 

Example 1. Residual profit split. (i) 

Company A, a corporation resident in 

Country X, auctions spare parts by means of 

an interactive database. Company A 

maintains a database that lists all spare parts 

available for auction. Company A developed 

the software used to run the database. 

Company A’s database is managed by 

Company A employees in a data center 

located in Country X, where storage and 

manipulation of data also take place. 

Company A has a wholly-owned subsidiary, 

Company B, located in Country Y. Company 

B performs marketing and advertising 

activities to promote Company A’s 

interactive database. Company B solicits 

unrelated companies to auction spare parts 

on Company A’s database, and solicits 

customers interested in purchasing spare 

parts online. Company B owns and maintains 

a computer server in Country Y, where it 

receives information on spare parts available 

for auction. Company B has also designed a 

specialized communications network that 

connects its data center to Company A’s data 

center in Country X. The communications 

network allows Company B to enter data 

from uncontrolled companies on Company 

A’s database located in Country X. Company 

B’s communications network also allows 

uncontrolled companies to access Company 

A’s interactive database and purchase spare 

parts. Company B bore the risks and cost of 

developing this specialized communications 

network. Company B enters into contracts 

with uncontrolled companies and provides 

the companies access to Company A’s 

database through the Company B network. 

(ii) Analysis of the facts and circumstances 

indicates that both Company A and Company 

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B possess valuable intangible property that 

they use to conduct the spare parts auction 

business. Company A bore the economic 

risks of developing and maintaining software 

and the interactive database. Company B bore 

the economic risks of developing the 

necessary technology to transmit information 

from its server to Company A’s data center, 

and to allow uncontrolled companies to 

access Company A’s database. Company B 

helped to enhance the value of Company A’s 

trademark and to establish a network of 

customers in Country Y. In addition, there 

are no market comparables for the 

transactions between Company A and 

Company B to reliably evaluate them 

separately. Given the facts and 

circumstances, the Commissioner determines 

that a residual profit split method will 

provide the most reliable measure of an arm’s 

length result. 

(iii) Under the residual profit split method, 

profits are first allocated based on the routine 

contributions of each taxpayer. Routine 

contributions include general sales, 

marketing or administrative functions 

performed by Company B for Company A for 

which it is possible to identify market 

returns. Any residual profits will be allocated 

based on the nonroutine contributions of 

each taxpayer. Since both Company A and 

Company B provided nonroutine 

contributions, the residual profits are 

allocated based on these contributions. 

Example 2. Residual profit split. (i) 

Company A, a Country 1 corporation, 

provides specialized services pertaining to 

the processing and storage of Level 1 

hazardous waste (for purposes of this 

example, the most dangerous type of waste). 

Under long-term contracts with private 

companies and governmental entities in 

Country 1, Company A performs multiple 

services, including transportation of Level 1 

waste, development of handling and storage 

protocols, recordkeeping, and supervision of 

waste-storage facilities owned and 

maintained by the contracting parties. 

Company A’s research and development unit 

has also developed new and unique 

processes for transport and storage of Level 

1 waste that minimize environmental and 

occupational effects. In addition to this novel 

technology, Company A has substantial 

know-how and a long-term record of safe 

operations in Country 1. 

(ii) Company A’s subsidiary, Company B, 

has been in operation continuously for a 

number of years in Country 2. Company B 

has successfully completed several projects 

in Country 2 involving Level 2 and Level 3 

waste, including projects with governmentowned entities. Company B has a license in 

Country 2 to handle Level 2 waste (Level 3 

does not require a license). Company B has 

established a reputation for completing these 

projects in a responsible manner. Company B 

has cultivated contacts with procurement 

officers, regulatory and licensing officials, 

and other government personnel in Country 

2. 

(iii) Country 2 government publishes 

invitations to bid on a project to handle the 

country’s burgeoning volume of Level 1 

waste, all of which is generated in 

government-owned facilities. Bidding is 

limited to companies that are domiciled in 

Country 2 and that possess a license from the 

government to handle Level 1 or Level 2 

waste. In an effort to submit a winning bid 

to secure the contract, Company B points to 

its Level 2 license and its record of successful 

completion of projects, and also 

demonstrates to these officials that it has 

access to substantial technical expertise 

pertaining to processing of Level 1 waste. 

(iv) Company A enters into a long-term 

technical services agreement with Company 

B. Under this agreement, Company A agrees 

to supply to Company B project managers 

and other technical staff who have detailed 

knowledge of Company A’s proprietary Level 

1 remediation techniques. Company A 

commits to perform under any long-term 

contracts entered into by Company B. 

Company B agrees to compensate Company 

A based on a markup on Company A’s 

marginal costs (pro rata compensation and 

current expenses of Company A personnel). 

In the bid on the Country 2 contract for Level 

1 waste remediation, Company B proposes to 

use a multi-disciplinary team of specialists 

from Company A and Company B. Project 

managers from Company A will direct the 

team, which will also include employees of 

Company B and will make use of physical 

assets and facilities owned by Company B. 

Only Company A and Company B personnel 

will perform services under the contract. 

Country 2 grants Company B a license to 

handle Level 1 waste. 

(v) Country 2 grants Company B a fiveyear, exclusive contract to provide processing 

services for all Level 1 hazardous waste 

generated in County 2. Under the contract, 

Company B is to be paid a fixed price per ton 

of Level 1 waste that it processes each year. 

Company B undertakes that all services 

provided will meet international standards 

applicable to processing of Level 1 waste. 

Company B begins performance under the 

contract. 

(vi) Analysis of the facts and circumstances 

indicates that both Company A and Company 

B make nonroutine contributions to the Level 

1 waste processing activity in Country 2. In 

addition, it is determined that reliable 

comparables are not available for the services 

that Company A provides under the longterm contract, in part because those services 

incorporate specialized knowledge and 

process intangible property developed by 

Company A. It is also determined that 

reliable comparables are not available for the 

Level 2 license in Country 2, the successful 

track record, the government contacts with 

Country 2 officials, and other intangible 

property that Company B provided. In view 

of these facts, the Commissioner determines 

that the residual profit split method for 

services in paragraph (g) of this section 

provides the most reliable means of 

evaluating the arm’s length results for the 

transaction. In evaluating the appropriate 

returns to Company A and Company B for 

their respective contributions, the 

Commissioner takes into account that the 

controlled parties incur different risks, 

because the contract between the controlled 

parties provides that Company A will be 

compensated on the basis of marginal costs 

incurred, plus a markup, whereas the 

contract between Company B and the 

government of Country 2 provides that 

Company B will be compensated on a fixedprice basis per ton of Level 1 waste 

processed. 

(vii) In the first stage of the residual profit 

split, an arm’s length return is determined for 

routine activities performed by Company B 

in Country 2, such as transportation, 

recordkeeping, and administration. In 

addition, an arm’s length return is 

determined for routine activities performed 

by Company A (administrative, human 

resources, etc.) in connection with providing 

personnel to Company B. After the arm’s 

length return for these functions is 

determined, residual profits may be present. 

In the second stage of the residual profit 

split, any residual profit is allocated by 

reference to the relative value of the 

nonroutine contributions made by each 

taxpayer. Company A’s nonroutine 

contributions include its commitment to 

perform under the contract and the 

specialized technical knowledge made 

available through the project managers under 

the services agreement with Company B. 

Company B’s nonroutine contributions 

include its licenses to handle Level 1 and 

Level 2 waste in Country 2, its knowledge of 

and contacts with procurement, regulatory 

and licensing officials in the government of 

Country 2, and its record in Country 2 of 

successfully handling non-Level 1 waste. 

(h) Unspecified methods. Methods not 

specified in paragraphs (b) through (g) 

of this section may be used to evaluate 

whether the amount charged in a 

controlled services transaction is arm’s 

length. Any method used under this 

paragraph (h) must be applied in 

accordance with the provisions of 

§ 1.482–1. Consistent with the specified 

methods, an unspecified method should 

take into account the general principle 

that uncontrolled taxpayers evaluate the 

terms of a transaction by considering the 

realistic alternatives to that transaction, 

including economically similar 

transactions structured as other than 

services transactions, and only enter 

into a particular transaction if none of 

the alternatives is preferable to it. For 

example, the comparable uncontrolled 

services price method compares a 

controlled services transaction to 

similar uncontrolled transactions to 

provide a direct estimate of the price to 

which the parties would have agreed 

had they resorted directly to a market 

alternative to the controlled services 

transaction. Therefore, in establishing 

whether a controlled services 

transaction achieved an arm’s length 

result, an unspecified method should 

provide information on the prices or 

profits that the controlled taxpayer 

could have realized by choosing a 

realistic alternative to the controlled 

services transaction (for example, 

outsourcing a particular service 

function, rather than performing the 

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function itself). As with any method, an 

unspecified method will not be applied 

unless it provides the most reliable 

measure of an arm’s length result under 

the principles of the best method rule. 

See § 1.482–1(c). Therefore, in 

accordance with § 1.482–1(d) 

(comparability), to the extent that an 

unspecified method relies on internal 

data rather than uncontrolled 

comparables, its reliability will be 

reduced. Similarly, the reliability of a 

method will be affected by the 

reliability of the data and assumptions 

used to apply the method, including any 

projections used. 

Example. (i) Company T, a U.S. 

corporation, develops computer software 

programs including a real estate investment 

program that performs financial analysis of 

commercial real properties. Companies U, V, 

and W are owned by Company T. The 

primary business activity of Companies U, V, 

and W is commercial real estate 

development. For business reasons, Company 

T does not sell the computer program to its 

customers (on a compact disk or via 

download from Company T’s server through 

the Internet). Instead, Company T maintains 

the software program on its own server and 

allows customers to access the program 

through the Internet by using a password. 

The transactions between Company T and 

Companies U, V, and W are structured as 

controlled services transactions whereby 

Companies U, V, and W obtain access via the 

Internet to Company T’s software program for 

financial analysis. Each year, Company T 

provides a revised version of the computer 

program including the most recent data on 

the commercial real estate market, rendering 

the old version obsolete. 

(ii) In evaluating whether the consideration 

paid by Companies U, V, and W to Company 

T was arm’s length, the Commissioner may 

consider, subject to the best method rule of 

§ 1.482–1(c), Company T’s alternative of 

selling the computer program to Companies 

U, V, and W on a compact disk or via 

download through the Internet. The 

Commissioner determines that the controlled 

services transactions between Company T 

and Companies U, V, and W are comparable 

to the transfer of a similar software program 

on a compact disk or via download through 

the Internet between uncontrolled parties. 

Subject to adjustments being made for 

material differences between the controlled 

services transactions and the comparable 

uncontrolled transactions, the uncontrolled 

transfers of tangible property may be used to 

evaluate the arm’s length results for the 

controlled services transactions between 

Company T and Companies U, V, and W. 

(i) Contingent-payment contractual 

terms for services—(1) Contingentpayment contractual terms recognized 

in general. In the case of a contingentpayment arrangement, the arm’s length 

result for the controlled services 

transaction generally would not require 

payment by the recipient to the renderer 

in the tax accounting period in which 

the service is rendered if the specified 

contingency does not occur in that 

period. If the specified contingency 

occurs in a tax accounting period 

subsequent to the period in which the 

service is rendered, the arm’s length 

result for the controlled services 

transaction generally would require 

payment by the recipient to the renderer 

on a basis that reflects the recipient’s 

benefit from the services rendered and 

the risks borne by the renderer in 

performing the activities in the absence 

of a provision that unconditionally 

obligates the recipient to pay for the 

activities performed in the tax 

accounting period in which the service 

is rendered. 

