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© Practising Law Institute
TAX LAW AND ESTATE PLANNING SERIESTax Law and Practice
Course Handbook SeriesNumber D-440
Basics of International
Taxation 2015
Co-ChairsLinda E. Carlisle
John L. Harrington
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© Practising Law Institute
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415
© Practising Law Institute
416
© Practising Law Institute
PPLI B
ASIC
S O
F IN
TERN
ATIO
NAL
TAX
ATIO
N 2
015
July
22,
201
5
Nea
l Koc
hman
Mem
ber
Capl
in &
Dry
sdal
e, C
hart
ered
Stev
en C
. Wra
ppe
Nat
iona
l Lea
der,
Tra
nsfe
r Pr
icin
g &
Dis
pute
Re
solu
tion
KP
MG
, LLP
417
© Practising Law Institute
Sect
ion
482
and
the
Arm
’s L
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Tran
sfer
Pric
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and
The
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side
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r Se
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Doc
umen
tatio
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dvan
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ricin
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reem
ents
, an
d M
utua
l Agr
eem
ent P
roce
dure
sIm
pact
of B
EPS
on T
rans
fer P
ricin
g
2
418
© Practising Law Institute
419
© Practising Law Institute
Pric
ing
of tr
ansa
ctio
ns b
etw
een
rela
ted
part
ies
for:
Tang
ible
pro
pert
ySe
rvic
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tang
ible
pro
pert
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nts
Loan
s
420
© Practising Law Institute
Gov
ernm
enta
l int
eres
tTh
e re
late
d pa
rty
aspe
ct o
f the
tran
sact
ions
su
spen
ds th
e no
rmal
law
s of
sup
ply
and
dem
and
With
out I
RC §
482
and
sim
ilar
stat
ues
in o
ther
co
untr
ies,
rel
ated
par
ties
coul
d ar
tific
ially
shi
ft
inco
me
to a
chie
ve ta
x be
nefit
s
5
421
© Practising Law Institute
Tran
sfer
pric
ing
plan
ning
opp
ortu
nity
Pare
nt(C
ount
ry A
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edTo
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nge
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ansf
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e28
030
310
Glo
bal e
ffect
ive
tax
rate
(ETR
)31
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fect
of t
rans
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ricin
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ange
on
ETR
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fter u
sing
tran
sfer
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com
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070
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rate
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10%
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liabi
lity
afte
r cha
nge
to tr
ansf
er
pric
e12
070
190
Glo
bal E
TR19
%
422
© Practising Law Institute
Expo
sure
to d
oubl
e ta
xatio
nPa
rent
(Cou
ntry
A)
Sub
(Cou
ntry
B)
Con
solid
ated
Tota
l pro
fit re
porte
d on
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rn30
070
01,
000
Tax
rate
40%
10%
Tax
liabi
lity
befo
re C
ount
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tran
sfer
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adju
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120
7019
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bal E
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Dou
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ct o
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A tr
ansf
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men
t (pe
nalti
es a
nd in
tere
st n
ot in
clud
ed)
280
7035
0
Glo
bal E
TR35
%
423
© Practising Law Institute
Man
ufac
ture
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istri
buto
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tal
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rice
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Net
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ratin
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com
e(_
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424
© Practising Law Institute
In a
ny c
ase
of tw
o or
mor
e or
gani
zatio
ns, t
rade
s or
bus
ines
ses
(whe
ther
or n
ot in
corp
orat
ed, w
heth
er o
r not
org
aniz
ed in
the
Unite
d St
ates
, and
whe
ther
or n
ot a
ffili
ated
) ow
ned
or c
ontr
olle
d di
rect
ly o
r in
dire
ctly
by
the
sam
e in
tere
sts,
the
Secr
etar
y m
ay
dist
ribut
e, a
ppor
tion
or a
lloca
te g
ross
inco
me,
ded
uctio
ns,
cred
its, o
r al
low
ance
s be
twee
n or
am
ong
such
org
aniz
atio
ns,
trad
es o
r bu
sine
sses
, if h
e de
term
ines
that
suc
h di
strib
utio
n,
appo
rtio
nmen
t or
allo
catio
n is
nec
essa
ry in
ord
er to
pre
vent
ev
asio
n of
taxe
s or
cle
arly
to r
efle
ct th
e in
com
e of
any
of s
uch
orga
niza
tions
, tra
des
or b
usin
esse
s. In
the
case
of a
ny tr
ansf
er
(or
licen
se) o
f int
angi
ble
prop
erty
(with
in th
e m
eani
ng o
f Cod
e Se
c. 9
36(h
)(3)(B
)), th
e in
com
e w
ith r
espe
ct to
suc
h tr
ansf
er o
r lic
ense
sha
ll be
com
men
sura
te w
ith th
e in
com
e at
trib
utab
le to
th
e in
tang
ible
.
425
© Practising Law Institute
Subj
ectiv
e ap
plic
atio
n of
the
rule
sPo
tent
ially
larg
e ad
just
men
ts a
nd p
enal
ties
Proc
edur
al o
ptio
nsG
over
nmen
tal d
iffer
ence
sD
oubl
e ta
xatio
n ex
posu
reFi
gure
s pr
omin
ently
in fi
nanc
ial s
tate
men
t di
sclo
sure
(ASC
740
, for
mer
ly F
IN 4
8)O
ECD
Bas
e Er
osio
n an
d Pr
ofit
Shift
ing
(BEP
S)
426
© Practising Law Institute
“Sta
rbuc
kspa
id ju
st
£8.6
M in
U.K
. tax
ove
r 14
yea
rs.”
