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U.S. IRS Expands List Of Specified Covered Services Under Transfer Pricing Rules.

DEC. 20, 2006

Rev. Proc. 2007-13; 2007-1 C.B. 295

DATED DEC. 20, 2006
DOCUMENT ATTRIBUTES
  • Institutional Authors
    U.S. Internal Revenue Service
  • Cross-Reference
    For Notice 2007-5, see Doc 2006-25337.

    For Announcement 2006-50, 2006-34 IRB 321, see Doc 2006-14439.

    For T.D. 9278, see Doc 2006-14440.

    For REG-146893-02, REG-115037-00, and REG-138603-03, see

    Doc 2006-14442.

    Part III

    Administrative, Procedural, and Miscellaneous

    (Also: Part I, §§ 482; 1.482-9T.)
  • Code Sections
  • Subject Areas/Tax Topics
  • Jurisdictions
  • Language
    English
  • Tax Analysts Document Number
    Doc 2006-25334
  • Tax Analysts Electronic Citation
    2006 TNT 245-5
Citations: Rev. Proc. 2007-13; 2007-1 C.B. 295

Rev. Proc. 2007-13

SECTION 1. PURPOSE

This revenue procedure identifies specified covered services within the meaning of Temp. Treas. Reg. § 1.482-9T(b)(4)(i). The activities identified in this revenue procedure are support services common among taxpayers in a variety of industry sectors, and generally do not involve a significant arm's length markup on total services costs. Services identified in this revenue procedure must meet the other conditions set forth in Temp. Treas. Reg. § 1.482- 9T(b) to be evaluated under the services cost method.

SECTION 2. BACKGROUND

The section 482 regulations provide pricing methods for transactions between controlled parties, including transactions involving services. The existing regulations for transactions involving services were issued in 1968. Section 1.482-2(b) of the existing regulations provides a "cost safe harbor" that permits certain "non-integral" services to be priced at cost. In 2003, the Treasury Department and IRS issued proposed regulations that set forth a simplified cost based method (SCBM) intended to preserve some benefits of the current Treas. Reg. § 1.482-2(b) cost safe harbor. A number of commentators noted that SCBM called for quantitative judgments that business people are not qualified to make by themselves. As a practical matter, taxpayers would be required to devote significant compliance resources to enlist outside consultants or otherwise to develop support for those judgments.

In 2006, the Treasury Department and the IRS issued temporary regulations that eliminated the SCBM and replaced it with the services cost method (SCM), as set forth in Temp. Treas. Reg. § 1.482-9T(b). The Treasury Department and IRS recognized that because the section 482 services regulations potentially affect a large volume of intragroup back office services that are common across many industries, it is in the interest of sound tax administration to minimize the compliance burden of such services, which would typically bear low arm's length markups.

The SCM evaluates whether the price for covered services, as defined, is arm's length by reference to the total services costs with no markup. Section 1.482-9T(b)(4) of the temporary regulations provides for two categories of covered services eligible for the SCM. The first category is described in Temp. Treas. Reg. § 1.482-9T(b)(4)(i) and consists of specified covered services that will be identified in this revenue procedure. These specified covered services are so identified because they constitute support services of a type common across industry sectors that generally do not involve a significant arm's length markup on total services costs. A second category of services described in Temp. Treas. Reg. § 1.482-9T(b)(4)(ii), low margin covered services, has a median comparable arm's length markup on total services costs of less than or equal to 7 percent. The second category is not addressed in this revenue procedure.

The Internal Revenue Service identified forty-eight activities that constitute specified covered services in a proposed revenue procedure included in Announcement 2006-50, which was published in the Internal Revenue Bulletin on August 21, 2006 (2006-34 I.R.B. 321). A number of public comments were received with respect to the SCM in general and Announcement 2006-50.