(2) Contingent-payment arrangement. 

For purposes of this paragraph (i), an 

arrangement will be treated as a 

contingent-payment arrangement if it 

meets all of the requirements in 

paragraph (i)(2)(i) of this section and is 

consistent with the economic substance 

and conduct requirement in paragraph 

(i)(2)(ii) of this section. 

(i) General requirements—(A) Written 

contract. The arrangement is set forth in 

a written contract entered into prior to, 

or contemporaneous with, the start of 

the activity or group of activities 

constituting the controlled services 

transaction. 

(B) Specified contingency. The 

contract states that payment for a 

controlled services transaction is 

contingent (in whole or in part) upon 

the happening of a future benefit 

(within the meaning of § 1.482–9(l)(3)) 

for the recipient directly related to the 

activity or group of activities. For 

purposes of the preceding sentence, 

whether the future benefit is directly 

related to the activity or group of 

activities is evaluated based on all the 

facts and circumstances. 

(C) Basis for payment. The contract 

provides for payment on a basis that 

reflects the recipient’s benefit from the 

services rendered and the risks borne by 

the renderer. 

(ii) Economic substance and conduct. 

The arrangement, including the 

contingency and the basis for payment, 

is consistent with the economic 

substance of the controlled transaction 

and the conduct of the controlled 

parties. See § 1.482–1(d)(3)(ii)(B). 

(3) Commissioner’s authority to 

impute contingent-payment terms. 

Consistent with the authority in 

§ 1.482–1(d)(3)(ii)(B), the Commissioner 

may impute contingent-payment 

contractual terms in a controlled 

services transaction if the economic 

substance of the transaction is 

consistent with the existence of such 

terms. 

(4) Evaluation of arm’s length charge. 

Whether the amount charged in a 

contingent-payment arrangement is 

arm’s length will be evaluated in 

accordance with this section and other 

applicable regulations under section 

482. In evaluating whether the amount 

charged in a contingent-payment 

arrangement for the manufacture, 

construction, or development of tangible 

or intangible property owned by the 

recipient is arm’s length, the charge 

determined under the rules of §§ 1.482– 

3 and 1.482–4 for the transfer of similar 

property may be considered. See 

§ 1.482–1(f)(2)(ii). 

(5) Examples. The principles of this 

paragraph (i) are illustrated by the 

following examples: 

Example 1. (i) Company X is a member of 

a controlled group that has operated in the 

pharmaceutical sector for many years. In year 

1, Company X enters into a written services 

agreement with Company Y, another member 

of the controlled group, whereby Company X 

will perform certain research and 

development activities for Company Y. The 

parties enter into the agreement before 

Company X undertakes any of the research 

and development activities covered by the 

agreement. At the time the agreement is 

entered into, the possibility that any new 

products will be developed is highly 

uncertain and the possible market or markets 

for any products that may be developed are 

not known and cannot be estimated with any 

reliability. Under the agreement, Company Y 

will own any patent or other rights that result 

from the activities of Company X under the 

agreement and Company Y will make 

payments to Company X only if such 

activities result in commercial sales of one or 

more derivative products. In that event, 

Company Y will pay Company X, for a 

specified period, x% of Company Y’s gross 

sales of each of such products. Payments are 

required with respect to each jurisdiction in 

which Company Y has sales of such a 

derivative product, beginning with the first 

year in which the sale of a product occurs in 

the jurisdiction and continuing for six 

additional years with respect to sales of that 

product in that jurisdiction. 

(ii) As a result of research and 

development activities performed by 

Company X for Company Y in years 1 

through 4, a compound is developed that 

may be more effective than existing 

medications in the treatment of certain 

conditions. Company Y registers the patent 

rights with respect to the compound in 

several jurisdictions in year 4. In year 6, 

Company Y begins commercial sales of the 

product in Jurisdiction A and, in that year, 

Company Y makes the payment to Company 

X that is required under the agreement. Sales 

of the product continue in Jurisdiction A in 

years 7 through 9 and Company Y makes the 

payments to Company X in years 7 through 

9 that are required under the agreement. 

(iii) The years under examination are years 

6 through 9. In evaluating whether the 

contingent-payment terms will be 

recognized, the Commissioner considers 

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38866 Federal Register / Vol. 74, No. 148 / Tuesday, August 4, 2009 / Rules and Regulations 

whether the conditions of paragraph (i)(2) of 

this section are met and whether the 

arrangement, including the specified 

contingency and basis of payment, is 

consistent with the economic substance of 

the controlled services transaction and with 

the conduct of the controlled parties. The 

Commissioner determines that the 

contingent-payment arrangement is reflected 

in the written agreement between Company 

X and Company Y; that commercial sales of 

products developed under the arrangement 

represent future benefits for Company Y 

directly related to the controlled services 

transaction; and that the basis for the 

payment provided for in the event such sales 

occur reflects the recipient’s benefit and the 

renderer’s risk. Consistent with § 1.482– 

1(d)(3)(ii)(B) and (iii)(B), the Commissioner 

determines that the parties’ conduct over the 

term of the agreement has been consistent 

with their contractual allocation of risk; that 

Company X has the financial capacity to bear 

the risk that its research and development 

services may be unsuccessful and that it may 

not receive compensation for such services; 

and that Company X exercises managerial 

and operational control over the research and 

development, such that it is reasonable for 

Company X to assume the risk of those 

activities. Based on all these facts, the 

Commissioner determines that the 

contingent-payment arrangement is 

consistent with economic substance. 

(iv) In determining whether the amount 

charged under the contingent-payment 

arrangement in each of years 6 through 9 is 

arm’s length, the Commissioner evaluates 

under this section and other applicable rules 

under section 482 the compensation paid in 

each year for the research and development 

services. This analysis takes into account that 

under the contingent-payment terms 

Company X bears the risk that it might not 

receive payment for its services in the event 

that those services do not result in 

marketable products and the risk that the 

magnitude of its payment depends on the 

magnitude of product sales, if any. The 

Commissioner also considers the alternatives 

reasonably available to the parties in 

connection with the controlled services 

transaction. One such alternative, in view of 

Company X’s willingness and ability to bear 

the risk and expenses of research and 

development activities, would be for 

Company X to undertake such activities on 

its own behalf and to license the rights to 

products successfully developed as a result 

of such activities. Accordingly, in evaluating 

whether the compensation of x% of gross 

sales that is paid to Company X during the 

first four years of commercial sales of 

derivative products is arm’s length, the 

Commissioner may consider the royalties (or 

other consideration) charged for intangible 

property that are comparable to those 

incorporated in the derivative products and 

that resulted from Company X’s research and 

development activities under the contingentpayment arrangement. 

Example 2. (i) The facts are the same as in 

Example 1, except that no commercial sales 

ever materialize with regard to the patented 

compound so that, consistent with the 

agreement, Company Y makes no payments 

to Company X in years 6 through 9. 

(ii) Based on all the facts and 

circumstances, the Commissioner determines 

that the contingent-payment arrangement is 

consistent with economic substance, and the 

result (no payments in years 6 through 9) is 

consistent with an arm’s length result. 

Example 3. (i) The facts are the same as in 

Example 1, except that, in the event that 

Company X’s activities result in commercial 

sales of one or more derivative products by 

Company Y, Company Y will pay Company 

X a fee equal to the research and 

development costs borne by Company X plus 

an amount equal to x% of such costs, with 

the payment to be made in the first year in 

which any such sales occur. The x% markup 

on costs is within the range, ascertainable in 

year 1, of markups on costs of independent 

contract researchers that are compensated 

under terms that unconditionally obligate the 

recipient to pay for the activities performed 

in the tax accounting period in which the 

service is rendered. In year 6, Company Y 

makes the single payment to Company X that 

is required under the arrangement. 

(ii) The years under examination are years 

6 through 9. In evaluating whether the 

contingent-payment terms will be 

recognized, the Commissioner considers 

whether the requirements of paragraph (i)(2) 

of this section were met at the time the 

written agreement was entered into and 

whether the arrangement, including the 

specified contingency and basis for payment, 

is consistent with the economic substance of 

the controlled services transaction and with 

the conduct of the controlled parties. The 

Commissioner determines that the 

contingent-payment terms are reflected in the 

written agreement between Company X and 

Company Y and that commercial sales of 

products developed under the arrangement 

represent future benefits for Company Y 

directly related to the controlled services 

transaction. However, in this case, the 

Commissioner determines that the basis for 

payment provided for in the event such sales 

occur (costs of the services plus x%, 

representing the markup for contract research 

in the absence of any nonpayment risk) does 

not reflect the recipient’s benefit and the 

renderer’s risks in the controlled services 

transaction. Based on all the facts and 

circumstances, the Commissioner determines 

that the contingent-payment arrangement is 

not consistent with economic substance. 

(iii) Accordingly, the Commissioner 

determines to exercise its authority to impute 

contingent-payment contractual terms that 

accord with economic substance, pursuant to 

paragraph (i)(3) of this section and § 1.482– 

1(d)(3)(ii)(B). In this regard, the 

Commissioner takes into account that at the 

time the arrangement was entered into, the 

possibility that any new products would be 

developed was highly uncertain and the 

possible market or markets for any products 

that may be developed were not known and 

could not be estimated with any reliability. 

In such circumstances, it is reasonable to 

conclude that one possible basis of payment, 

in order to reflect the recipient’s benefit and 

the renderer’s risks, would be a charge equal 

to a percentage of commercial sales of one or 

more derivative products that result from the 

research and development activities. The 

Commissioner in this case may impute terms 

that require Company Y to pay Company X 

a percentage of sales of the products 

developed under the agreement in each of 

years 6 through 9. 

(iv) In determining an appropriate arm’s 

length charge under such imputed 

contractual terms, the Commissioner 

conducts an analysis under this section and 

other applicable rules under section 482, and 

considers the alternatives reasonably 

available to the parties in connection with 

the controlled services transaction. One such 

alternative, in view of Company X’s 

willingness and ability to bear the risks and 

expenses of research and development 

activities, would be for Company X to 

undertake such activities on its own behalf 

and to license the rights to products 

successfully developed as a result of such 

activities. Accordingly, for purposes of its 

determination, the Commissioner may 

consider the royalties (or other consideration) 

charged for intangible property that are 

comparable to those incorporated in the 

derivative products that resulted from 

Company X’s research and development 

activities under the contingent-payment 

arrangement. 

(j) Total services costs. For purposes 

of this section, total services costs 

means all costs of rendering those 

services for which total services costs 

are being determined. Total services 

costs include all costs in cash or in kind 

(including stock-based compensation) 

that, based on analysis of the facts and 

circumstances, are directly identified 

with, or reasonably allocated in 

accordance with the principles of 

paragraph (k)(2) of this section to, the 

services. In general, costs for this 

purpose should comprise provision for 

all resources expended, used, or made 

available to achieve the specific 

objective for which the service is 

rendered. Reference to generally 

accepted accounting principles or 

Federal income tax accounting rules 

may provide a useful starting point but 

will not necessarily be conclusive 

regarding inclusion of costs in total 

services costs. Total services costs do 

not include interest expense, foreign 

income taxes (as defined in § 1.901– 

2(a)), or domestic income taxes. 

(k) Allocation of costs—(1) In general. 