BB
C N
ews,
O
ctob
er 1
6, 2
012
“Fro
m n
ow o
n I’l
l be
putti
ng a
way
my
Kin
dle
and
feed
ing
my
caffe
ine
addi
ctio
n so
mew
here
oth
er th
an S
tarb
ucks
. We
know
th
at A
maz
on,G
oogl
ean
d St
arbu
cks
are
raki
ng in
pro
fits
from
thei
r eco
nom
ic a
ctiv
ity
in B
ritai
n bu
t usi
ng a
rang
e of
dev
ices
to
avoi
d pa
ying
thei
r fai
r sha
re o
f cor
pora
tion
tax.
” U.K
. Obs
erve
r, N
ovem
ber 1
8, 2
012
“[Goo
gle’
s] h
ighl
y co
ntriv
ed ta
x ar
rang
emen
t has
no
purp
ose
othe
r tha
n to
ena
ble
the
com
pany
to a
void
U.K
. co
rpor
atio
n ta
x.“ M
arga
ret H
odge
, Cha
ir of
U.K
. PA
C, J
une
12, 2
013
“App
lepa
ys ju
st 2
% U
.K. t
ax a
s A
maz
onan
d G
oogl
efa
ce
ques
tioni
ng.”
Inte
rnat
iona
l Bus
ines
s Ti
mes
, Nov
embe
r 5, 2
012.
“Goo
gle
caug
ht in
cr
ossf
ire o
ver F
renc
h ta
x pl
anni
ng.”
Le F
igar
o,
Oct
ober
19,
201
2
“Inte
rnat
iona
l ret
aile
rs th
at h
ave
low
ered
U
.K. t
ax b
y ho
ldin
g tra
dem
arks
in th
e N
ethe
rland
s in
clud
e no
t onl
y St
arbu
cks
and
IKEA
but
als
o SA
BM
iller
, Nik
e, B
acar
di-
Mar
tini,
Zara
, Spe
edo
and
Volk
swag
en.
Het
Fin
anci
eele
Dag
blad
, 15
Nov
embe
r 20
12
“Goo
gle
insi
sts
its Ir
ish
head
quar
ters
are
mor
e th
an
just
a ‘p
ost b
ox.’”
Le
Figa
ro,
Nov
embe
r 6, 2
012.
“Dol
ce a
nd G
aban
na to
face
tria
l ove
r tax
ev
asio
n M
ilan
pros
ecut
ors
alle
ge th
e fa
shio
n ha
d so
ld th
eir D
&G
and
Dol
ce &
G
abba
nabr
ands
to a
hol
ding
com
pany
th
ey s
et u
p in
Lux
embo
urg
in 2
004
in
orde
r to
avoi
d pa
ying
hig
h ta
xes
in It
aly.
”Th
e Te
legr
aph,
Jun
e 11
, 201
2
“The
re is
a te
chni
cal t
erm
eco
nom
ists
like
to u
se fo
r be
havi
or li
ke th
is. U
nbel
ieva
ble
chut
zpah
.” E
dwar
d K
lein
bard
, for
mer
Chi
ef o
f Sta
ff of
the
Con
gres
sion
al
Join
t Com
mitt
ee o
n Ta
xatio
n, o
n A
pple
’sef
forts
to
avoi
d pa
ying
taxe
s.” N
ew Y
ork
Tim
es, M
ay 2
1, 2
013.
“Ram
pant
cor
pora
te ta
x av
oida
nce
may
not
be
illega
l, bu
t tha
t doe
sn’t
mak
e it
right
or f
air.”
NY
Tim
es
Edi
toria
l, M
ay 2
5, 2
013
11
427
© Practising Law Institute
Kor
ea (R
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lic
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vak
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ted
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gdom
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epub
lic
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vak
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ublic
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ted
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gdom
of C
hina
)
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
<199
420
08-2
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12
428
© Practising Law Institute
Cont
rol
Arm
’s le
ngth
sta
ndar
dBe
st m
etho
d ru
le/
Com
para
bilit
yTr
ansf
er p
ricin
g m
etho
dsAr
m’s
leng
th r
ange
13
429
© Practising Law Institute
14
Any
two
or m
ore
com
pani
es “o
wne
d or
co
ntro
lled”
by
“sam
e in
tere
sts.
”D
efin
ition
of “
cont
rolle
d” in
reg
ulat
ions
:Re
g. §
1.48
2-1(
i)(4)
–an
y ki
nd o
f con
trol
, dire
ct o
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dire
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er le
gally
enf
orce
able
or
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and
how
ever
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rcis
able
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cise
d, in
clud
ing
cont
rol
resu
lting
from
the
actio
ns o
f tw
o or
mor
e ta
xpay
ers
actin
g in
con
cert
or
with
a c
omm
on g
oal o
r pu
rpos
e. It
is
the
real
ity o
f con
trol
that
is d
ecis
ive,
not
its
form
or
the
mod
e of
its
exer
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.“[I
]n c
once
rt” t
est (
B. F
orm
anca
se (2
nd C
ir. 1
972)
)Pr
esum
ptio
n of
con
trol
aris
es if
inco
me
or d
educ
tions
ha
ve b
een
arbi
trar
ily s
hift
ed.
430
© Practising Law Institute
No
hier
arch
y of
met
hods
spe
cifie
dBe
st-m
etho
d pr
ovid
es m
ost r
elia
ble
mea
sure
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arm
’s-l
engt
h re
sult
Best
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s de
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on fa
cts
and
circ
umst
ance
sIf
no c
lear
bes
t-m
etho
d, c
onve
rgen
ce o
f re
sults
431
© Practising Law Institute
Deg
ree
of c
ompa
rabi
lity
betw
een
cont
rolle
d an
d un
cont
rolle
d tr
ansa
ctio
nsCo
mpl
eten
ess
and
accu
racy
of d
ata
avai
labl
eRe
liabi
lity
of a
ssum
ptio
nsEx
tent
of a
djus
tmen
ts n
eede
dSe
nsiti
vity
of r
esul
ts to
def
icie
ncie
s in
dat
a an
d as
sum
ptio
nsSe
ctio
n 1.