Notice 2007-5, issued contemporaneously with this Revenue Procedure, contains clarifications concerning several provisions related to the SCM. In addition, the Notice partially modifies the effective date of the temporary regulations. Subject to the exceptions described below, the effective date of the temporary regulations, insofar as they pertain to the identification of controlled services eligible to be priced at cost, is moved back one year. The provisions related to the SCM in Temp. Treas. Reg. § 1.482-9T(b) will thus apply to taxable years beginning after December 31, 2007. The only SCM provision that has immediate effect, i.e., for taxable years beginning after December 31, 2006, is the business judgment rule in Temp. Treas. Reg. § 1.482-9T(b)(2).

The net effect of this modification is that, for taxable years with beginning dates from January 1, 2007 to December 31, 2007, taxpayers may apply the existing regulations in Treas. Reg. § 1.482-2(b) for purposes of identifying controlled services that are eligible to be priced on a cost basis, without a markup. For such taxable years, any services priced at cost must be "non-integral" within the meaning of existing Treas. Reg. § 1.482-2(b)(7), and they must also satisfy the SCM business judgment test in Temp. Treas. Reg. § 1.482-9T(b)(2).

Alternatively, for tax years beginning between January 1, 2007 and December 31, 2007, taxpayers may elect to apply the SCM as set forth in Temp. Treas. Reg. § 1.482-9T(b), without taking into account any of the modifications described in the previous two paragraphs.

A number of commentators stated that the list of specified covered services in Announcement 2006-50 was too narrow. In response to comments, this revenue procedure significantly broadens the existing categories and adds a number of new activities to the list of specified covered services. In addition, a provision covering "other similar activities" has been added to each category of activities.

SECTION 3. SCOPE

The following categories of services are eligible for treatment as specified covered services under Temp. Treas. Reg. § 1.482- 9T(b)(4)(i):

 Payroll:

 

 

 1.   Compiling and posting employee time and other information needed

 

      to calculate periodic compensation to employees. Computing

 

      employees' time worked, production, and commissions. Computing

 

      and posting wages and deductions to appropriate accounting

 

      records. Preparing paychecks, travel reimbursement and expense

 

      reimbursement.

 

 

 2.   Preparing payroll tax forms (such as the preparation of Forms

 

      940, 941 and W-2 in order to comply with U.S. requirements or

 

      similar requirements under another country's laws).

 

 

 3.   Administering garnishment and other wage withholding orders.

 

 

 4.   Other activities similar to those specified in paragraphs (1)

 

      through (3).

 

 

 Premiums for Unemployment, Disability and Workers Compensation:

 

 

 5.   Processing employees' unemployment insurance premiums,

 

      disability premiums and workers compensation premiums.

 

 

 6.   Other activities similar to those specified in paragraph (5).

 

 

 Accounts Receivable:

 

 

 7.   Compiling, analyzing and recording current credit data and other

 

      financial information regarding individuals or firms (including

 

      preparing reports with this information for use in

 

      decisionmaking).

 

 

 8.   Compiling and recording billing, accounting and other numerical

 

      data for billing purposes. Preparing billing invoices for

 

      services rendered or for delivery or shipment of goods.

 

 

 9.   Locating and notifying customer(s) of delinquent accounts by

 

      mail (either electronic or otherwise) or telephone to solicit

 

      payment. Receiving payment from customers and posting payment to

 

      customer accounts. If customer fails to respond, preparing

 

      statements to credit department, initiating repossession

 

      proceedings or service disconnection. Keeping records of

 

      collection activities and status of accounts.

 

 

 10.  Other activities similar to those specified in paragraphs (7)

 

      through (9).

 

 

 Accounts Payable:

 

 

 11.  Compiling information and records to draw up purchase orders for

 

      procurement of materials and services.

 

 

 12.  Making payment to vendors and posting payment to status of

 

      accounts.

 

 

 13.  Other activities similar to those specified in paragraphs (11)

 

      and (12).

 

 

 General Administrative:

 

 

 14.  Performing clerical and administrative functions such as

 

      drafting correspondence, scheduling appointments, and organizing

 

      and maintaining paper and electronic files.

 

 

 15.  Performing data entry through use of a keyboard or scanning

 

      device, including verifying data and preparing materials for

 

      printing.