In any case where the renderer’s activity 

that results in a benefit (within the 

meaning of paragraph (l)(3) of this 

section) for one recipient in a controlled 

services transaction also generates a 

benefit for one or more other members 

of a controlled group (including the 

benefit, if any, to the renderer), and the 

amount charged under this section in 

the controlled services transaction is 

determined under a method that makes 

reference to costs, costs must be 

allocated among the portions of the 

activity performed for the benefit of the 

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first mentioned recipient and such other 

members of the controlled group under 

this paragraph (k). The principles of this 

paragraph (k) must also be used 

whenever it is appropriate to allocate 

and apportion any class of costs (for 

example, overhead costs) in order to 

determine the total services costs of 

rendering the services. In no event will 

an allocation of costs based on a 

generalized or non-specific benefit be 

appropriate. 

(2) Appropriate method of allocation 

and apportionment—(i) Reasonable 

method standard. Any reasonable 

method may be used to allocate and 

apportion costs under this section. In 

establishing the appropriate method of 

allocation and apportionment, 

consideration should be given to all 

bases and factors, including, for 

example, total services costs, total costs 

for a relevant activity, assets, sales, 

compensation, space utilized, and time 

spent. The costs incurred by supporting 

departments may be apportioned to 

other departments on the basis of 

reasonable overall estimates, or such 

costs may be reflected in the other 

departments’ costs by applying 

reasonable departmental overhead rates. 

Allocations and apportionments of costs 

must be made on the basis of the full 

cost, as opposed to the incremental cost. 

(ii) Use of general practices. The 

practices used by the taxpayer to 

apportion costs in connection with 

preparation of statements and analyses 

for the use of management, creditors, 

minority shareholders, joint venturers, 

clients, customers, potential investors, 

or other parties or agencies in interest 

will be considered as potential 

indicators of reliable allocation 

methods, but need not be accorded 

conclusive weight by the Commissioner. 

In determining the extent to which 

allocations are to be made to or from 

foreign members of a controlled group, 

practices employed by the domestic 

members in apportioning costs among 

themselves will also be considered if the 

relationships with the foreign members 

are comparable to the relationships 

among the domestic members of the 

controlled group. For example, if for 

purposes of reporting to public 

stockholders or to a governmental 

agency, a corporation apportions the 

costs attributable to its executive 

officers among the domestic members of 

a controlled group on a reasonable and 

consistent basis, and such officers 

exercise comparable control over foreign 

members of the controlled group, such 

domestic apportionment practice will be 

considered in determining the 

allocations to be made to the foreign 

members. 

(3) Examples. The principles of this 

paragraph (k) are illustrated by the 

following examples: 

Example 1. Company A pays an annual 

license fee of 500x to an uncontrolled 

taxpayer for unlimited use of a database 

within the corporate group. Under the terms 

of the license with the uncontrolled taxpayer, 

Company A is permitted to use the database 

for its own use and in rendering research 

services to its subsidiary, Company B. 

Company B obtains benefits from the 

database that are similar to those that it 

would obtain if it had independently 

licensed the database from the uncontrolled 

taxpayer. Evaluation of the arm’s length 

charge (under a method in which costs are 

relevant) to Company B for the controlled 

services that incorporate use of the database 

must take into account the full amount of the 

license fee of 500x paid by Company A, as 

reasonably allocated and apportioned to the 

relevant benefits, although the incremental 

use of the database for the benefit of 

Company B did not result in an increase in 

the license fee paid by Company A. 

Example 2. (i) Company A is a consumer 

products company located in the United 

States. Companies B and C are wholly-owned 

subsidiaries of Company A and are located in 

Countries B and C, respectively. Company A 

and its subsidiaries manufacture products for 

sale in their respective markets. Company A 

hires a consultant who has expertise 

regarding a manufacturing process used by 

Company A and its subsidiary, Company B. 

Company C, the Country C subsidiary, uses 

a different manufacturing process, and 

accordingly will not receive any benefit from 

the outside consultant hired by Company A. 

In allocating and apportioning the cost of 

hiring the outside consultant (100), Company 

A determines that sales constitute the most 

appropriate allocation key. 

(ii) Company A and its subsidiaries have 

the following sales: 

Company A B C Total 

Sales ................................................................................................................ 400 100 200 700 

(iii) Because Company C does not obtain 

any benefit from the consultant, none of the 

costs are allocated to it. Rather, the costs of 

100 are allocated and apportioned ratably to 

Company A and Company B as the entities 

that obtain a benefit from the campaign, 

based on the total sales of those entities 

(500). An appropriate allocation of the costs 

of the consultant is as follows: 

Company A B Total 

Allocation ..................................................................................................................................... 400/500 100/500 

Amount ......................................................................................................................................... 80 20 100 

(l) Controlled services transaction— 

(1) In general. A controlled services 

transaction includes any activity (as 

defined in paragraph (l)(2) of this 

section) by one member of a group of 

controlled taxpayers (the renderer) that 

results in a benefit (as defined in 

paragraph (l)(3) of this section) to one or 

more other members of the controlled 

group (the recipient(s)). 

(2) Activity. An activity includes the 

performance of functions, assumptions 

of risks, or use by a renderer of tangible 

or intangible property or other 

resources, capabilities, or knowledge, 

such as knowledge of and ability to take 

advantage of particularly advantageous 

situations or circumstances. An activity 

also includes making available to the 

recipient any property or other 

resources of the renderer. 

(3) Benefit—(i) In general. An activity 

is considered to provide a benefit to the 

recipient if the activity directly results 

in a reasonably identifiable increment of 

economic or commercial value that 

enhances the recipient’s commercial 

position, or that may reasonably be 

anticipated to do so. An activity is 

generally considered to confer a benefit 

if, taking into account the facts and 

circumstances, an uncontrolled taxpayer 

in circumstances comparable to those of 

the recipient would be willing to pay an 

uncontrolled party to perform the same 

or similar activity on either a fixed or 

contingent-payment basis, or if the 

recipient otherwise would have 

performed for itself the same activity or 

a similar activity. A benefit may result 

to the owner of intangible property if 

the renderer engages in an activity that 

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is reasonably anticipated to result in an 

increase in the value of that intangible 

property. Paragraphs (l)(3)(ii) through 

(v) of this section provide guidelines 

that indicate the presence or absence of 

a benefit for the activities in the 

controlled services transaction. 

(ii) Indirect or remote benefit. An 

activity is not considered to provide a 

benefit to the recipient if, at the time the 

activity is performed, the present or 

reasonably anticipated benefit from that 

activity is so indirect or remote that the 

recipient would not be willing to pay, 

on either a fixed or contingent-payment 

basis, an uncontrolled party to perform 

a similar activity, and would not be 

willing to perform such activity for itself 

for this purpose. The determination 

whether the benefit from an activity is 

indirect or remote is based on the nature 

of the activity and the situation of the 

recipient, taking into consideration all 

facts and circumstances. 

(iii) Duplicative activities. If an 

activity performed by a controlled 

taxpayer duplicates an activity that is 

performed, or that reasonably may be 

anticipated to be performed, by another 

controlled taxpayer on or for its own 

account, the activity is generally not 

considered to provide a benefit to the 

recipient, unless the duplicative activity 

itself provides an additional benefit to 

the recipient. 

(iv) Shareholder activities. An activity 

is not considered to provide a benefit if 

the sole effect of that activity is either 

to protect the renderer’s capital 

investment in the recipient or in other 

members of the controlled group, or to 

facilitate compliance by the renderer 

with reporting, legal, or regulatory 

requirements applicable specifically to 

the renderer, or both. Activities in the 

nature of day-to-day management 

generally do not relate to protection of 

the renderer’s capital investment. Based 

on analysis of the facts and 

circumstances, activities in connection 

with a corporate reorganization may be 

considered to provide a benefit to one 

or more controlled taxpayers. 

(v) Passive association. A controlled 

taxpayer generally will not be 

considered to obtain a benefit where 

that benefit results from the controlled 

taxpayer’s status as a member of a 

controlled group. A controlled 

taxpayer’s status as a member of a 

controlled group may, however, be 

taken into account for purposes of 

evaluating comparability between 

controlled and uncontrolled 

transactions. 

(4) Disaggregation of transactions. A 

controlled services transaction may be 

analyzed as two separate transactions 

for purposes of determining the arm’s 

length consideration, if that analysis is 

the most reliable means of determining 

the arm’s length consideration for the 

controlled services transaction. See the 

best method rule under § 1.482–1(c). 

(5) Examples. The principles of this 

paragraph (l) are illustrated by the 

following examples. In each example, 

assume that Company X is a U.S. 

corporation and Company Y is a whollyowned subsidiary of Company X in 

Country B. 

Example 1. In general. In developing a 

worldwide advertising and promotional 

campaign for a consumer product, Company 

X pays for and obtains designation as an 

official sponsor of the Olympics. This 

designation allows Company X and all its 

subsidiaries, including Company Y, to 

identify themselves as sponsors and to use 

the Olympic logo in advertising and 

promotional campaigns. The Olympic 

sponsorship campaign generates benefits to 

Company X, Company Y, and other 

subsidiaries of Company X. 

Example 2. Indirect or remote benefit. 

Based on recommendations contained in a 

study performed by its internal staff, 

Company X implements certain changes in 

its management structure and the 

compensation of managers of divisions 

located in the United States. No changes 

were recommended or considered for 

Company Y in Country B. The internal study 

and the resultant changes in its management 

may increase the competitiveness and overall 

efficiency of Company X. Any benefits to 

Company Y as a result of the study are, 

however, indirect or remote. Consequently, 

Company Y is not considered to obtain a 

benefit from the study. 

Example 3. Indirect or remote benefit. 

Based on recommendations contained in a 

study performed by its internal staff, 

Company X decides to make changes to the 

management structure and management 

compensation of its subsidiaries, in order to 

increase their profitability. As a result of the 

recommendations in the study, Company X 

implements substantial changes in the 

management structure and management 

compensation scheme of Company Y. The 

study and the changes implemented as a 

result of the recommendations are 

anticipated to increase the profitability of 

Company X and its subsidiaries. The 

increased management efficiency of 

Company Y that results from these changes 

is considered to be a specific and identifiable 

benefit, rather than remote or speculative. 

Example 4. Duplicative activities. At its 

corporate headquarters in the United States, 

Company X performs certain treasury 

functions for Company X and for its 

subsidiaries, including Company Y. These 

treasury functions include raising capital, 

arranging medium and long-term financing 

for general corporate needs, including cash 

management. Under these circumstances, the 

treasury functions performed by Company X 

do not duplicate the functions performed by 

Company Y’s staff. Accordingly, Company Y 

is considered to obtain a benefit from the 

functions performed by Company X. 

Example 5. Duplicative activities. The facts 

are the same as in Example 4, except that 

Company Y’s functions include ensuring that 

the financing requirements of its own 

operations are met. Analysis of the facts and 

circumstances indicates that Company Y 

independently administers all financing and 

cash-management functions necessary to 

support its operations, and does not utilize 

financing obtained by Company X. Under the 

circumstances, the treasury functions 

performed by Company X are duplicative of 

similar functions performed by Company Y’s 

staff, and the duplicative functions do not 

enhance Company Y’s position. Accordingly, 

Company Y is not considered to obtain a 

benefit from the duplicative activities 

performed by Company X. 

Example 6. Duplicative activities. 

Company X’s in-house legal staff has 

specialized expertise in several areas, 

including intellectual property. The 

intellectual property legal staff specializes in 

technology licensing, patents, copyrights, 

and negotiating and drafting intellectual 

property agreements. Company Y is involved 

in negotiations with an unrelated party to 

enter into a complex joint venture that 

includes multiple licenses and cross-licenses 

of patents and copyrights. Company Y retains 

outside counsel that specializes in 

intellectual property law to review the 

transaction documents. Company Y does not 

have in-house counsel of its own to review 

intellectual property transaction documents. 