482-
8 —
exam
ples
of a
pplic
atio
n of
be
st-m
etho
d ru
le
432
© Practising Law Institute
Unco
ntro
lled
tran
sact
ions
mus
t be
suff
icie
ntly
si
mila
r to
co
ntro
lled
tran
sact
ions
to p
rovi
de a
rel
iabl
e m
easu
re o
f the
arm
’s-l
engt
h re
sult.
Five
fact
ors:
Func
tions
per
form
edCo
ntra
ctua
l ter
ms
Risk
s as
sum
edEc
onom
ic a
nd fi
nanc
ial c
ondi
tions
Nat
ure
of p
rope
rty
or s
ervi
ces
tran
sfer
red
Each
tran
sfer
pric
ing
met
hod
plac
es d
iffer
ent
degr
ees
of p
riorit
y on
the
fact
ors.
433
© Practising Law Institute
“Ful
l ran
ge” u
nder
res
tric
tive
rule
s re
gard
ing
com
para
bilit
y an
d ad
just
men
tsW
hen
mat
eria
l diff
eren
ces
betw
een
com
para
bles
an
d co
ntro
lled
tran
sact
ions
for
whi
ch a
djus
tmen
ts
cann
ot b
e m
ade,
nar
row
ing
of r
ange
is u
sed
to
incr
ease
rel
iabi
lity
of r
esul
tsG
ener
ally
use
inte
rqua
rtile
ran
ge —
mid
dle
50%
of
obse
rvat
ions
Low
Inte
rqua
rtile
rang
e
Hig
h
25%
75%
50%
434
© Practising Law Institute
435
© Practising Law Institute
20
Tang
ible
pro
pert
yIn
tang
ible
pro
pert
ySe
rvic
es
CU
P(c
ompa
rabl
e un
cont
rolle
d pr
ice
met
hod)
CU
T(c
ompa
rabl
e un
cont
rolle
d tra
nsac
tion
met
hod)
CU
SP(c
ompa
rabl
e un
cont
rolle
d se
rvic
es
pric
e m
etho
d)
RPM
(resa
le p
rice
met
hod)
–G
SM(g
ross
ser
vice
s m
argi
n m
etho
d)
Cos
t Plu
s(c
ost-p
lus
met
hod)
–C
SPM
(cos
t of s
ervi
ces
plus
met
hod)
CPM
(com
para
ble
prof
its m
etho
d)(c
f. to
TN
MM
in O
ECD
Gui
delin
es)
(tran
sact
iona
l net
mar
gin
met
hod)
CPM
and
TN
MM
(com
men
sura
te w
ith in
com
e ru
les)
CPM
PSM
(pro
fit s
plit
met
hod)
PSM
PSM
CPS
(com
para
ble
prof
it sp
lit m
etho
d)
RPS
(resi
dual
pr
ofit
split
m
etho
d)C
PSR
PSC
PSR
PS
Uns
peci
fied
met
hods
Uns
peci
fied
met
hods
–
Inco
me
met
hod
—(c
oord
inat
ion
with
482
-7)
SCM
(ser
vice
s co
st m
etho
d)–
436
© Practising Law Institute
Pric
e an
d co
st m
atch
ing
met
hod
—co
mpa
res
inte
rcom
pany
-con
trol
led
tran
sact
ion
to
mar
ket-
base
d un
cont
rolle
d tr
ansa
ctio
nsUn
cont
rolle
d tr
ansa
ctio
n ha
s ei
ther
no
or m
inor
di
ffer
ence
s th
at h
ave
defin
ite a
nd r
easo
nabl
y as
cert
aina
ble
effe
ct o
n pr
ice
and
can
be a
djus
ted
for;
then
com
pare
to c
ontr
olle
d tr
ansa
ctio
nSi
mila
rity
of g
oods
and
tran
sact
ions
ver
y im
port
ant
437
© Practising Law Institute
Cont
rolle
d pr
ice
“Inte
rnal
” unc
ontr
olle
d pr
ice
Rela
ted
mfg
Unre
late
d m
fg
Rela
ted
mfg
Rela
ted
asse
mbl
er
Rela
ted
asse
mbl
er
Unre
late
d as
sem
bler
Unre
late
d cu
stom
er
Unre
late
d cu
stom
er
Unre
late
d cu
stom
er
438
© Practising Law Institute
Tran
sact
ions
-bas
ed m
etho
d th
at m
easu
res
the
valu
e of
func
tions
per
form
edG
ross
pro
fit m
argi
n re
aliz
ed is
ben
chm
arke
d ag
ains
t tha
t of c
ompa
rabl
e un
cont
rolle
d tr
ansa
ctio
nsM
etho
d is
not
app
licab
le if
con
trol
led
taxp
ayer
add
s si
gnifi
cant
val
ue to
tang
ible
goo
ds (f
unct
ions
diff
er)
(qua
lity
vs. q
uant
ity)
439
© Practising Law Institute
Unre
late
d m
fg
Rela
ted
mfg
Unre
late
d cu
stom
erD
istr
ibut
or
Dis
trib
utor
gro
ss m
argi
n an
alys
is o
f sim
ilar
prod
ucts
pur
chas
ed fr
om r
elat
ed a
nd
unre
late
d m
fgD
istr
ibut
or 3
rdpa
rty
reve
nue
-Re
late
d pa
rty
COG
SRe
late
d pa
rty
gros
s pr
ofit
Vs.