 

 

 16.  Using a word processor/computer or typewriter to generate

 

      (without substantial modification) letters, reports, forms, or

 

      other material from another person's rough draft, corrected

 

      copy, or voice recording.

 

 

 17.  Performing duties relating to office management systems and

 

      procedures, such as answering telephones, bookkeeping, typing,

 

      word processing, office machine operation, and filing.

 

 

 18.  Operating any of the following office machines: photocopying,

 

      scanning and facsimile machines.

 

 

 19.  Providing interoffice service/document delivery, including

 

      mailroom services, document management, and graphics, video, and

 

      website preparation.

 

 

 20.  Other activities similar to those specified in paragraphs (14)

 

      through (19).

 

 

 Corporate and Public Relations:

 

 

 21.  Planning and executing a public relations program or corporate

 

      communication policy, including the distribution of internal and

 

      external corporate communications, but not to include specific

 

      advertising and/or marketing of a product or service.

 

 

 22.  Other activities similar to those specified in paragraph (21).

 

 

 Meeting Coordination and Travel Planning:

 

 

 23.  Coordinating activities of staff and convention personnel to

 

      make arrangements for group meetings and conventions.

 

 

 24.  Negotiating airline, rental car, and hotel contracts.

 

 

 25.  Assisting in travel arrangements, including providing a system

 

      for reservations and ticket purchases.

 

 

 26.  Managing motor pool and fleet.

 

 

 27.  Other activities similar to those specified in paragraphs (23)

 

      through (26).

 

 

 Accounting and Auditing:

 

 

 28.  Gathering and reviewing information in accounting records for

 

      use in preparing financial statements.

 

 

 29.  Computing, classifying, and recording numerical data to maintain

 

      accurate and complete financial records, performing any

 

      combination of calculating, posting, and verifying duties to

 

      obtain primary financial data for use in maintaining accounting

 

      records, checking the accuracy of figures, calculations, and

 

      postings pertaining to business transactions recorded by other

 

      workers; and calculating investment performance and net asset

 

      values of investments.

 

 

 30.  Consolidating legal entity financial results per country for use

 

      in statutory financial statements and tax returns and

 

      consolidating worldwide results by business area for use in

 

      management accounting.

 

 

 31.  Developing a company-wide accounting manual that prescribes

 

      accounting policies and methods to be used and providing related

 

      advice.

 

 

 32.  Performing operational and financial internal audits.

 

 

 33.  Preparing government census and related forms required by a

 

      service recipient's home country.

 

 

 34.  Preparing reports required by escheat laws required by a service

 

      recipient's home country.

 

 

 35.  Completing import/export documentation and arranging for customs

 

      payment.

 

 

 36.  Overseeing audits by customs authorities.

 

 

 37.  Other activities similar to those specified in paragraphs (28)

 

      through (36).

 

 

 Tax:

 

 

 38.  Processing tax payments according to prescribed laws and

 

      regulations.

 

 

 39.  Gathering information from accounting records and including that

 

      information in the preparation of income, property, sales/use,

 

      VAT, excise and other tax returns.

 

 

 40.  Overseeing audits conducted by tax authorities.

 

 

 41.  Providing tax advice to businesses to ensure compliance with tax

 

      laws, including access to electronic research and tax compliance

 

      software.

 

 

 42.  Reviewing local country tax provisions for purposes of inclusion

 

      in the consolidated world-wide provision and preparation of the

 

      world-wide tax provision.

 

 

 43.  Negotiating advance pricing agreements and other local

 

      incentives that benefit the consolidated organization.

 

 

 44.  Other activities similar to those specified in paragraphs (38)

 

      through (43).

 

 

 Health, Safety, Environmental and Regulatory Affairs:

 

 

 45.  Developing company health, safety, and environment standards,

 

      monitoring compliance with such standards, and training affected

 

      personnel.

 

 

 46.  Gathering information and preparing documentation relating to

 

      eligibility for or compliance with laws and regulations

 

      governing contracts, licenses and permits.