Outside counsel advises that the terms for the 

proposed transaction are advantageous to 

Company Y and that the contracts are valid 

and fully enforceable. Company X’s 

intellectual property legal staff possess 

valuable knowledge of Company Y’s patents 

and technological achievements. They are 

capable of identifying particular scientific 

attributes protected under patent that 

strengthen Company Y’s negotiating position, 

and of discovering flaws in the patents 

offered by the unrelated party. To reduce risk 

associated with the transaction, Company X’s 

intellectual property legal staff reviews the 

transaction documents before Company Y 

executes the contracts. Company X’s 

intellectual property legal staff also 

separately evaluates the patents and 

copyrights with respect to the licensing 

arrangements and concurs in the opinion 

provided by outside counsel. The activities 

performed by Company X substantially 

duplicate the legal services obtained by 

Company Y, but they also reduce risk 

associated with the transaction in a way that 

confers an additional benefit on Company Y. 

Example 7. Shareholder activities. 

Company X is a publicly held corporation. 

U.S. laws and regulations applicable to 

publicly held corporations such as Company 

X require the preparation and filing of 

periodic reports that show, among other 

things, profit and loss statements, balance 

sheets, and other material financial 

information concerning the company’s 

operations. Company X, Company Y and 

each of the other subsidiaries maintain their 

own separate accounting departments that 

record individual transactions and prepare 

financial statements in accordance with their 

local accounting practices. Company Y, and 

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the other subsidiaries, forward the results of 

their financial performance to Company X, 

which analyzes and compiles these data into 

periodic reports in accordance with U.S. laws 

and regulations. Because Company X’s 

preparation and filing of the reports relate 

solely to its role as an investor of capital or 

shareholder in Company Y or to its 

compliance with reporting, legal, or 

regulatory requirements, or both, these 

activities constitute shareholder activities 

and therefore Company Y is not considered 

to obtain a benefit from the preparation and 

filing of the reports. 

Example 8. Shareholder activities. The 

facts are the same as in Example 7, except 

that Company Y’s accounting department 

maintains a general ledger recording 

individual transactions, but does not prepare 

any financial statements (such as profit and 

loss statements and balance sheets). Instead, 

Company Y forwards the general ledger data 

to Company X, and Company X analyzes and 

compiles financial statements for Company 

Y, as well as for Company X’s overall 

operations, for purposes of complying with 

U.S. reporting requirements. Company Y is 

subject to reporting requirements in Country 

B similar to those applicable to Company X 

in the United States. Much of the data that 

Company X analyzes and compiles regarding 

Company Y’s operations for purposes of 

complying with the U.S. reporting 

requirements are made available to Company 

Y for its use in preparing reports that must 

be filed in Country B. Company Y 

incorporates these data, after minor 

adjustments for differences in local 

accounting practices, into the reports that it 

files in Country B. Under these 

circumstances, because Company X’s 

analysis and compilation of Company Y’s 

financial data does not relate solely to its role 

as an investor of capital or shareholder in 

Company Y, or to its compliance with 

reporting, legal, or regulatory requirements, 

or both, these activities do not constitute 

shareholder activities. 

Example 9. Shareholder activities. 

Members of Company X’s internal audit staff 

visit Company Y on a semiannual basis in 

order to review the subsidiary’s adherence to 

internal operating procedures issued by 

Company X and its compliance with U.S. 

anti-bribery laws, which apply to Company 

Y on account of its ownership by a U.S. 

corporation. Because the sole effect of the 

reviews by Company X’s audit staff is to 

protect Company X’s investment in Company 

Y, or to facilitate Company X’s compliance 

with U.S. anti-bribery laws, or both, the visits 

are shareholder activities and therefore 

Company Y is not considered to obtain a 

benefit from the visits. 

Example 10. Shareholder activities. 

Country B recently enacted legislation that 

changed the foreign currency exchange 

controls applicable to foreign shareholders of 

Country B corporations. Company X 

concludes that it may benefit from changing 

the capital structure of Company Y, thus 

taking advantage of the new foreign currency 

exchange control laws in Country B. 

Company X engages an investment banking 

firm and a law firm to review the Country B 

legislation and to propose possible changes 

to the capital structure of Company Y. 

Because Company X’s retention of the firms 

facilitates Company Y’s ability to pay 

dividends and other amounts and has the 

sole effect of protecting Company X’s 

investment in Company Y, these activities 

constitute shareholder activities and 

Company Y is not considered to obtain a 

benefit from the activities. 

Example 11. Shareholder activities. The 

facts are the same as in Example 10, except 

that Company Y bears the full cost of 

retaining the firms to evaluate the new 

foreign currency control laws in Country B 

and to make appropriate changes to its stock 

ownership by Company X. Company X is 

considered to obtain a benefit from the 

rendering by Company Y of these activities, 

which would be shareholder activities if 

conducted by Company X (see Example 10). 

Example 12. Shareholder activities. The 

facts are the same as in Example 10, except 

that the new laws relate solely to corporate 

governance in Country B, and Company X 

retains the law firm and investment banking 

firm in order to evaluate whether 

restructuring would increase Company Y’s 

profitability, reduce the number of legal 

entities in Country B, and increase Company 

Y’s ability to introduce new products more 

quickly in Country B. Because Company X 

retained the law firm and the investment 

banking firm primarily to enhance Company 

Y’s profitability and the efficiency of its 

operations, and not solely to protect 

Company X’s investment in Company Y or to 

facilitate Company X’s compliance with 

Country B’s corporate laws, or to both, these 

activities do not constitute shareholder 

activities. 

Example 13. Shareholder activities. 

Company X establishes detailed personnel 

policies for its subsidiaries, including 

Company Y. Company X also reviews and 

approves the performance appraisals of 

Company Y’s executives, monitors levels of 

compensation paid to all Company Y 

personnel, and is involved in hiring and 

firing decisions regarding the senior 

executives of Company Y. Because this 

personnel-related activity by Company X 

involves day-to-day management of Company 

Y, this activity does not relate solely to 

Company X’s role as an investor of capital or 

a shareholder of Company Y, and therefore 

does not constitute a shareholder activity. 

Example 14. Shareholder activities. Each 

year, Company X conducts a two-day retreat 

for its senior executives. The purpose of the 

retreat is to refine the long-term business 

strategy of Company X and its subsidiaries, 

including Company Y, and to produce a 

confidential strategy statement. The strategy 

statement identifies several potential growth 

initiatives for Company X and its subsidiaries 

and lists general means of increasing the 

profitability of the company as a whole. The 

strategy statement is made available without 

charge to Company Y and the other 

subsidiaries of Company X. Company Y 

independently evaluates whether to 

implement some, all, or none of the 

initiatives contained in the strategy 

statement. Because the preparation of the 

strategy statement does not relate solely to 

Company X’s role as an investor of capital or 

a shareholder of Company Y, the expense of 

preparing the document is not a shareholder 

expense. 

Example 15. Passive association/benefit. 

Company X is the parent corporation of a 

large controlled group that has been in 

operation in the information-technology 

sector for ten years. Company Y is a small 

corporation that was recently acquired by the 

Company X controlled group from local 

Country B owners. Several months after the 

acquisition of Company Y, Company Y 

obtained a contract to redesign and assemble 

the information-technology networks and 

systems of a large financial institution in 

Country B. The project was significantly 

larger and more complex than any other 

project undertaken to date by Company Y. 

Company Y did not use Company X’s 

marketing intangible property to solicit the 

contract, and Company X had no 

involvement in the solicitation, negotiation, 

or anticipated execution of the contract. For 

purposes of this section, Company Y is not 

considered to obtain a benefit from Company 

X or any other member of the controlled 

group because the ability of Company Y to 

obtain the contract, or to obtain the contract 

on more favorable terms than would have 

been possible prior to its acquisition by the 

Company X controlled group, was due to 

Company Y’s status as a member of the 

Company X controlled group and not to any 

specific activity by Company X or any other 

member of the controlled group. 

Example 16. Passive association/benefit. 

The facts are the same as in Example 15, 

except that Company X executes a 

performance guarantee with respect to the 

contract, agreeing to assist in the project if 

Company Y fails to meet certain mileposts. 

This performance guarantee allowed 

Company Y to obtain the contract on 

materially more favorable terms than 

otherwise would have been possible. 

Company Y is considered to obtain a benefit 

from Company X’s execution of the 

performance guarantee. 

Example 17. Passive association/benefit. 

The facts are the same as in Example 15, 

except that Company X began the process of 

negotiating the contract with the financial 

institution in Country B before acquiring 

Company Y. Once Company Y was acquired 

by Company X, the contract with the 

financial institution was entered into by 

Company Y. Company Y is considered to 

obtain a benefit from Company X’s 

negotiation of the contract. 

Example 18. Passive association/benefit. 

The facts are the same as in Example 15, 

except that Company X sent a letter to the 

financial institution in Country B, which 

represented that Company X had a certain 

percentage ownership in Company Y and 

that Company X would maintain that same 

percentage ownership interest in Company Y 

until the contract was completed. This letter 

allowed Company Y to obtain the contract on 

more favorable terms than otherwise would 

have been possible. Since this letter from 

Company X to the financial institution 

simply affirmed Company Y’s status as a 

member of the controlled group and 

represented that this status would be 

maintained until the contract was completed, 

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Company Y is not considered to obtain a 

benefit from Company X’s furnishing of the 

letter. 

Example 19. Passive association/benefit. (i) 

S is a company that supplies plastic 

containers to companies in various 

industries. S establishes the prices for its 

containers through a price list that offers 

customers discounts based solely on the 

volume of containers purchased. 

(ii) Company X is the parent corporation of 

a large controlled group in the information 

technology sector. Company Y is a whollyowned subsidiary of Company X located in 

Country B. Company X and Company Y both 

purchase plastic containers from unrelated 

supplier S. In year 1, Company X purchases 

1 million units and Company Y purchases 

100,000 units. S, basing its prices on 

purchases by the entire group, completes the 

order for 1.1 million units at a price of $0.95 

per unit, and separately bills and ships the 

orders to each company. Companies X and Y 

undertake no bargaining with supplier S with 

respect to the price charged, and purchase no 

other products from supplier S. 

(iii) R1 and its wholly-owned subsidiary 

R2 are a controlled group of taxpayers 

(unrelated to Company X or Company Y) 

each of which carries out functions 

comparable to those of Companies X and Y 

and undertakes purchases of plastic 

containers from supplier S, identical to those 

purchased from S by Company X and 

Company Y, respectively. S, basing its prices 

on purchases by the entire group, charges R1 

and R2 $0.95 per unit for the 1.1 million 

units ordered. R1 and R2 undertake no 

bargaining with supplier S with respect to 

the price charged, and purchase no other 

products from supplier S. 

(iv) U is an uncontrolled taxpayer that 

carries out comparable functions and 

undertakes purchases of plastic containers 

from supplier S identical to Company Y. U 

is not a member of a controlled group, 

undertakes no bargaining with supplier S 

with respect to the price charged, and 

purchases no other products from supplier S. 

U purchases 100,000 plastic containers from 

S at the price of $1.00 per unit. 

(v) Company X charges Company Y a fee 

of $5,000, or $0.05 per unit of plastic 

containers purchased by Company Y, 

reflecting the fact that Company Y receives 

the volume discount from supplier S. 

