Transfer Pricing Insider

Services Regulations

CrossBorder Compliance Enhancements in Version 3.3

In response to the temporary services regulations released on August 4, 2006, CrossBorder has incorporated changes to the CrossBorder Compliance application to accommodate the different methods of analysis that are applicable for inter-company services transactions. These include:

• Services Cost Method (SCM)
• Comparable Uncontrolled Services Price Method (analogous to the Comparable Uncontrolled Price Method)
• Gross Services Margin Method (analogous to the Resale Price Method)
• Cost of Services Plus Method (analogous to the Cost Plus Method)
• Comparable Profits Method
• Profit Split Method

All of the methods named above, except for SCM, are existing methods or analogs to existing methods outlined by Treas. Reg. § 1.482. Therefore, the software has been modified to ensure that these methods are available for users that are analyzing inter-company services transactions for fiscal years beginning January 1, 2008.

The SCM is a new method that allows the arm's-length charge for the controlled services transaction to be determined by reference to the total services cost without a markup. Since the SCM is an elective method that is based on certain qualifying factors, CrossBorder Compliance version 3.3 will help you to decide whether SCM can and should be utilized.

The benefits test was modified in this version to include additional questions that will help to determine whether a services transaction directly benefits the recipient. Questions were also added to determine if the service is eligible for application of the SCM. In addition, the integral test was removed, as it is no longer relevant for analyzing services transactions after 2007.

CrossBorder Compliance version 3.3 is entirely backward-compatible in that CrossBorder Compliance users will still be able to create studies using the previous services validation test, despite the introduction of the SCM. Furthermore, the software will enable you to transfer your work to a different analysis if it is ultimately determined that the service transaction does not qualify for the SCM. If the SCM is not a valid option, all of the background information, functional overviews and potential comparable searches are transferable for application of the CPM.

The new temporary regulations provide explicit guidance on shared services arrangements. CrossBorder Compliance will enable you to aggregate transactions, provided that the aggregation is reasonable based on the facts and circumstances and you will be able to treat aggregated transactions as a single analysis.

In addition to addressing the temporary services regulations, CrossBorder Compliance version 3.3 will also include enhancements to facilitate the creation of a "masterfile" of standardized information. The masterfile will include the general business descriptions of the business and business strategy, a general description of the transactions involving European Union member countries and the transfer pricing policies. Previously in CrossBorder Compliance, you could create studies based upon trading pairs and the study only provided the information based upon the specific set of companies engaged in the inter-company transaction being analyzed. With the introduction of the masterfile, European Union member countries can implement the European Union Transfer Pricing Documentation approach, which is less of an administrative burden on the taxpayer. In addition, the masterfile approach helps to establish more uniformity in the European Union members' transfer pricing regimes.

The masterfile will be elective in CrossBorder Compliance, so you’ll be able to choose whether you want to create one. Many CrossBorder Compliance users have requested the ability to create a standardized set of background documents and the new masterfile feature will make that possible. You will be able to make changes to one file instead of several different files that contain the same background information.

CrossBorder Compliance version 3.3 will provide the flexibility you need to analyze inter-company transactions in accordance with your internal transfer pricing policies, while maintaining enough rigidity to prevent you from applying methods and approaches that are inappropriate for your analyses.

Transfer Pricing Insider, Vol. 1, No. 2
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