 

 

 47.  Gathering information, verifying data and preparing

 

      documentation relating to compliance with laws and regulations

 

      governing financial and securities institutions and financial

 

      and real estate transactions. Examining and verifying

 

      correctness of, or establishing authenticity of records.

 

 

 48.  Providing security services (e.g., executive protection or

 

      global headquarters security).

 

 

 49.  Providing common health risk management systems development,

 

      clinical services, industrial hygiene, alcohol and drug testing

 

      services (laboratory analyses done by third parties), and advice

 

      to business management on health issues.

 

 

 50.  Providing guidance and support operations, integrity management

 

      support implementation, coaching, and conducting operations

 

      integrity management assessments, development and implementation

 

      of safety behavior based programs, and incident reporting and

 

      accident investigations.

 

 

 51.  Providing strategies, resources, and training for effective

 

      crisis preparedness and response.

 

 

 52.  Other activities similar to those specified in paragraphs (45)

 

      through (51).

 

 

 Budgeting:

 

 

 53.  Compiling data for use by cost estimators in determining cost

 

      projections and in preparing budget estimates, including

 

      verifying information for completeness, accuracy, and

 

      conformance with internal procedures and regulations.

 

 

 54.  Compiling data to prepare budget and accounting reports for

 

      management.

 

 

 55.  Other activities similar to those specified in paragraphs (53)

 

      and (54).

 

 

 Treasury Activities:

 

 

 56.  Establishing bank accounts and lock boxes for use by controlled

 

      parties, including overdraft facilities and lines of credit.

 

 

 57.  Providing staff and facilities to hedge currency exposures that

 

      arise from operations in the normal course of business. This

 

      paragraph does not apply to banks (including investment banks),

 

      insurance companies, investment companies, similar entities that

 

      provide financial services to the public, and investment funds

 

      (including hedge and private equity funds).

 

 

 58.  Coordinating investment activities in connection with short-term

 

      management of cash generated from operations in the normal

 

      course of business. This paragraph does not apply to related-

 

      party factoring activities, or to banks (including investment

 

      banks), insurance companies, investment companies, similar

 

      entities that provide financial services to the public, and

 

      investment funds (including hedge and private equity funds).

 

 

 59.  Other activities that are ancillary to the activities specified

 

      in paragraphs (56) through (58).

 

 

 Statistical Assistance:

 

 

 60.  Compiling data for use in statistical studies.

 

 

 61.  Other activities similar to those specified in paragraph (60).

 

 

 Staffing and Recruiting:

 

 

 62.  Providing staffing support that includes creating job

 

      announcements, determining eligibility, evaluating

 

      qualifications of candidates, conducting background checks on

 

      final candidates, verifying references, developing performance

 

      evaluation procedures and forms, and conducting exit interviews

 

      for departed employees.

 

 

 63.  Coordinating with temporary employment agencies, applicants, and

 

      management throughout the recruiting process.

 

 

 64.  Providing information to applicants regarding open positions,

 

      the application and recruiting process, and employment policies.

 

 

 65.  Providing administrative support that includes sourcing and

 

      processing resumes, arranging interview schedules for open

 

      positions, preparing offer letters, and entering new employee

 

      information into the human resource system.

 

 

 66.  Establishing and maintaining employee files relating to payroll,

 

      performance and other personnel issues.

 

 

 67.  Assisting with new employee orientations and paperwork.

 

 

 68.  Implementing recruiting plan and locating potential candidates

 

      by working with professional search firms, colleges,

 

      universities and professional associations. Organizing and

 

      attending job fairs and other recruitment events.

 

 

 69.  Developing recruiting and marketing materials and assisting in

 

      developing and maintaining content for recruiting website.

 

 

 70.  Analyzing recruiting data and review all job analysis, promotion

 

      and placement products.

 

 

 71.  Posting job opening advertisements in appropriate markets

 

      through publications, journals and other media.

 

 

 72.  Managing company-wide job postings and employee referral

 

      program.

 

 

 73.  Administering a compensation policy, including grading and

 

      determining salary ranges for positions.

 

 

 74.  Other activities similar to those specified in paragraphs (62)

 

      through (73).