(vi) In evaluating the fee charged by 

Company X to Company Y, the 

Commissioner considers whether the 

transactions between R1, R2, and S or the 

transactions between U and S provide a more 

reliable measure of the transactions between 

Company X, Company Y and S. The 

Commissioner determines that Company Y’s 

status as a member of a controlled group 

should be taken into account for purposes of 

evaluating comparability of the transactions, 

and concludes that the transactions between 

R1, R2, and S are more reliably comparable 

to the transactions between Company X, 

Company Y, and S. The comparable charge 

for the purchase was $0.95 per unit. 

Therefore, obtaining the plastic containers at 

a favorable rate (and the resulting $5,000 

savings) is entirely due to Company Y’s 

status as a member of the Company X 

controlled group and not to any specific 

activity by Company X or any other member 

of the controlled group. Consequently, 

Company Y is not considered to obtain a 

benefit from Company X or any other 

member of the controlled group. 

Example 20. Disaggregation of 

transactions. (i) X, a domestic corporation, is 

a pharmaceutical company that develops and 

manufactures ethical pharmaceutical 

products. Y, a Country B corporation, is a 

distribution and marketing company that also 

performs clinical trials for X in Country B. 

Because Y does not possess the capability to 

conduct the trials, it contracts with a third 

party to undertake the trials at a cost of $100. 

Y also incurs $25 in expenses related to the 

third-party contract (for example, in hiring 

and working with the third party). 

(ii) Based on a detailed functional analysis, 

the Commissioner determines that Y 

performed functions beyond merely 

facilitating the clinical trials for X, such as 

audit controls of the third party performing 

those trials. In determining the arm’s length 

price, the Commissioner may consider a 

number of alternatives. For example, for 

purposes of determining the arm’s length 

price, the Commissioner may determine that 

the intercompany service is most reliably 

analyzed on a disaggregated basis as two 

separate transactions: in this case, the 

contract between Y and the third party could 

constitute an internal CUSP with a price of 

$100. Y would be further entitled to an arm’s 

length remuneration for its facilitating 

services. If the most reliable method is one 

that provides a markup on Y’s costs, then 

‘‘total services cost’’ in this context would be 

$25. Alternatively, the Commissioner may 

determine that the intercompany service is 

most reliably analyzed as a single 

transaction, based on comparable 

uncontrolled transactions involving the 

facilitation of similar clinical trial services 

performed by third parties. If the most 

reliable method is one that provides a 

markup on all of Y’s costs, and the base of 

the markup determined by the comparable 

companies includes the third-party clinical 

trial costs, then such a markup would be 

applied to Y’s total services cost of $125. 

Example 21. Disaggregation of 

transactions. (i) X performs a number of 

administrative functions for its subsidiaries, 

including Y, a distributor of widgets in 

Country B. These services include those 

relating to working capital (inventory and 

accounts receivable/payable) management. 

To facilitate provision of these services, X 

purchases an ERP system specifically 

dedicated to optimizing working capital 

management. The system, which entails 

significant third-party costs and which 

includes substantial intellectual property 

relating to its software, costs $1,000. 

(ii) Based on a detailed functional analysis, 

the Commissioner determines that in 

providing administrative services for Y, X 

performed functions beyond merely 

operating the ERP system itself, since X was 

effectively using the ERP as an input to the 

administrative services it was providing to Y. 

In determining arm’s length price for the 

services, the Commissioner may consider a 

number of alternatives. For example, if the 

most reliable uncontrolled data is derived 

from companies that use similar ERP systems 

purchased from third parties to perform 

similar administrative functions for 

uncontrolled parties, the Commissioner may 

determine that a CPM is the best method for 

measuring the functions performed by X, 

and, in addition, that a markup on total 

services costs, based on the markup from the 

comparable companies, is the most reliable 

PLI. In this case, total services cost, and the 

basis for the markup, would include 

appropriate reflection of the ERP costs of 

$1,000. Alternatively, X’s functions may be 

most reliably measured based on comparable 

uncontrolled companies that perform similar 

administrative functions using their 

customers’ own ERP systems. Under these 

circumstances, the total services cost would 

equal X’s costs of providing the 

administrative services excluding the ERP 

cost of $1,000. 

(m) Coordination with transfer pricing 

rules for other transactions—(1) Services 

transactions that include other types of 

transactions. A transaction structured as 

a controlled services transaction may 

include other elements for which a 

separate category or categories of 

methods are provided, such as a loan or 

advance, a rental, or a transfer of 

tangible or intangible property. See 

§§ 1.482–1(b)(2) and 1.482–2(a), (c), and 

(d). Whether such an integrated 

transaction is evaluated as a controlled 

services transaction under this section 

or whether one or more elements should 

be evaluated separately under other 

sections of the section 482 regulations 

depends on which approach will 

provide the most reliable measure of an 

arm’s length result. Ordinarily, an 

integrated transaction of this type may 

be evaluated under this section and its 

separate elements need not be evaluated 

separately, provided that each 

component of the transaction may be 

adequately accounted for in evaluating 

the comparability of the controlled 

transaction to the uncontrolled 

comparables and, accordingly, in 

determining the arm’s length result in 

the controlled transaction. See § 1.482– 

1(d)(3). 

(2) Services transactions that effect a 

transfer of intangible property. A 

transaction structured as a controlled 

services transaction may in certain cases 

include an element that constitutes the 

transfer of intangible property or may 

result in a transfer, in whole or in part, 

of intangible property. Notwithstanding 

paragraph (m)(1) of this section, if such 

element relating to intangible property 

is material to the evaluation, the arm’s 

length result for the element of the 

transaction that involves intangible 

property must be corroborated or 

determined by an analysis under 

§ 1.482–4. 

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(3) [Reserved]. For further guidance, 

see § 1.482–9T(m)(3). 

(4) Other types of transactions that 

include controlled services transactions. 

A transaction structured other than as a 

controlled services transaction may 

include one or more elements for which 

separate pricing methods are provided 

in this section. Whether such an 

integrated transaction is evaluated 

under another section of the section 482 

regulations or whether one or more 

elements should be evaluated separately 

under this section depends on which 

approach will provide the most reliable 

measure of an arm’s length result. 

Ordinarily, a single method may be 

applied to such an integrated 

transaction, and the separate services 

component of the transaction need not 

be separately analyzed under this 

section, provided that the controlled 

services may be adequately accounted 

for in evaluating the comparability of 

the controlled transaction to the 

uncontrolled comparables and, 

accordingly, in determining the arm’s 

length results in the controlled 

transaction. See § 1.482–1(d)(3). 

(5) Examples. The principles of this 

paragraph (m) are illustrated by the 

following examples: 

Example 1. (i) U.S. parent corporation 

Company X enters into an agreement to 

maintain equipment of Company Y, a foreign 

subsidiary. The maintenance of the 

equipment requires the use of spare parts. 

The cost of the spare parts necessary to 

maintain the equipment amounts to 

approximately 25 percent of the total costs of 

maintaining the equipment. Company Y pays 

a fee that includes a charge for labor and 

parts. 

(ii) Whether this integrated transaction is 

evaluated as a controlled services transaction 

or is evaluated as a controlled services 

transaction and the transfer of tangible 

property depends on which approach will 

provide the most reliable measure of an arm’s 

length result. If it is not possible to find 

comparable uncontrolled services 

transactions that involve similar services and 

tangible property transfers as the controlled 

transaction between Company X and 

Company Y, it will be necessary to determine 

the arm’s length charge for the controlled 

services, and then to evaluate separately the 

arm’s length charge for the tangible property 

transfers under § 1.482–1 and §§ 1.482–3 

through 1.482–6. Alternatively, it may be 

possible to apply the comparable profits 

method of § 1.482–5 to evaluate the arm’s 

length profit of Company X or Company Y 

from the integrated controlled transaction. 

The comparable profits method may provide 

the most reliable measure of an arm’s length 

result if uncontrolled parties are identified 

that perform similar, combined functions of 

maintaining and providing spare parts for 

similar equipment. 

Example 2. (i) U.S. parent corporation 

Company X sells industrial equipment to its 

foreign subsidiary, Company Y. In 

connection with this sale, Company X 

renders to Company Y services that consist 

of demonstrating the use of the equipment 

and assisting in the effective start-up of the 

equipment. Company X structures the 

integrated transaction as a sale of tangible 

property and determines the transfer price 

under the comparable uncontrolled price 

method of § 1.482–3(b). 

(ii) Whether this integrated transaction is 

evaluated as a transfer of tangible property or 

is evaluated as a controlled services 

transaction and a transfer of tangible property 

depends on which approach will provide the 

most reliable measure of an arm’s length 

result. In this case, the controlled services 

may be similar to services rendered in the 

transactions used to determine the 

comparable uncontrolled price, or they may 

appropriately be considered a difference 

between the controlled transaction and 

comparable transactions with a definite and 

reasonably ascertainable effect on price for 

which appropriate adjustments can be made. 

See § 1.482–1(d)(3)(ii)(A)(6). In either case, 

application of the comparable uncontrolled 

price method to evaluate the integrated 

transaction may provide a reliable measure of 

an arm’s length result, and application of a 

separate transfer pricing method for the 

controlled services element of the transaction 

is not necessary. 

Example 3. (i) The facts are the same as in 

Example 2 except that, after assisting 

Company Y in start-up, Company X also 

renders ongoing services, including 

instruction and supervision regarding 

Company Y’s ongoing use of the equipment. 

Company X structures the entire transaction, 

including the incremental ongoing services, 

as a sale of tangible property, and determines 

the transfer price under the comparable 

uncontrolled price method of § 1.482–3(b). 

(ii) Whether this integrated transaction is 

evaluated as a transfer of tangible property or 

is evaluated as a controlled services 

transaction and a transfer of tangible property 

depends on which approach will provide the 

most reliable measure of an arm’s length 

result. It may not be possible to identify 

comparable uncontrolled transactions in 

which a seller of merchandise renders 

services similar to the ongoing services 

rendered by Company X to Company Y. In 

such a case, the incremental services in 

connection with ongoing use of the 

equipment could not be taken into account 

as a comparability factor because they are not 

similar to the services rendered in 

connection with sales of similar tangible 

property. Accordingly, it may be necessary to 

evaluate separately the transfer price for such 

services under this section in order to 

produce the most reliable measure of an 

arm’s length result. Alternatively, it may be 

possible to apply the comparable profits 

method of § 1.482–5 to evaluate the arm’s 

length profit of Company X or Company Y 

from the integrated controlled transaction. 

The comparable profits method may provide 

the most reliable measure of an arm’s length 

result if uncontrolled parties are identified 

that perform the combined functions of 

selling equipment and rendering ongoing 

after-sale services associated with such 

equipment. In that case, it would not be 

necessary to separately evaluate the transfer 

price for the controlled services under this 

section. 

Example 4. (i) Company X, a U.S. 

corporation, and Company Y, a foreign 

corporation, are members of a controlled 

group. Both companies perform research and 

development activities relating to integrated 

circuits. In addition, Company Y 

manufactures integrated circuits. In years 1 

through 3, Company X engages in substantial 

research and development activities, gains 

significant know-how regarding the 

development of a particular high-temperature 

resistant integrated circuit, and memorializes 

that research in a written report. In years 1 

through 3, Company X generates overall net 

operating losses as a result of the 

expenditures associated with this research 

and development effort. At the beginning of 

year 4, Company X enters into a technical 

assistance agreement with Company Y. As 

part of this agreement, the researchers from 

Company X responsible for this project meet 

with the researchers from Company Y and 

provide them with a copy of the written 

report. Three months later, the researchers 

from Company Y apply for a patent for a 

high-temperature resistant integrated circuit 

based in large part upon the know-how 

obtained from the researchers from Company 

X. 