Dis
trib
utor
3rd
part
y re
venu
e-
Unre
late
d pa
rty
COG
SUn
rela
ted
part
y gr
oss
prof
it
440
© Practising Law Institute
Tran
sact
ions
-bas
ed m
etho
d de
pend
ent o
n si
mila
rity
of fu
nctio
ns p
erfo
rmed
, ris
ks b
orne
an
d co
ntra
ctua
l ter
ms
Gro
ss p
rofit
mar
kup
real
ized
is b
ench
mar
ked
agai
nst t
hat o
f the
com
para
ble
unco
ntro
lled
tran
sact
ions
.M
etho
d is
use
d in
cas
es in
volv
ing
man
ufac
ture
and
as
sem
bly.
Not
e: M
anuf
actu
rers
tend
to u
se c
ost-
plus
in
prac
tice
to e
stab
lish
pric
es.
441
© Practising Law Institute
Unre
late
d di
strib
utor
Rela
ted
dist
ribut
or
Unre
late
d su
pplie
rM
anuf
actu
rer
Man
ufac
ture
r co
st m
ark
up a
naly
sis
of s
imila
r pr
oduc
ts s
old
to r
elat
ed a
nd u
nrel
ated
di
strib
utor
sM
anuf
actu
rer
unre
late
d re
venu
e-
3rd
part
y CO
GS
Unre
late
d pa
rty
gros
s pr
ofit
Vs.
Man
ufac
ture
r re
late
d re
venu
e-
3rd
part
y CO
GS
Rela
ted
part
y gr
oss
prof
it
442
© Practising Law Institute
Benc
hmar
ks p
rofit
abili
ty o
f tes
ted
part
y ag
ains
t tha
t of c
ompa
rabl
e co
mpa
nies
Gen
eral
ly a
pplie
d to
the
cont
rolle
d pa
rty
that
is
the
leas
t com
plex
and
has
the
few
est
valu
able
inta
ngib
les
Can
adju
st c
ompa
rabl
e co
mpa
nies
’ fin
anci
al
data
for
diff
eren
ces
in fu
nctio
ns, r
isks
and
ac
coun
ting
met
hods
Met
hod
test
s tr
ansf
er p
rices
indi
rect
ly
443
© Practising Law Institute
Busi
ness
exp
erie
nce
Busi
ness
or
prod
uct l
ife c
ycle
Man
agem
ent e
ffic
ienc
yPr
oper
ty, p
lant
and
equ
ipm
ent a
geIP
(as
in §
1.48
2-1)
Line
s of
bus
ines
sSi
ze o
f bus
ines
sAs
set m
ix
444
© Practising Law Institute
Base
d on
ope
ratin
g pr
ofit
com
paris
onO
pera
ting
prof
it co
mpe
nsat
es fo
r:As
sets
and
res
ourc
es in
vest
edRi
sks
assu
med
Func
tions
per
form
ed, t
o a
less
er d
egre
ePr
oduc
t diff
eren
ces
not a
s im
port
ant a
s in
ot
her
met
hods
Cost
str
uctu
re, b
usin
ess
expe
rienc
e an
d m
anag
emen
t eff
icie
ncy
very
impo
rtan
t
445
© Practising Law Institute
OOpe
ratin
g m
argi
n: O
pera
ting
prof
it di
vide
d by
sal
es
Retu
rn o
n as
sets
: Ope
ratin
g pr
ofit
divi
ded
by v
alue
of a
sset
s ac
tivel
y em
ploy
ed in
the
busi
ness
(usu
ally
tang
ible
ass
ets)
Retu
rn o
n in
vest
ed c
apita
l: O
pera
ting
prof
it di
vide
d by
the
valu
e of
ass
ets
activ
ely
empl
oyed
in th
e bu
sine
ss, m
inus
non
-in
tere
st-b
earin
g lia
bilit
ies
Berr
y Ra
tio: G
ross
pro
fit d
ivid
ed b
y op
erat
ing
expe
nses
Mat
hem
atic
ally
, rep
rese
nts
a m
arku
p on
ope
ratin
g ex
pens
esM
arku
p on
tota
l cos
ts: O
pera
ting
prof
it di
vide
d by
tota
l cos
ts
(incl
ude
COG
S, a
s w
ell a
s op
erat
ing
expe
nse)
Mar
kup
on C
OG
S: G
ross
pro
fit d
ivid
ed b
y CO
GS
446
© Practising Law Institute
May
be
used
for
tang
ible
and
inta
ngib
le p
rope
rty
Eval
uate
s w
heth
er th
e al
loca
tion
of th
e co
mbi
ned
oper
atin
g pr
ofit
or lo
ss a
ttrib
utab
le to
con
trol
led
tran
sact
ions
is a
rm’s
-len
gth
by r
efer
ence
to th
e re
lativ
e va
lue
of e
ach
cont
rolle
d ta
xpay
er’s
con
trib
utio
n to
that
co
mbi
ned
oper
atin
g pr
ofit
or lo
ssTr
easu
ry r
egul
atio
ns p
rovi
de fo
r tw
o ty
pes
of p
rofit
spl
its:
Com
para
ble
prof
it sp
lit: R
arel
y us
ed b
ecau
se in
form
atio
n on
how
ot
her
rela
ted
part
ies
are
split
ting
prof
its is
gen
eral
ly n
ot a
vaila
ble
Resi
dual
pro
fit s
plit:
Tw
o-st
ep p
roce
ss: (
1) a
lloca
te a
rou
tine
prof
it to
bas
ic fu
nctio
ns a
nd (2
) spl
it an
y re
sidu
al p
rofit
acc
ordi
ng
to e
ach
cont
rolle
d pa
rty’
s co
ntrib
utio
ns o
f int
angi
ble
prop
erty
to
the
rele
vant
pro
fit
447
© Practising Law Institute
Two-
step
app
roac
h:As
sign
a m
arke
t ret
urn
to r
outin
e fu
nctio
nsAl
loca
te r
esid
ual p
rofit
bas
ed o
n th
e re
lativ
e va
lue
of c
ontr
ibut
ions
of i
ntan
gibl
e pr
oper
tyM
etho
ds o
f app
roxi
mat
ing
rela
tive
valu
e in
clud
e:Re
lativ
e ex
pend
iture
s in
curr
ed in
dev
elop
ing
inta
ngib
les
in
rece
nt y
ears
Exte
rnal
ben
