• Must include a specified covered service (see Rev. Proc. 2007-13)
• Must include a low-margin covered service (7% mark-up or less)
• Must not be an excluded transaction

The effective date for controlled transactions to be priced at cost under SCM has been postponed for one year from its original effective date, December 31, 2006. SCM is applicable for all tax years starting after December 31, 2007 except for the “business judgment rule” which was effective as of January 1, 2007.

During the one-year transition period, the Treasury Department and the IRS intend that taxpayers’ reasonable efforts to comply with the temporary regulations, as modified by Notice 2007-5, will avoid the imposition of penalties for controlled services transactions, except for those evaluated under Treas. Reg. § 1.482-2(b), as modified by section 3.01 of Notice 2007-5.

Clearly, the service regulations continue to be a work in process.

Remember: A transfer pricing penalty is a fine for doing something wrong. A tax is a penalty for doing something right.