Contents - AL-Tax

94 6 Intercompany Sale of Medical DevicesIn lieu of the CUP method, we designate USP as the tested party and utilize theresale price method. We consider this approach to be the best method, given ourfact pattern, principally because we are able to draw on internal resale margins. TheU.S. transfer pricing regulations clearly favor such internal data (for good reason),relative to resale margins reported by unrelated companies:[C]omparability under [the resale price] method is particularly dependent on similarityof functions performed, risks borne and contractual terms, or adjustments to account forthe effects of such differences. If possible, appropriate gross profit margins should bederived from comparable uncontrolled purchases and resales by the reseller involved in thecontrolled sale, because similar characteristics are more likely to be found among differentresales of property made by the same reseller than among sales made by other resellers. 5As noted, USP will function as a stocking distributor on products sourced fromFS, selling directly to end-users in the U.S. market (with the assistance of agents).As such, USP should earn its standardized U.S. stocking distributor discount of40%, before adjustments. To the extent that USP performs incremental marketingand minor re-engineering functions that U.S. stocking distributors do not typicallyperform, it should be reimbursed by FS. 6 Correspondingly, if USP carries proportionatelylarger inventories of FS’ products than USP’s independent U.S. stockingdistributors are generally expected to carry, USP should be compensated for theincremental carrying costs. Lastly, because USP will sell FS’ products under itsown name, the standard distributor margin should be increased to reflect the incomeattributable thereto.The U.S. transfer pricing regulations generally do not favor adjustments to resalemargins for differences in trademark values. 7 However, in this instance, we identifiedclosely comparable uncontrolled trademark licensing arrangements, involvingtrademarks that are similar to USP’s marks in terms of field of use, term, etc. Thissample indicates that USP’s trademark and name would command a royalty rate of2.0%–4.0% of net sales on an arm’s length basis. In keeping with the Commensuratewith Income standard, we take these arm’s length royalty rates to be a measure ofall income attributable to USP’s trademark and name (and, hence, the amount bywhich USP’s standardized distributor discount should be increased).5 Treas. Reg. Section 1.482-3(c)(3)(ii)(A).6 The U.S. services regulations promulgated in 1968, in combination with the Business JudgmentRule contained in the Temporary Regulations issued in 2006, jointly determine whether acost-based intercompany services fee is warranted in 2007 (unless a taxpayer elects to apply theTemporary Regulations in their entirety). Under these rules, a markup over cost for marketing andminor re-engineering services rendered on a small scale should not be required.7 Example 7 under Treas. Reg. Section 1.482-3(c)(4) has a similar fact pattern in some respects.In this example, three of five potentially comparable uncontrolled distributors are excluded fromthe sample of comparable firms, for purposes of applying the resale price method, because theydistribute unbranded widgets, while the controlled distributor at issue resells branded widgets. Therationale given for this sample selection criterion is that the products distributed by the excludedcompanies are not sufficiently similar in value to the products distributed by the controlled distributor.Moreover, “because in this case it is difficult to determine the effect the trademark will haveon price or profits, reliable adjustments for the differences cannot reliably be made.”