chm
arks
Capi
taliz
ed R
&D e
xpen
ditu
res
over
a p
erio
d of
yea
rs
448
© Practising Law Institute
For
tang
ible
pro
pert
y, in
tang
ible
pro
pert
y or
se
rvic
esAn
y ot
her
met
hod
Mus
t pro
vide
mos
t rel
iabl
e m
easu
re u
nder
be
st-m
etho
d ru
leAd
ditio
nal b
urde
n
449
© Practising Law Institute
Cont
rolle
d gr
oup
loan
s m
ust c
arry
arm
’s-
leng
th in
tere
st r
ate
from
dat
e of
loan
Rate
that
wou
ld b
e ch
arge
d in
unr
elat
ed
tran
sact
ions
und
er s
imila
r ci
rcum
stan
ces
Resu
lts o
f tra
nsac
tions
com
para
ble
to u
ncon
trol
led
tran
sact
ions
Inte
rest
-fre
e pe
riod
appl
ies
to in
terc
ompa
ny tr
ade
rece
ivab
les
450
© Practising Law Institute
Betw
een
100%
and
130
% of
app
licab
le fe
dera
l ra
te (A
FR)
If ac
tual
< 1
00%
or >
130%
of A
FR, I
RS to
ad
just
to 1
00%
and
130%
, res
pect
ivel
yD
oes
not a
pply
to fo
reig
n cu
rren
cy lo
ans
Doe
s no
t app
ly if
rela
ted-
part
y le
nder
re
gula
rly e
ngag
es in
trad
e or
bus
ines
s of
m
akin
g lo
ans
or a
dvan
ces
to u
nrel
ated
pa
rtie
s
451
© Practising Law Institute
Gen
eral
ben
chm
arki
ng m
etho
dolo
gyCr
edit
ratin
g of
bor
row
erM
atur
ity o
f loa
nCu
rren
cy“H
alo
effe
ct” —
incr
ease
in e
ntity
cre
dit r
atin
g be
caus
e of
par
ent
Paym
ent f
requ
ency
Su
bord
inat
ion
Fixe
d v.
floa
ting
rate
Juris
dict
ions
of l
ende
r an
d bo
rrow
er
452
© Practising Law Institute
Deb
ate
whe
ther
gua
rant
ees
are
com
pens
able
D
ebat
e w
heth
er g
uara
ntee
is p
rovi
sion
of s
ervi
ceSe
rvic
es re
gula
tions
exc
lude
gua
rant
ees
from
cos
t-ba
sed
trea
tmen
t; ho
wev
er, l
ikel
y tr
eatm
ent w
ill n
ot b
e as
a s
ervi
ce b
ut
hand
led
unde
r for
thco
min
g re
gula
tions
for g
loba
l dea
ling
and
othe
r fin
anci
al p
rodu
cts
In th
e sh
ort t
erm
, stil
l opt
ions
:G
uara
ntee
–se
rvic
e w
ith n
o to
tal o
r ac
tual
cos
ts (T
AM 7
8220
05)
Cons
ider
ed p
art o
f pas
sive
ass
ocia
tion
bene
fitH
owev
er, i
f gua
rant
ee is
a s
igni
fican
t tra
nsac
tion
to th
e ov
eral
l fa
ct p
atte
rn, m
ore
anal
ysis
is n
eces
sary
May
req
uire
cre
dit a
nd in
tere
st r
ate
diff
eren
tial a
naly
ses
Com
pens
ator
y gu
aran
tees
can
be
usef
ul p
lann
ing
tool
as
wel
l
453
© Practising Law Institute
454
© Practising Law Institute
39
Adde
d to
the
Code
in 1
986,
as
a re
spon
se to
taxp
ayer
s ta
king
ad
vant
age
of tr
ansf
errin
g va
luab
le in
tang
ible
s w
ith h
igh
prof
it po
tent
ial t
o re
late
d pa
rtie
s in
low
tax
juris
dict
ion
with
out b
eing
ap
prop
riate
ly c
ompe
nsat
ed fo
r the
tran
sfer
Requ
ires
that
act
ual p
rofit
expe
rienc
e re
aliz
ed fr
om th
e us
e of
th
e in
tang
ible
s be
con
side
red
in d
eter
min
ing
arm
's le
ngth
co
mpe
nsat
ion
The
amou
nt s
hall
be a
djus
ted
over
tim
e to
ref
lect
cha
nges
in th
e in
com
e at
trib
utab
le to
that
inta
ngib
le
“per
iodi
c ad
just
men
ts”
Whi
tepa
per:
Vie
wed
this
as
arm
's le
ngth
, as
part
ies
ofte
n re
nego
tiate
IRS
has
now
ado
pted
the
theo
ry th
at it
rec
tifie
s in
form
atio
n di
spar
ities
One
way
str
eet f
or IR
S to
use
late
r fin
anci
al p
erfo
rman
ceTa
xpay
er c
an re
but a
djus
tmen
t by
show
ing
orig
inal
ass
umpt
ions
w
ere
valid
giv
en a
ll av
aila
ble
info
rmat
ion
455
© Practising Law Institute
40
Whe
re th
e in
tang
ible
is tr
ansf
erre
d fo
r m
ore
than
one
ye
ar, t
he c
onsi
dera
tion
char
ged
is s
ubje
ct to
an
annu
al a
djus
tmen
tto
assu
re th
at th
e am
ount
is
com
men
sura
te w
ith in
com
eD
eter
min
atio
n ba
sed
on r
elev
ant f
acts
and
circ
umst
ance
s on
the
who
le p
erio
d of
use
A de
term
inat
ion
in a
n ea
rlier
yea
r th
at th
e ro
yalty
am
ount
is
arm
's le
ngth
doe
s N
OT
prec
lude
an
adju
stm
ent i
n la
ter
year
sSt
atut
e of
lim
itatio
n do
es n
ot b
ar a
djus
tmen
t in
futu
re
year
s, e
ven
thou
gh th
e ta
x ye
ar o
f the
tran
sfer
is c
lose
dTh
e po
wer
to m
ake
a CW
I adj
ustm
ent i
s w
ith th
e IR
S;
taxp
ayer
may
not
aff
irmat
ivel
y us
e CW
I to
mak
e a
dow
nwar
d ad
just
men
t to
the
paym
ent.
