Contents - AL-Tax

184 13 Concluding Observationsmethods are based on economic reasoning, economic measures of profits should beused in lieu of accounting profit measures.Under certain of the proposed methods, much of the current compliance burdenwould be shifted from firms to taxing authorities. For example, the numericalstandards approach would require taxing authorities to conduct comprehensive,industry-specific benchmarking studies annually, in lieu of the thousands of studiesconducted by individual firms. However, with the exception of the required returnmethod, the proposed methods would also greatly reduce the magnitude of thisburden. They would, hopefully, also go much further than the current regime inreducing audit and dispute resolution costs, the likelihood of double-taxation andpenalties, and uncertainty regarding individual firms’ anticipated tax liabilities.The case studies also highlight certain more specific observations. First, thenumerical standards approach would remedy many of the shortcomings of the existingsystem in relatively straightforward transfer pricing cases. However, it should beapplied on a skill- and/or an industry-specific basis. More particularly, in the case ofservices, taxing authorities should publish a range of safe harbors for services requiringdifferent skill levels. As applied to distributors, safe harbors should also encompassadvertising-to-sales ratios, inventory-to-sales ratios and other magnitudes thathave proven to be controversial in a transfer pricing context, in addition to safeharbor resale margins by industry and geographic market. Inasmuch as numericalstandards would be framed in terms of safe harbor resale margins and markups overcost, this approach would clearly not ameliorate the conceptual shortcomings ofthe resale price, cost plus and comparable profits methods. Rather, this approachis put forth in recognition of the fact that genuinely arm’s length results are timeconsumingand difficult to develop, and perhaps such efforts should be reserved forthe more complex transfer pricing issues.Moreover, even when numerical standards are applied, a careful analysis of marketstructure and the nature and extent of competition in the relevant markets isimportant. This type of analysis is the only means of ascertaining whether membersof controlled groups have developed and utilize valuable intangible assets. Whilethe OECD Guidelines strongly stress the importance of detailed analyses of marketstructure, competition, etc., the U.S. transfer pricing regulations, and, still morestrikingly, the application of these regulations, are more formulaic than they oughtto be.The modified inexact CUP and CUT methods are intended to make use of informationcontained in product and intangible asset pricing to a greater extent thanis currently permitted. A more flexible application of the CUP and CUT methodsmay yield the most reliable results in analyzing certain fact patterns. For example,the use of franchise agreements to analyze the intercompany pricing of bundledintangible assets is both empirically valid in some circumstances, and feasible froma practical standpoint, given the large number of such agreements and the fact thattheir terms are often publicly available. Moreover, existing methods do not satisfactorilyaddress these types of transactions. Similarly, joint venture arrangementsbetween unaffiliated companies should potentially be considered valid comparableuncontrolled transactions.