 

 

 Training and Employee Development:

 

 

 75.  Assisting in training of personnel including assessing

 

      development and training needs, creating and conducting internal

 

      development and training programs and communicating training

 

      opportunities to personnel.

 

 

 76.  Arranging for management training on employment law compliance,

 

      employer liability avoidance, interviewing, hiring,

 

      terminations, promotions, performance reviews, safety, and

 

      sexual harassment.

 

 

 77.  Developing and implementing plans regarding career-development

 

      and succession.

 

 

 78.  Developing and implementing a job evaluation process including

 

      procedures and forms.

 

 

 79.  Other activities similar to those specified in paragraphs (75)

 

      through (78).

 

 

 Benefits:

 

 

 80.  Developing and implementing employee compensation and benefits

 

      including healthcare, life insurance, 401(k), pension, worker's

 

      compensation, unemployment, dental, profit sharing, employee

 

      incentive compensation, and employee assistance programs.

 

 

 81.  Providing benchmarking studies for compensation and other

 

      benefit programs.

 

 

 82.  Providing guidance and direction to employees regarding

 

      elections for benefits, applications for benefits and receipt of

 

      benefits (including providing assistance to employees in

 

      completing all necessary forms).

 

 

 83.  Arranging annual benefit enrollment meetings and employee

 

      benefit seminars.

 

 

 84.  Processing employee benefits inquiries and complaints, and

 

      reconciling billing issues.

 

 

 85.  Coordinating with hospitals, physicians, insurers, employees,

 

      and beneficiaries to facilitate proper and complete utilization

 

      of benefits for all employees.

 

 

 86.  Other activities similar to those specified in paragraphs (80)

 

      through (85).

 

 

 Information and Technology (IT) Services:

 

 

 87.  Supporting company-wide computer systems including those used in

 

      connection with operations, accounting, manufacturing, customer

 

      service, human resources, payroll, and email.

 

 

 88.  Formulating guidelines with respect to the use of IT systems.

 

 

 89.  Maintaining and repairing IT systems.

 

 

 90.  Providing telecommunications facilities.

 

 

 91.  Providing technical assistance and training to users of computer

 

      systems and other information technology devices. Answering

 

      questions or resolving technical problems relating to computer

 

      systems and other information technology devices in person, via

 

      telephone or from remote location. Providing assistance

 

      concerning the use of computer hardware and software, including

 

      printing, installation, word processing, electronic mail, and

 

      operating systems, as well as disaster recovery back-up

 

      services.

 

 

 92.  Maintaining and testing existing computer databases (including

 

      implementing security measures to safeguard computer databases),

 

      but not to include analyzing user needs or developing hardware

 

      or software solutions (such as systems integration, website

 

      design, writing computer programs, modifying general

 

      applications software, or recommending the purchase of

 

      commercially available hardware or software).

 

 

 93.  Supporting an organization's existing local area network (LAN),

 

      wide area network (WAN), and Internet system or a segment of a

 

      network system, regular maintenance of network hardware and

 

      software, monitoring network to ensure network availability to

 

      all system users and performing necessary maintenance to support

 

      network availability, supervising other network support and

 

      client server specialists (including implementing network

 

      security measures), but not to include analyzing user needs or

 

      developing hardware or software solutions (such as systems

 

      integration, website design, writing computer programs,

 

      modifying general applications software, or recommending

 

      commercially available software).

 

 

 94.  Other activities similar to those specified in paragraphs (87)

 

      through (93).

 

 

 Legal Services:

 

 

 95.  General legal services performed on behalf of the taxpayer by

 

      in-house legal counsel, including but not limited to, drafting,

 

      negotiating and review of contracts or agreements, legal

 

      documents, and opinions, representation and advocacy before

 

      courts, administrative agencies, arbitrators, legislatures, or

 

      other bodies, preparing advice in respect of structuring and

 

      reorganization, acquisition, and divestment transactions, and

 

      maintaining corporate books and records. Support and

 

      administrative functions associated with the above activities

 

      (legal research, secretarial, filing and document retrieval,

 

      etc.).