(ii) The controlled services transaction 

between Company X and Company Y 

includes an element that constitutes the 

transfer of intangible property (such as, 

know-how). Because the element relating to 

the intangible property is material to the 

arm’s length evaluation, the arm’s length 

result for that element must be corroborated 

or determined by an analysis under § 1.482– 

4. 

(6) Global dealing operations. 

[Reserved]. 

(n) Effective/applicability date—(1) In 

general. This section is generally 

applicable for taxable years beginning 

after July 31, 2009. In addition, a person 

may elect to apply the provisions of this 

section to earlier taxable years. See 

paragraph (n)(2) of this section. 

(2) Election to apply regulations to 

earlier taxable years—(i) Scope of 

election. A taxpayer may elect to apply 

§ 1.482–1(a)(1), (b)(2)(i), (d)(3)(ii)(C) 

Examples 3 through 6, (d)(3)(v), 

(f)(2)(ii)(A), (f)(2)(iii)(B), (g)(4)(i), 

(g)(4)(iii) Example 1, (i), (j)(6)(i) and 

(j)(6)(ii), § 1.482–2(b), (f)(1) and (2), 

§ 1.482–4(f)(3)(i)(A), (f)(3)(ii) Examples 

1 and 2, (f)(4), (h)(1) and (2), § 1.482– 

6(c)(2)(ii)(B)(1), (c)(2)(ii)(D), (c)(3)(i)(A), 

(c)(3)(i)(B), (c)(3)(ii)(D), and (d), § 1.482– 

8(b) Examples 10 through 12, (c)(1) and 

(c)(2), § 1.482–9(a) through (m)(2), and 

(m)(4) through (n)(2), § 1.861–8(a)(5)(ii), 

(b)(3), (e)(4), (f)(4)(i), (g) Examples 17, 

18, and 30, § 1.6038A–3(a)(3) Example 4 

and (i), § 1.6662–6(d)(2)(ii)(B), 

(d)(2)(iii)(B)(4), (d)(2)(iii)(B)(6), and (g), 

and § 31.3121(s)–1(c)(2)(iii) and (d) of 

this chapter to any taxable year 

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beginning after September 10, 2003. 

Such election requires that all of the 

provisions of such sections be applied 

to such taxable year and all subsequent 

taxable years (earlier taxable years) of 

the taxpayer making the election. 

(ii) Effect of election. An election to 

apply the regulations to earlier taxable 

years has no effect on the limitations on 

assessment and collection or on the 

limitations on credit or refund (see 

Chapter 66 of the Internal Revenue 

Code). 

(iii) Time and manner of making 

election. An election to apply the 

regulations to earlier taxable years must 

be made by attaching a statement to the 

taxpayer’s timely filed U.S. tax return 

(including extensions) for its first 

taxable year beginning after July 31, 

2009. 

(iv) Revocation of election. An 

election to apply the regulations to 

earlier taxable years may not be revoked 

without the consent of the 

Commissioner. 

■ Par. 15. Section 1.482–9T is amended 

by revising paragraphs (a), (b), (c), (d), 

(e), (f), (g), (h), (i), (j), (k), (l), (m)(1), 

(m)(2), (m)(4), (m)(5), and (n), and 

adding paragraph (o) to read as follows: 

§ 1.482–9T Methods to determine taxable 

income in connection with a controlled 

services transaction (temporary). 

(a) through (m)(2) [Reserved]. For 

further guidance, see § 1.482–9(a) 

through (m)(2). 

(3) * * * 

(4) and (m)(5) [Reserved]. For further 

guidance, see § 1.482–9(m)(4) and 

(m)(5). 

(n) Effective/applicability date. 

Paragraph (m)(3) of this section is 

generally applicable on January 5, 2009. 

(o) Expiration date. The applicability 

of paragraph (m)(3) of this section 

expires on December 30, 2011. 

■ Par. 16. Section 1.861–8 is amended 

by revising paragraphs (a)(5)(ii), (b)(3), 

(e)(4), (f)(4), (g) Examples 17, 18 and 30, 

and (h) to read as follows: 

§ 1.861–8 Computation of taxable income 

from sources within the United States and 

from other sources and activities. 

* * * * * 

(a) * * * 

(5) * * * 

(ii) Paragraph (e)(4), the last sentence 

of paragraph (f)(4)(i), and paragraph (g), 

Examples 17, 18, and 30 of this section 

are generally applicable for taxable 

years beginning after July 31, 2009. In 

addition, a person may elect to apply 

the provisions of paragraph (e)(4) of this 

section to earlier years. Such election 

shall be made in accordance with the 

rules set forth in § 1.482–9(n)(2). 

* * * * * 

(b) * * * 

(3) Supportive functions. Deductions 

which are supportive in nature (such as 

overhead, general and administrative, 

and supervisory expenses) may relate to 

other deductions which can more 

readily be allocated to gross income. In 

such instance, such supportive 

deductions may be allocated and 

apportioned along with the deductions 

to which they relate. On the other hand, 

it would be equally acceptable to 

attribute supportive deductions on some 

reasonable basis directly to activities or 

property which generate, have generated 

or could reasonably be expected to 

generate gross income. This would 

ordinarily be accomplished by 

allocating the supportive expenses to all 

gross income or to another broad class 

of gross income and apportioning the 

expenses in accordance with paragraph 

(c)(1) of this section. For this purpose, 

reasonable departmental overhead rates 

may be utilized. For examples of the 

application of the principles of this 

paragraph (b)(3) to expenses other than 

expenses attributable to stewardship 

activities, see Examples 19 through 21 

of paragraph (g) of this section. See 

paragraph (e)(4)(ii) of this section for the 

allocation and apportionment of 

deductions attributable to stewardship 

expenses. However, supportive 

deductions that are described in 

§ 1.861–14T(e)(3) shall be allocated and 

apportioned in accordance with the 

rules of § 1.861–14T and shall not be 

allocated and apportioned by reference 

only to the gross income of a single 

member of an affiliated group of 

corporations as defined in § 1.861– 

14T(d). 

* * * * * 

(e) * * * 

(4) Stewardship and controlled 

services—(i) Expenses attributable to 

controlled services. If a corporation 

performs a controlled services 

transaction (as defined in § 1.482– 

9(l)(3)), which includes any activity by 

one member of a group of controlled 

taxpayers that results in a benefit to a 

related corporation, and the rendering 

corporation charges the related 

corporation for such services, section 

482 and these regulations provide for an 

allocation where the charge is not 

consistent with an arm’s length result as 

determined. The deductions for 

expenses of the corporation attributable 

to the controlled services transaction are 

considered definitely related to the 

amounts so charged and are to be 

allocated to such amounts. 

(ii) Stewardship expenses attributable 

to dividends received. Stewardship 

expenses, which result from 

‘‘overseeing’’ functions undertaken for a 

corporation’s own benefit as an investor 

in a related corporation, shall be 

considered definitely related and 

allocable to dividends received, or to be 

received, from the related corporation. 

For purposes of this section, 

stewardship expenses of a corporation 

are those expenses resulting from 

‘‘duplicative activities’’ (as defined in 

§ 1.482–9(l)(3)(iii)) or ‘‘shareholder 

activities’’ (as defined in § 1.482– 

9(l)(3)(iv)) of the corporation with 

respect to the related corporation. Thus, 

for example, stewardship expenses 

include expenses of an activity the sole 

effect of which is either to protect the 

corporation’s capital investment in the 

related corporation or to facilitate 

compliance by the corporation with 

reporting, legal, or regulatory 

requirements applicable specifically to 

the corporation, or both. If a corporation 

has a foreign or international 

department which exercises overseeing 

functions with respect to related foreign 

corporations and, in addition, the 

department performs other functions 

that generate other foreign-source 

income (such as fees for services 

rendered outside of the United States for 

the benefit of foreign related 

corporations, foreign-source royalties, 

and gross income of foreign branches), 

some part of the deductions with 

respect to that department are 

considered definitely related to the 

other foreign-source income. In some 

instances, the operations of a foreign or 

international department will also 

generate United States source income 

(such as fees for services performed in 

the United States). Permissible methods 

of apportionment with respect to 

stewardship expenses include 

comparisons of time spent by employees 

weighted to take into account 

differences in compensation, or 

comparisons of each related 

corporation’s gross receipts, gross 

income, or unit sales volume, assuming 

that stewardship activities are not 

substantially disproportionate to such 

factors. See paragraph (f)(5) of this 

section for the type of verification that 

may be required in this respect. See 

§ 1.482–9(l)(5) for examples that 

illustrate the principles of § 1.482– 

9(l)(3). See Example 17 and Example 18 

of paragraph (g) of this section for the 

allocation and apportionment of 

stewardship expenses. See paragraph 

(b)(3) of this section for the allocation 

and apportionment of deductions 

attributable to supportive functions 

other than stewardship expenses, such 

as expenses in the nature of day-to-day 

management, and paragraph (e)(5) of 

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this section generally for the allocation 

and apportionment of deductions 

attributable to legal and accounting fees 

and expenses. 

* * * * * 

(f) * * * 

(4) Adjustments made under other 

provisions of the Code—(i) In general. If 

an adjustment which affects the 

taxpayer is made under section 482 or 

any other provision of the Code, it may 

be necessary to recompute the 

allocations and apportionments 

required by this section in order to 

reflect changes resulting from the 

adjustment. The recomputation made by 

the Commissioner shall be made using 

the same method of allocation and 

apportionment as was originally used by 

the taxpayer, provided such method as 

originally used conformed with 

paragraph (a)(2) of this section and, in 

light of the adjustment, such method 

does not result in a material distortion. 

In addition to adjustments which would 

be made aside from this section, 

adjustments to the taxpayer’s income 

and deductions which would not 

otherwise be made may be required 

before applying this section in order to 

prevent a distortion in determining 

taxable income from a particular source 

of activity. For example, if an item 

included as a part of the cost of goods 

sold has been improperly attributed to 

specific sales, and, as a result, gross 

income under one of the operative 

sections referred to in paragraph (f)(1) of 

this section is improperly determined, it 

may be necessary for the Commissioner 

to make an adjustment to the cost of 

goods sold, consistent with the 

principles of this section, before 

applying this section. Similarly, if a 

domestic corporation transfers the stock 

in its foreign subsidiaries to a domestic 

subsidiary and the parent corporation 

continues to incur expenses in 

connection with protecting its capital 

investment in the foreign subsidiaries 

(see paragraph (e)(4) of this section), it 

may be necessary for the Commissioner 

to make an allocation under section 482 

with respect to such expenses before 

making allocations and apportionments 

required by this section, even though 

the section 482 allocation might not 

otherwise be made. 

* * * * * 

(g) * * * 

Example 17. Stewardship expenses 

(consolidation). (i) (A) Facts. X, a domestic 

corporation, wholly owns M, N, and O, also 

domestic corporations. X, M, N, and O file a 

consolidated income tax return. All the 

income of X and O is from sources within the 

United States, all of M’s income is general 

category income from sources within South 

America, and all of N’s income is general 

category income from sources within Africa. 

X receives no dividends from M, N, or O. 