See
GLA
M
2007
-007
456
© Practising Law Institute
Prim
ary
tax
bene
fit o
f cos
t sha
ring
is a
ll pa
rtic
ipan
ts a
re c
onsi
dere
d ow
ner
of a
n in
tere
st in
the
inta
ngib
le, p
recl
udin
g th
e tr
ansf
er p
ricin
g ru
les
for i
ntan
gibl
esPr
actic
al a
ltern
ativ
e to
cro
ss-b
orde
r lic
ensi
ngN
ew c
ost-
shar
ing
regu
latio
ns s
igni
fican
tly
limit
use
of a
cos
t-sh
arin
g ar
rang
emen
t (CS
A)
on a
pra
ctic
al b
asis
457
© Practising Law Institute
42
An a
gree
men
t bet
wee
n pa
rtic
ipan
ts (r
elat
ed o
nly)
to s
hare
co
sts
and
risks
of d
evel
opin
g in
tang
ible
pro
pert
yTh
e re
sult
is a
form
of c
o-ow
ners
hip,
typi
cally
terr
itoria
lTh
e ar
rang
emen
t mus
t mee
t a n
umbe
r of
req
uire
men
ts in
or
der
to q
ualif
y fo
r th
e re
gs tr
eatm
ent:
Two
or m
ore
part
icip
ants
Cont
empo
rane
ousl
y re
cord
ed w
ritte
n ag
reem
ent t
hat c
onta
ins
spec
ific
prov
isio
ns ( e
.g.,
dura
tion
of a
rran
gem
ent)
Iden
tifie
s in
tang
ible
s to
be
deve
lope
dPr
ovid
es m
etho
d to
cal
cula
te e
ach
part
icip
ant's
sha
re o
f cos
ts
cons
iste
nt w
ith r
easo
nabl
y an
ticip
ated
ben
efits
(RAB
), w
ith
adju
stm
ent m
echa
nism
458
© Practising Law Institute
Cont
rol
Def
initi
ons
–se
rvic
eBe
nefit
M
etho
dolo
gies
Cost
onl
y Co
st p
ool a
nd a
lloca
tion
keys
459
© Practising Law Institute
If ac
tivity
resu
lts in
iden
tifia
ble
incr
emen
t of
econ
omic
or
com
mer
cial
val
ue, o
r is
re
ason
ably
ant
icip
ated
to d
o so
, rec
ipie
nt
wou
ld b
e w
illin
g to
pay
; no
bene
fit if
onl
y “in
dire
ct a
nd r
emot
e” e
ffec
tsD
uplic
ativ
e ac
tiviti
es –
gene
rally
no
bene
fit, u
nles
s du
plic
ativ
e ac
tivity
itse
lf pr
ovid
es a
dditi
onal
ben
efit
Shar
ehol
der
activ
ities
–no
ben
efit
if th
e so
le e
ffec
t of
act
ivity
is to
pro
tect
ren
dere
r’s
inve
stm
ent o
r fa
cilit
ate
rend
erer
’s r
egul
ator
y co
mpl
ianc
ePa
ssiv
e as
soci
atio
n –
not a
ben
efit
460
© Practising Law Institute
Serv
ices
cos
t met
hod
(SCM
)Co
mpa
rabl
e un
cont
rolle
d se
rvic
es p
rice
(CUS
P)G
ross
ser
vice
s m
argi
n –
sim
ilar t
o re
sale
pric
e Co
st o
f ser
vice
s pl
us –
sim
ilar t
o co
st-p
lus
Com
para
ble
prof
its
Prof
it sp
lit
461
© Practising Law Institute
An e
lect
ive
prov
isio
nEv
alua
tes
arm
’s-l
engt
h p
rice
for
cert
ain
cove
red
serv
ices
by
refe
renc
e to
tota
l ser
vice
s co
sts
with
no
mar
kup
Serv
ices
elig
ible
for
SCM
trea
tmen
t:Sp
ecifi
ed c
over
ed s
ervi
ces
(whi
te li
st) –
liste
d in
Rev
. Pro
c. 2
007-
13 (f
unct
iona
l des
crip
tions
)Lo
w-m
argi
n co
vere
d se
rvic
es –
med
ian
of in
terq
uart
ile r
ange
7%
Serv
ices
not
elig
ible
for
SCM
trea
tmen
t: Ke
y ad
vant
ages
, cor
e ca
pabi
litie
s, fu
ndam
enta
l ris
ks (i
n ta
xpay
er’s
bu
sine
ss ju
dgm
ent)
Excl
uded
list
(bla
ck li
st):
man
ufac
turin
g, p
rodu
ctio
n, e
xtra
ctio
n,
cons
truc
tion,
dis
trib
utio
n, R
&D, e
ngin
eerin
g, g
uara
ntee
s an
d in
sura
nce
462
© Practising Law Institute
463
© Practising Law Institute
US tr
ansf
er p
ricin
g pe
nalti
es m
ay b
e av
oide
d by
mee
ting
requ
irem
ents
und
er T
reas
. Reg
. Sec
tion
1.66
62-6
(d):
Taxp
ayer
est
ablis
hed
tran
sfer
pric
ing
resu
lt w
as d
eter
min
ed in
ac
cord
ance
with
met
hodo
logi
es u
nder
SSec
tion
482
regu
latio
ns,
and
taxp
ayer
’s u
se o
f the
met
hod
is r
easo
nabl
e.Ta
xpay
er h
as d
ocum
enta
tion
that
set
s fo
rth
the
dete
rmin
atio
n of
th
e tr
ansf
er p
rice
or r
esul
t in
acco
rdan
ce w
ith s
uch
met
hod,
and
th
at ta
xpay
er’s
use
of t
he m
etho
d w
as r
easo
nabl
e.D
ocum
enta
tion
is c
onte
mpo
rane
ous
to th
e tim
e th
e re
turn
was
fil
ed a
nd is
pro
vide
d to
the
IRS
with
in 3
0 da
ys o
f its
req
uest
.
