Contents - AL-Tax

28 3 Overview and Critique of Existing Transfer Pricing Methodsone or more businesses of the controlled group, in the opinion of the taxpayer (the“Business Judgment Rule”), a cost-based charge will suffice. 22,23Certain types of services cannot be charged out at cost. This list of services (the“black list”) includes the following:1. Manufacturing;2. Production;3. Extraction, exploration or processing of natural resources;4. Construction;5. Reselling, distribution, acting as a sales or purchasing agent or acting under acommission or other similar arrangement;6. Research, development or experimentation;7. Engineering or scientific;8. Financial transactions, including guarantees; and9. Insurance or reinsurance.Although a standalone services provider would generally establish its fees with aview to recovering its costs and earning an element of profit, the OECD Guidelinesalso contemplate circumstances in which a profit should not be included in chargesto affiliated services recipients. For example, if intra-group services fees, inclusiveof a profit factor, are more costly than the economic alternatives available to therecipient, it would presumably be unwilling to pay more, on an arm’s length basis,than these alternatives would entail. This constraint may reduce or eliminate theprofit element that the affiliated services provider would otherwise have charged.There are also circumstances in which an independent services provider would renderservices at cost (e.g., to complement its other activities).3.4.2 Rationale for Services Cost MethodMost multinational companies centralize certain routine support services. It wouldbe extremely burdensome to require that companies conduct exhaustive transferpricing studies to support cross-charges for each such service. The services costmethod is an effort to lighten the administrative load on taxpayers; it does not havean economic justification per se.The OECD Guidelines covering services reflect the basic tenet that rational economicactors will consider the alternatives available to them and select the mostadvantageous option. In some instances, this consideration will dictate a cost-based22 A literal reading of the Temporary Regulations indicates that a cost-based charge will be consideredthe best method when the requirements described above are met. However, in various publicforums, the IRS has described the SCM as a safe harbor.23 The Business Judgment Rule was originally framed in terms of the key competitive advantages,core capabilities or the fundamental chances of success or failure of the renderer or the recipient.Notice 2007-5 modified this definition by substituting “controlled group” for “renderer or recipient”.