USA Law and Practice Contributed by: Kevin Spencer, Kim Marie Boylan, Nicholas Wilkins and Christina Culver, White & Case LLP
There is also a safe harbour for certain low value- adding intra-group services in Treasury Regulation Section 1.482-9 (b). This safe harbour provides for the SCM (see 3.1 Transfer Pricing Methods ) – under which, low value-adding intra-group services can be charged out at cost in certain circumstances. The method evaluates whether the amount charged is arm’s length by reference to the total services costs with no mark-up. So long as the taxpayer applies the SCM in accordance with the regulation, the method will be considered the best method and any IRS allo - cations will be limited in the adjustments it can make. To qualify for the SCM, the service must: • be a covered service (generally services that do not involve a significant median comparable mark-up of more than 7%); • not be on the regulation’s list of excluded activities; • meet the business judgement rule, requiring the taxpayer to reasonably conclude that the service does not contribute significantly to certain compet - itive advantages, core capabilities or fundamental risks; and • be supported by the taxpayer’s maintenance of adequate books and records. 11.2 Rules on Savings Arising From Operating in the Jurisdiction Treasury Regulation Section 1.482-1 (d)(3)(iv)(E) con - tains the rule governing savings that arise from oper - ating in the USA (as well as any other location). The rule does not dictate how savings should be treated but, rather, takes location-specific costs into con - sideration in determining the degree of comparabil - ity between controlled and uncontrolled transactions when evaluating the economic conditions that could affect pricing or profit. 11.3 Unique Transfer Pricing Rules or Practices The USA does not have any unique rules disallowing marketing expenses by a local entity that is a licensee claiming local distribution intangibles. 11.4 Financial Transactions The USA has specific rules governing intercompany loans. Treasury Regulation Section 1.482-2 provides methods for determining an arm’s length interest rate
on bona fide indebtedness between related parties. The regulation provides safe harbour provisions under certain circumstances. There are many other Code sections that could impact the tax treatment of intercompany financial trans - actions. They are too numerous to cover here, but include Section 163 (j) of the Code (limitation on busi - ness interest) and Section 267A of the Code (certain related-party amounts paid or accrued in hybrid trans - actions or with hybrid entities). 12. Co-Ordination With Customs Valuation 12.1 Co-Ordination Requirements Between Transfer Pricing and Customs Valuation The co-ordination of tax and customs obligations has long frustrated taxpayers and authorities. Trans - fer pricing and customs laws and regulations operate in mostly separate frameworks and are not always in alignment. Under Section 1059A of the Code and its regulations, federal income tax law requires that ‒ where related parties import property directly or indi - rectly into the USA ‒ the transfer price used for income tax purposes generally must not exceed the declared value for customs purposes, subject to certain excep - tions discussed here. Specifically, the customs value generally caps the amount a US taxpayer may claim as a basis or inventory cost of the imported property; that is, customs value generally provides a ceiling on transfer pricing valuation for federal income tax pur - poses. Although some compensating adjustments are allowed, Section 1059A of the Code and Treas - ury Regulation Section 1.1059A-1 prohibit taxpay - ers from making upward adjustments to the transfer price after the customs entry has liquidated. Notably, Section 1059A of the Code does not limit the IRS’s authority under Section 482 of the Code, and the IRS can determine that the transfer price is lower than the customs valuation if the customs valuation exceeds the arm’s length price. Section 1059A of the Code does not apply to any portion of the value of an imported good that is not subject to customs duties on an ad valorem basis or
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