464
© Practising Law Institute
Tran
sact
iona
lN
et a
djus
tmen
tS
ubst
antia
l val
uatio
n(2
0% p
enal
ty)
Pric
e or
val
ue is
200
%
or m
ore
(50%
or l
ess)
th
an th
e co
rrec
t am
ount
Net
adj
ustm
ent
exce
eds
the
less
er o
f $5
milli
on o
r 10%
of
gros
s re
ceip
tsG
ross
val
uatio
n(4
0% p
enal
ty)
Pric
e or
val
ue is
400
%
or m
ore
(25%
or l
ess)
th
an th
e co
rrec
t am
ount
Net
adj
ustm
ent
exce
eds
the
less
er o
f $2
0 m
illion
or 2
0% o
f gr
oss
rece
ipts
465
© Practising Law Institute
Suff
icie
nt to
est
ablis
h th
at ta
xpay
er
reas
onab
ly c
oncl
uded
that
the
met
hod
sele
cted
(and
app
lied)
sat
isfie
d th
e be
st-
met
hod
crite
riaTy
pes
of d
ocum
enta
tion:
Ten
prin
cipa
l doc
umen
ts (n
o ex
tens
ion
of 3
0-da
y re
quire
men
t)Ba
ckgr
ound
doc
umen
ts (I
RS m
ay e
xten
d 30
-day
re
quire
men
t)
466
© Practising Law Institute
51
Wha
t is
an A
PA?
Adva
nce
issu
e re
solu
tion
prog
ram
as
alte
rnat
ive
to a
dmin
istr
ativ
e pr
oces
s;
prog
ram
rec
ently
com
bine
d w
ith U
S Ta
x Tr
eaty
Off
ice
to fo
rm n
ew “A
PMA
Prog
ram
” to
hand
le b
oth
APAs
and
dou
ble-
tax
allo
catio
n ca
ses.
Bind
ing,
writ
ten
cont
ract
bet
wee
n th
e ta
xpay
er a
nd th
e IR
S (a
nd p
ossi
bly
a fo
reig
n ta
x au
thor
ity) r
egar
ding
:Co
vere
d Tr
ansa
ctio
nsTr
ansf
er p
ricin
g m
etho
d –
targ
et, a
pplic
atio
n of
test
Term
Cr
itica
l ass
umpt
ions
–cl
ause
s th
at r
elea
se ta
xpay
er a
nd IR
S fr
om A
PAAn
nual
rep
orts
Lega
l eff
ect:
IRS
(and
fore
ign
tax
auth
oriti
es, f
or a
bila
tera
l APA
) will
reg
ard
the
APA
resu
lts a
s sa
tisfy
ing
the
arm
's le
ngth
sta
ndar
dPr
ospe
ctiv
ity v
s. r
ollb
ack
Un
ilate
ral v
s. b
ilate
ral
APA
proc
ess
–m
ulti-
func
tiona
l tea
ms;
sta
ges
in p
roce
ss
467
© Practising Law Institute
52
Allo
cate
taxi
ng ju
risdi
ctio
nAv
oid
doub
le ta
xatio
nPe
rman
ent e
stab
lishm
ent &
bus
ines
s pr
ofits
Arm
's le
ngth
sta
ndar
dM
utua
l agr
eem
ent p
roce
dure
Trea
ty-b
ased
dis
pute
res
olut
ion
proc
ess
to a
void
do
uble
taxa
tion
Trea
ty A
rtic
le 9
est
ablis
hes
arm
's le
ngth
prin
cipl
eTr
eaty
Art
icle
25
allo
ws
“com
pete
nt a
utho
ritie
s” to
en
deav
or to
res
olve
cas
es o
f tax
atio
n no
t in
acco
rdan
ce w
ith tr
eaty
, e.g
., do
uble
taxa
tion
–“M
utua
l Agr
eem
ent P
roce
ss” (
MAP
)
468
© Practising Law Institute
53
Rev.