 

 

 96.  Other activities similar to those specified in paragraph (95).

 

 

 Insurance Claims Management:

 

 

 97.  Securing insurance coverage for general, product, and worker's

 

      compensation liability, property loss, business interruption,

 

      and other business risks.

 

 

 98.  Coordinating with third party insurers, with respect to

 

      insurance policies, including preparing claims for submission to

 

      such third party insurers.

 

 

 99.  Other activities similar to those specified in paragraphs (97)

 

      and (98).

 

 

 Purchasing:

 

 

 100. Planning and executing procurement of services and material

 

      pursuant to company standard for support functions.

 

 

 101. Other activities similar to those specified in paragraph (100).

 

 

SECTION 4. APPLICATION

The services cost method (SCM) as set forth in Temp. Treas. Reg. § 1.482-9T(b) evaluates whether the price for covered services, as defined, is arm's length by reference to the total services costs with no markup. Two categories of covered services are eligible for the SCM. The first category, specified covered services, is described in Temp. Treas. Reg. § 1.482-9T(b)(i) and is limited to services that are described in this revenue procedure. The second category, low margin covered services, is not described in this revenue procedure.

SECTION 5. EFFECTIVE DATE

This revenue procedure is generally effective for taxable years beginning after December 31, 2007. Taxpayers may elect to apply retroactively the provisions of Section 1.482-9T of the temporary regulations to certain taxable years. See Temp. Treas. Reg. § 1.482-9T(n)(1). In the case of a valid election, this revenue procedure would also apply to the taxable years subject to such an election.

SECTION 6. REQUEST FOR COMMENTS

The Treasury Department and the IRS request further comments from interested persons on the listing contained in this revenue procedure. The revenue procedure is intended to be an evolving list of services that are eligible for the SCM. The Treasury Department and the IRS contemplate issuing updates as appropriate, including a further revision of the revenue procedure to coincide with the end of the one-year transition period and in response to comments received on the temporary regulations. Comments are solicited on the categories and listed activities in the revenue procedure, possible additions, and other revisions. For example, comments are solicited whether warehousing and other functions that support distribution should be eligible for the SCM in light of Temp. Treas. Reg. § 1.482-9T(b)(3)(ii)(E)(reselling, distribution ineligible for SCM).

Written comments may be submitted to CC:INTL:Br6 (Rev. Proc. 2007-13), room 4607, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, Washington, DC 20224. Submissions may be hand delivered Monday through Friday between the hours of 8 a.m. and 5 p.m. to: CC:INTL:Br6 (Rev. Proc. 2007-13) Courier's desk, Internal Revenue Service, 1111 Constitution Avenue, NW, Washington, DC 20224. Alternatively, taxpayers may submit comments electronically via the following e-mail address: Notice.Comments@irscounsel.treas.gov. Please include "Rev. Proc. 2007-13" in the subject line of any electronic communications.

SECTION 7. DRAFTING INFORMATION

The principal authors of this revenue procedure are Thomas A. Vidano and Carol B. Tan of the Office of Associate Chief Counsel (International). For further information regarding this revenue procedure contact Thomas A. Vidano or Carol B. Tan at (202) 435-5265 (not a toll free call).

DOCUMENT ATTRIBUTES
  • Institutional Authors
    U.S. Internal Revenue Service
  • Cross-Reference
    For Notice 2007-5, see Doc 2006-25337.

    For Announcement 2006-50, 2006-34 IRB 321, see Doc 2006-14439.

    For T.D. 9278, see Doc 2006-14440.

    For REG-146893-02, REG-115037-00, and REG-138603-03, see

    Doc 2006-14442.

    Part III

    Administrative, Procedural, and Miscellaneous

    (Also: Part I, §§ 482; 1.482-9T.)
  • Code Sections
  • Subject Areas/Tax Topics
  • Jurisdictions
  • Language
    English
  • Tax Analysts Document Number
    Doc 2006-25334
  • Tax Analysts Electronic Citation
    2006 TNT 245-5
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