During the taxable year, the consolidated 

group of corporations earned consolidated 

gross income of $550,000 and incurred total 

deductions of $370,000 as follows: 

Gross 

income Deductions 

Corporations: 

X ................ $100,000 $50,000 

M ................ 250,000 100,000 

N ................ 150,000 200,000 

O ................ 50,000 20,000 

Total ... 550,000 370,000 

(B) Of the $50,000 of deductions incurred 

by X, $15,000 relates to X’s ownership of M; 

$10,000 relates to X’s ownership of N; $5,000 

relates to X’s ownership of O; and the sole 

effect of the entire $30,000 of deductions is 

to protect X’s capital investment in M, N, and 

O. X properly categorizes the $30,000 of 

deductions as stewardship expenses. The 

remainder of X’s deductions ($20,000) relates 

to production of United States source income 

from its plant in the United States. 

(ii) (A) Allocation. X’s deductions of 

$50,000 are definitely related and thus 

allocable to the types of gross income to 

which they give rise, namely $25,000 wholly 

to general category income from sources 

outside the United States ($15,000 for 

stewardship of M and $10,000 for 

stewardship of N) and the remainder 

($25,000) wholly to gross income from 

sources within the United States. Expenses 

incurred by M and N are entirely related and 

thus wholly allocable to general category 

income earned from sources without the 

United States, and expenses incurred by O 

are entirely related and thus wholly allocable 

to income earned within the United States. 

Hence, no apportionment of expenses of X, 

M, N, or O is necessary. For purposes of 

applying the foreign tax credit limitation; the 

statutory grouping is general category gross 

income from sources without the United 

States and the residual grouping is gross 

income from sources within the United 

States. As a result of the allocation of 

deductions, the X consolidated group has 

taxable income from sources without the 

United States in the amount of $75,000, 

computed as follows: 

Foreign source general category 

gross income ($250,000 from 

M + $150,000 from N) ............ $400,000 

Less: Deductions allocable to 

foreign source general category gross income ($25,000 

from X, $100,000 from M, and 

$200,000 from N) .................... (325,000) 

Total foreign-source taxable 

income ............................. 75,000 

(B) Thus, in the combined computation of 

the general category limitation, the 

numerator of the limiting fraction (taxable 

income from sources outside the United 

States) is $75,000. 

Example 18. Stewardship and supportive 

expenses. (i) (A) Facts. X, a domestic 

corporation, manufactures and sells 

pharmaceuticals in the United States. X’s 

domestic subsidiary S, and X’s foreign 

subsidiaries T, U, and V perform similar 

functions in the United States and foreign 

countries T, U, and V, respectively. Each 

corporation derives substantial net income 

during the taxable year that is general 

category income described in section 

904(d)(1). X’s gross income for the taxable 

year consists of: 

Domestic sales income .......... $32,000,000 

Dividends from S (before 

dividends received deduction) .................................... 3,000,000 

Dividends from T .................. 2,000,000 

Dividends from U .................. 1,000,000 

Dividends from V .................. 0 

Royalties from T and U ......... 1,000,000 

Fees from U for services performed by X ....................... 1,000,000 

Total gross income ......... 40,000,000 

(B) In addition, X incurs expenses of its 

supervision department of $1,500,000. 

(C) X’s supervision department (the 

Department) is responsible for the 

supervision of its four subsidiaries and for 

rendering certain services to the subsidiaries, 

and this Department provides all the 

supportive functions necessary for X’s 

foreign activities. The Department performs 

three principal types of activities. The first 

type consists of services for the direct benefit 

of U for which a fee is paid by U to X. The 

cost of the services for U is $900,000 (which 

results in a total charge to U of $1,000,000). 

The second type consists of activities 

described in § 1.482–9(l)(3)(iii) that are in the 

nature of shareholder oversight that duplicate 

functions performed by the subsidiaries’ own 

employees and that do not provide an 

additional benefit to the subsidiaries. For 

example, a team of auditors from X’s 

accounting department periodically audits 

the subsidiaries’ books and prepares internal 

reports for use by X’s management. Similarly, 

X’s treasurer periodically reviews for the 

board of directors of X the subsidiaries’ 

financial policies. These activities do not 

provide an additional benefit to the related 

corporations. The cost of the duplicative 

services and related supportive expenses is 

$540,000. The third type of activity consists 

of providing services which are ancillary to 

the license agreements which X maintains 

with subsidiaries T and U. The cost of the 

ancillary services is $60,000. 

(ii) Allocation. The Department’s outlay of 

$900,000 for services rendered for the benefit 

of U is allocated to the $1,000,000 in fees 

paid by U. The remaining $600,000 in the 

Department’s deductions are definitely 

related to the types of gross income to which 

they give rise, namely dividends from 

subsidiaries S, T, U, and V and royalties from 

T and U. However, $60,000 of the $600,000 

in deductions are found to be attributable to 

the ancillary services and are definitely 

related (and therefore allocable) solely to 

royalties received from T and U, while the 

remaining $540,000 in deductions are 

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definitely related (and therefore allocable) to 

dividends received from all the subsidiaries. 

(iii) (A) Apportionment. For purposes of 

applying the foreign tax credit limitation, the 

statutory grouping is general category gross 

income from sources outside the United 

States and the residual grouping is gross 

income from sources within the United 

States. X’s deduction of $540,000 for the 

Department’s expenses and related 

supportive expenses which are allocable to 

dividends received from the subsidiaries 

must be apportioned between the statutory 

and residual groupings before the foreign tax 

credit limitation may be applied. In 

determining an appropriate method for 

apportioning the $540,000, a basis other than 

X’s gross income must be used since the 

dividend payment policies of the subsidiaries 

bear no relationship either to the activities of 

the Department or to the amount of income 

earned by each subsidiary. This is evidenced 

by the fact that V paid no dividends during 

the year, whereas S, T, and U paid dividends 

of $1 million or more each. In the absence 

of facts that would indicate a material 

distortion resulting from the use of such 

method, the stewardship expenses ($540,000) 

may be apportioned on the basis of the gross 

receipts of each subsidiary. 

(B) The gross receipts of the subsidiaries 

were as follows: 

S .............................................. $4,000,000 

T ............................................. 3,000,000 

U ............................................. 500,000 

V ............................................. 1,500,000 

Total ................................ 9,000,000 

(C) Thus, the expenses of the Department 

are apportioned for purposes of the foreign 

tax credit limitation as follows: 

Apportionment of stewardship expenses to the statutory grouping of gross income: $540,000 × [($3,000,000 + $500,000 + 

$1,500,000)/$9,000,000] .................................................................................................................................................................... $300,000 

Apportionment of supervisory expenses to the residual grouping of gross income: $540,000 × [$4,000,000/9,000,000] ............ 240,000 

Total: Apportioned stewardship expense .................................................................................................................................... 540,000 

* * * * * 

Example 30. Income taxes. (i)(A) Facts. As 

in Example 17 of this paragraph (g), X is a 

domestic corporation that wholly owns M, N, 

and O, also domestic corporations. X, M, N, 

and O file a consolidated income tax return. 

All the income of X and O is from sources 

within the United States, all of M’s income 

is general category income from sources 

within South America, and all of N’s income 

is general category income from sources 

within Africa. X receives no dividends from 

M, N, or O. During the taxable year, the 

consolidated group of corporations earned 

consolidated gross income of $550,000 and 

incurred total deductions of $370,000. X has 

gross income of $100,000 and deductions of 

$50,000, without regard to its deduction for 

state income tax. Of the $50,000 of 

deductions incurred by X, $15,000 relates to 

X’s ownership of M; $10,000 relates to X’s 

ownership of N; $5,000 relates to X’s 

ownership of O; and the entire $30,000 

constitutes stewardship expenses. The 

remainder of X’s $20,000 of deductions 

(which is assumed not to include state 

income tax) relates to production of U.S. 

source income from its plant in the United 

States. M has gross income of $250,000 and 

deductions of $100,000, which yield foreignsource general category taxable income of 

$150,000. N has gross income of $150,000 

and deductions of $200,000, which yield a 

foreign-source general category loss of 

$50,000. O has gross income of $50,000 and 

deductions of $20,000, which yield U.S. 

source taxable income of $30,000. 

(B) Unlike Example 17 of this paragraph 

(g), however, X also has a deduction of 

$1,800 for state A income taxes. X’s state A 

taxable income is computed by first making 

adjustments to the Federal taxable income of 

X to derive apportionable taxable income for 

state A tax purposes. An analysis of state A 

law indicates that state A law also includes 

in its definition of the taxable business 

income of X which is apportionable to X’s 

state A activities, the taxable income of M, 

N, and O, which is related to X’s business. 

As in Example 25 of this paragraph (g), the 

amount of apportionable taxable income 

attributable to business activities conducted 

in state A is determined by multiplying 

apportionable taxable income by a fraction 

(the ‘‘state apportionment fraction’’) that 

compares the relative amounts of payroll, 

property, and sales within state A with 

worldwide payroll, property, and sales. 

Assuming that X’s apportionable taxable 

income equals $180,000, $100,000 of which 

is from sources without the United States, 

and $80,000 is from sources within the 

United States, and that the state 

apportionment fraction is equal to 10 

percent, X has state A taxable income of 

$18,000. The state A income tax of $1,800 is 

then derived by applying the state A income 

tax rate of 10 percent to the $18,000 of state 

A taxable income. 

(ii) Allocation and apportionment. Assume 

that under Example 29 of this paragraph (g), 

it is determined that X’s deduction for state 

A income tax is definitely related to a class 

of gross income consisting of income from 

sources both within and without the United 

States, and that the state A tax is apportioned 

$1,000 to sources without the United States, 

and $800 to sources within the United States. 

Under Example 17 of this paragraph (g), 

without regard to the deduction for X’s state 

A income tax, X has a separate loss of 

($25,000) from sources without the United 

States. After taking into account the 

deduction for state A income tax, X’s 

separate loss from sources without the 

United States is increased by the $1,000 state 

A tax apportioned to sources without the 

United States, and equals a loss of ($26,000), 

for purposes of computing the numerator of 

the consolidated general category foreign tax 

credit limitation. 

■ Par. 17. Section 1.861–8T is amended 

by revising paragraphs (a)(3), (a)(4), 

(a)(5), (b), (e)(3), (e)(4), (e)(5), (e)(6), 

(e)(7), (e)(8), (e)(9), (e)(10), (e)(11), 

(f)(1)(i), (f)(1)(iii), (f)(2), (f)(3), (f)(4), 

(f)(5), (g) Examples 1, 2, 3, 4, 5, 6, 7, 8, 

9, 10, 11, 12, 13,14, 15, 16, 17, 18, 19, 

20, 21, 22, 22, 23, and 30, and (h) to 

read as follows: 

§ 1.861–8T Computation of taxable income 

from sources within the United States and 

from other sources and activities 

(temporary). 

* * * * * 

(a)(3) through (b) [Reserved]. For 

further guidance, see § 1.861–8(a)(3) 

through (b). 

* * * * * 

(e) * * * 

(3) through (f)(1)(i) [Reserved]. For 

further guidance, see § 1.861–8(e)(3) 

through (f)(1)(i). 

* * * * * 

(f)(1)(iii) through (g) Examples 1 

through 23 [Reserved]. For further 

guidance, see § 1.861–8(f)(1)(iii) through 

(g) Examples 1 through 23. 

* * * * * 

Example 30. [Reserved]. For further 

guidance, see § 1.861–8(g) Example 30. 