Pro
c. 2
006-
54
Invo
ke a
ny ti
me
adju
stm
ent q
uant
ified
If yo
u re
solv
e ca
se b
y w
ritte
n ag
reem
ent (
870-
AD o
r 90
6) C
A w
ill o
nly
nego
tiate
for
a co
rrel
ativ
e ad
just
men
tFi
le in
bot
h ju
risdi
ctio
nsG
over
nmen
t-to
-gov
ernm
ent p
roce
ss -
effo
rts
only
Leng
thy
Resu
lt –
Non
-bin
ding
on
taxp
ayer
Inte
r-go
vern
men
tal a
gree
men
tLo
cal a
gree
men
ts (e
.g.,
clos
ing
agre
emen
t)N
ew U
S tr
eatie
s no
w p
rovi
de fo
r bi
ndin
g “b
aseb
all”
arbi
trat
ion
afte
r 2-
year
sta
lem
ate
(Bel
gium
, Ger
man
y, C
anad
a, F
ranc
e)Bi
ndin
g on
gov
ernm
ents
Not
bin
ding
on
taxp
ayer
469
© Practising Law Institute
470
© Practising Law Institute
HHyb
rid m
ism
atch
arr
ange
men
ts
Stre
ngth
en C
FC r
ules
Lim
it ba
se e
rosi
on v
ia in
tere
st
dedu
ctio
nsan
d ot
her
finan
cial
pay
men
ts
Coun
ter
harm
ful t
ax p
ract
ices
taki
ng
into
acc
ount
tran
spar
ency
and
su
bsta
nce
Prev
ent t
reat
y ab
use
Prev
ent a
rtifi
cial
avo
idan
ce o
f PE
stat
us
Assu
re tr
ansf
er p
ricin
g ou
tcom
es a
re in
lin
e w
ith v
alue
cre
atio
n –
inta
ngib
les
Assu
re tr
ansf
er p
ricin
g ou
tcom
es a
re in
lin
e w
ith v
alue
cre
atio
n –
risks
and
cap
ital
Assu
re tr
ansf
er p
ricin
g ou
tcom
es a
re in
line
w
ith v
alue
cre
atio
n –
high
risk
tran
sact
ions
Esta
blis
h m
etho
dolo
gies
to c
olle
ct a
nd
anal
yze
data
on
BEPS
Requ
ire d
iscl
osur
e of
agg
ress
ive
tax
plan
ning
arr
ange
men
ts
Re-e
xam
ine
tran
sfer
pric
ing
docu
men
tatio
n
Mak
e di
sput
e re
solu
tion
mec
hani
sms
mor
e ef
fect
ive
1 4
Chal
leng
es o
f a D
igita
l Eco
nom
y
Mul
tilat
eral
Inst
rum
ents
1 5
4 7
1 21 11 09
3
1 38
6521
Tran
spar
ency
Subs
tanc
eCo
here
nce
Rele
ases
O
ut
471
© Practising Law Institute
Ris
kA
sses
smen
t
App
ropr
iate
C
onsi
dera
tion
in
Setti
ngPr
ices
Con
tem
pora
neou
s
Pen
alty
Prov
ide
Info
rmat
ion
Nee
ded
to A
udit
Obj
ectiv
es
Mas
ter F
ile
Loca
l File
Cou
ntry
by
Cou
ntry
(C
byC
)
App
roac
h
472
© Practising Law Institute
Cby
C T
empl
ate
–Pa
ge 1
*
Rev
enue
Cou
ntry
Rel
ated
Pa
rty
Unr
elat
ed
Part
yTo
tal
Prof
it (L
oss)
B
efor
e In
com
e Ta
x
Inco
me
Tax
Paid
(o
n C
ash
Bas
is)
Inco
me
Tax
Acc
rued
–C
urre
nt Y
ear
Stat
ed
Cap
ital
Acc
umul
ated
Ea
rnin
gs
Num
ber
of
Empl
oyee
Tang
ible
A
sset
s O
ther
th
an C
ash
and
Cas
h Eq
uiva
lent
s
Cou
ntry
AX
XX
XX
XX
XX
X
Cou
ntry
BX
XX
XX
XX
XX
X
Cby
C T
empl
ate
–Pa
ge 2
* (O
nwar
ds) Act
iviti
es
Cou
ntry
Con
stitu
ent
Ent
ities
R
esid
ent
in C
ount
ry
Cou
ntry
of
Org
anis
atio
n or
In
corp
orat
ion
if di
ffere
nt
from
C
ount
ry o
f R
esid
ence
R&d
Holding or Managing IP
Purchasing & Procurement
Manufacturing & Production
Sales, Marketing & Distribution
Administrative, Management & Support Services
Provision of services to unrelated partiesInternal Group Finance
Regulated Financial Services
Insurance
Holding shares or other equity instruments
Dormant
Other
Cou
ntry
AE
ntity
AC
ount
ry B
Ent
ity B
*Info
rmat
ion
obta
ined
from
Ann
exIII
to C
hapt
er V
of O
ECD
/G20
Bas
e Er
osio
n an
d Pr
ofit
Shift
ing
Proj
ect:
Gui
danc
e on
Tra
nsfe
r Pric
ing
Doc
umen
tatio
n an
d C
ount
ry-b
y-C
ount
ry
Rep
ortin
g
473
© Practising Law Institute
Gre
ater
tran
sfer
pric
ing
risk
in m
ore
coun
trie
s fr
om C
-by-
C in
form
atio
nEx
posu
re to
dou
ble
tax
is in
crea
sed,
with
out s
ubst
antia
l inc
reas
e in
re
sour
ces
to r
esol
veG
reat
er ri
sk m
ay e
ncou
rage
mor
e ce
ntra
lized
man
agem
ent o
f glo
bal t
rans
fer
pric
ing
by ta
xpay
ers
-Co
nsis
tenc
y-
Effic
ienc
yIn
turn
, cen
tral
ized
man
agem
ent m
ay e
ncou
rage
add
ition
al in
-hou
se s
taff
ing
and
soft
war
e -
Effic
ienc
y-
Cont
rol
474
© Practising Law Institute
NOTES
475
© Practising Law Institute
NOTES
476