(h) Effective/applicability date. (1) 

Paragraphs (f)(1)(vi)(E), (f)(1)(vi)(F), and 

(f)(1)(vi)(G) of this section apply to 

taxable years ending after April 9, 2008. 

(2) Paragraph (e)(4), the last sentence 

of paragraph (f)(4)(i), and paragraph (g), 

Examples 17, 18, and 30 of this section 

apply to taxable years beginning after 

July 31, 2009. 

(3) Also, see paragraph (e)(12)(iv) of 

this section and 1.861–14(e)(6) for rules 

concerning the allocation and 

apportionment of deductions for 

charitable contributions. 

■ Par. 18. Section 1.861–9T(k) is 

amended by adding new first and 

second sentences to read as follows: 

§ 1.861–9T Allocation and apportionment 

of interest expense (temporary). 

* * * * * 

(k) * * * In general, the rules of this 

section apply for taxable years 

beginning after December 31, 1986. 

Paragraphs (b)(2) (concerning the 

treatment of certain foreign currency) 

and (d)(2) (concerning the treatment of 

interest incurred by nonresident aliens) 

of this section are applicable for taxable 

years commencing after December 31, 

1988. * * * 

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Federal Register / Vol. 74, No. 148 / Tuesday, August 4, 2009 / Rules and Regulations 38875 

■ Par. 19. Section 1.861–10T is 

amended by revising the section 

heading and adding new paragraph (f) to 

read as follows: 

§ 1.861–10T Special allocations of interest 

expense (temporary). 

* * * * * 

(f) Effective/applicability date. (1) In 

general, the rules of this section apply 

for taxable years beginning after 

December 31, 1986. 

(2) Paragraphs (b)(3)(ii) (providing an 

operating costs test for purposes of the 

nonrecourse indebtedness exception) 

and (b)(6) (concerning excess 

collaterization of nonrecourse 

borrowings) of this section are 

applicable for taxable years 

commencing after December 31, 1988. 

(3) Paragraph (e) (concerning the 

treatment of related controlled foreign 

corporation indebtedness) of this 

section is applicable for taxable years 

commencing after December 31, 1987. 

For rules for taxable years beginning 

before January 1, 1987, and for later 

years to the extent permitted by § 1.861– 

13T, see § 1.861–8 (revised as of April 

1, 1986). 

■ Par. 20. Section 1.861–11T is 

amended by revising the section 

heading and adding new paragraph (h) 

to read as follows: 

§ 1.861–11T Special rules for allocating 

and apportioning interest expense of an 

affiliated group of corporations (temporary). 

* * * * * 

(h) Effective/applicability date. The 

rules of this section apply for taxable 

years beginning after December 31, 

1986. 

■ Par. 21. Section 1.861–12T is 

amended by revising the section 

heading and adding new paragraph (k) 

to read as follows: 

§ 1.861–12T Characterization rules and 

adjustments for certain assets (temporary). 

* * * * * 

(k) Effective/applicability date. The 

rules of this section apply for taxable 

years beginning after December 31, 

1986. 

■ Par. 22. Section 1.861–14T is 

amended by adding new paragraph (k) 

to read as follows: 

§ 1.861–14T Special rules for allocating 

and apportioning certain expenses (other 

than interest expense) of an affiliated group 

of corporations (temporary). 

* * * * * 

(k) Effective/applicability date. The 

rules of this section apply for taxable 

years beginning after December 31, 

1986. 

§ 1.6038A–1 [Amended] 

■ Par. 23. Section 1.6038A–1 is 

amended by removing paragraph (n)(3) 

and redesignating paragraphs (n)(4), 

(n)(5), (n)(6) and (n)(7) as paragraphs 

(n)(3), (n)(4), (n)(5) and (n)(6), 

respectively. 

■ Par. 24. Section 1.6038A–3 is 

amended by revising paragraphs (a)(3) 

Example 4, and (i) to read as follows: 

§ 1.6038A–3 Record maintenance. 

(a) * * * 

(3) * * * 

Example 4. S, a U.S. reporting corporation, 

provides computer consulting services for its 

foreign parent, X. Based on the application of 

section 482 and the regulations, it is 

determined that the cost of services plus 

method, as described in § 1.482–9(e), will 

provide the most reliable measure of an arm’s 

length result, based on the facts and 

circumstances of the controlled transaction 

between S and X. S is required to maintain 

records to permit verification upon audit of 

the comparable transactional costs (as 

described in § 1.482–9(e)(2)(iii)) used to 

calculate the arm’s length price. Based on the 

facts and circumstances, if it is determined 

that X’s records are relevant to determine the 

correct U.S. tax treatment of the controlled 

transaction between S and X, the record 

maintenance requirements under section 

6038A(a) and this section will be applicable 

to the records of X. 

* * * * * 

(i) Effective/applicability date—(1) In 

general. This section is generally 

applicable on December 10, 1990. 

However, records described in this 

section in existence on or after March 

20, 1990, must be maintained, without 

regard to when the taxable year to 

which the records relate began. 

Paragraph (a)(3) Example 4 of this 

section is generally applicable for 

taxable years beginning after July 31, 

2009. 

(2) Election to apply regulation to 

earlier taxable years. A person may elect 

to apply the provisions of paragraph 

(a)(3) Example 4 of this section to earlier 

taxable years in accordance with the 

rules set forth in § 1.482–9(n)(2). 

§ 1.6038A–3T [Removed] 

■ Par. 25. Section 1.6038A–3T is 

removed. 

■ Par. 26. Section 1.6662–6 is amended 

by revising paragraphs (d)(2)(ii)(B), 

(d)(2)(iii)(B)(4), (d)(2)(iii)(B)(6), and (g) 

to read as follows: 

§ 1.6662–6 Transactions between persons 

described in section 482 and net section 

482 transfer price adjustments. 

* * * * * 

(d) * * * 

(2) * * * 

(ii) * * * 

(B) Services cost method. A taxpayer’s 

selection of the services cost method for 

certain services, described in § 1.482– 

9(b), and its application of that method 

to a controlled services transaction will 

be considered reasonable for purposes 

of the specified method requirement 

only if the taxpayer reasonably allocated 

and apportioned costs in accordance 

with § 1.482–9(k), and reasonably 

concluded that the controlled services 

transaction satisfies the requirements 

described in § 1.482–9(b)(2). Whether 

the taxpayer’s conclusion was 

reasonable must be determined from all 

the facts and circumstances. The factors 

relevant to this determination include 

those described in paragraph 

(d)(2)(ii)(A) of this section, to the extent 

applicable. 

* * * * * 

(iii) * * * 

(B) * * * 

(4) A description of the method 

selected and an explanation of why that 

method was selected, including an 

evaluation of whether the regulatory 

conditions and requirements for 

application of that method, if any, were 

met; 

* * * * * 

(6) A description of the controlled 

transactions (including the terms of 

sale) and any internal data used to 

analyze those transactions. For example, 

if a profit split method is applied, the 

documentation must include a schedule 

providing the total income, costs, and 

assets (with adjustments for different 

accounting practices and currencies) for 

each controlled taxpayer participating 

in the relevant business activity and 

detailing the allocations of such items to 

that activity. Similarly, if a cost-based 

method (such as the cost plus method, 

the services cost method for certain 

services, or a comparable profits method 

with a cost-based profit level indicator) 

is applied, the documentation must 

include a description of the manner in 

which relevant costs are determined and 

are allocated and apportioned to the 

relevant controlled transaction. 

* * * * * 

(g) Effective/applicability date—(1) In 

general. This section is generally 

applicable on February 9, 1996. 

However, taxpayers may elect to apply 

this section to all open taxable years 

beginning after December 31, 1993. 

(2) Special rules. The provisions of 

paragraphs (d)(2)(ii)(B), (d)(2)(iii)(B)(4) 

and (d)(2)(iii)(B)(6) of this section are 

applicable for taxable years beginning 

after July 31, 2009. However, taxpayers 

may elect to apply the provisions of 

paragraphs (d)(2)(ii)(B), (d)(2)(iii)(B)(4) 

and (d)(2)(iii)(B)(6) of this section to 

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38876 Federal Register / Vol. 74, No. 148 / Tuesday, August 4, 2009 / Rules and Regulations 

earlier taxable years in accordance with 

the rules set forth in § 1.482–9(n)(2). 

§ 1.6662–6T [Removed] 

■ Par. 27. Section 1.6662–6T is 

removed. 

PART 31—EMPLOYMENT TAXES AND 

COLLECTION OF INCOME TAX AT THE 

SOURCE 

■ Par. 28. The authority citation for part 

31 continues to read in part as follows: 

Authority: 26 U.S.C. 7805 * * * 

■ Par. 29. Section 31.3121(s)–1 is 

amended by revising paragraphs 

(c)(2)(iii) and (d) to read as follows: 

§ 31.3121(s)–1 Concurrent employment by 

related corporations with common 

paymaster. 

* * * * * 

(c) * * * 

(2) * * * 

(iii) Group-wide allocation rules. 

Under the group-wide method of 

allocation, the Commissioner may 

allocate the taxes imposed by sections 

3102 and 3111 in an appropriate 

manner to a related corporation that 

remunerates an employee through a 

common paymaster if the common 

paymaster fails to remit the taxes to the 

Internal Revenue Service. Allocation in 

an appropriate manner varies according 

to the circumstances. It may be based on 

sales, property, corporate payroll, or any 

other basis that reflects the distribution 

of the services performed by the 

employee, or a combination of the 

foregoing bases. To the extent 

practicable, the Commissioner may use 

the principles of § 1.482–2(b) of this 

chapter in making the allocations with 

respect to wages paid after December 31, 

1978, and on or before July 31, 2009. To 

the extent practicable, the 

Commissioner may use the principles of 

§ 1.482–9 of this chapter in making the 

allocations with respect to wages paid 

after July 31, 2009. 

(d) Effective/applicability date—(1) In 

general. This section is applicable with 

respect to wages paid after December 31, 

1978. The fourth sentence of paragraph 

(c)(2)(iii) of this section is applicable 

with respect to wages paid after 

December 31, 1978, and on or before 

July 31, 2009. The fifth sentence of 

paragraph (c)(2)(iii) of this section is 

applicable with respect to wages paid 

after July 31, 2009. 

(2) Election to apply regulation to 

earlier taxable years. A person may elect 

to apply the fifth sentence of paragraph 

(c)(2)(iii) of this section to earlier 

taxable years in accordance with the 

rules set forth in § 1.482–9(n)(2) of this 

chapter. 

§ 31.3121(s)–1T [Removed] 

■ Par. 30. Section 31.3121(s)–1T is 

removed. 

PART 602—OMB CONTROL NUMBERS 

UNDER THE PAPERWORK 

REDUCTION ACT 

■ Par. 31. The authority citation for part 

602 continues to read as follows: 

Authority: 26 U.S.C. 7805. 

■ Par. 32. In § 602.101, paragraph (b) is 

amended by adding an entry for 

‘‘§ 1.482–9(b)’’ to the table to read 

follows: 

§ 602.101 OMB Control numbers. 

* * * * * 

(b) * * * 

CFR part or section where 

identified and described 

Current 

OMB control 

number 

*****

1.482–9(b) ................................ 1545–2149 

*****

Approved: July 25, 2009. 

Linda E. Stiff, 

Deputy Commissioner for Services and 

Enforcement. 

Michael Mundaca, 

Acting Assistant Secretary of the Treasury 

(Tax Policy). 

[FR Doc. E9–18326 Filed 7–31–09; 8:45 am] 

BILLING CODE 4830–01–P 

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