Are You Being Served? Final U.S. Treasury Regulations governing services are released (Part II)
September 22nd, 2009 by admin | Tags: Final Regulations, Intercompany, IRS, Services, tax, transfer pricing | Posted in IRS |Treasury published final regulations (T.D. 9456) regarding the treatment of controlled services transactions under §482 of the Internal Revenue Code on August 4, 2009. This post is our second in a series discussing key points of interest in the final regulations.
Reviewing the final regulations, two key areas of clarification jumped out at us.
Services Cost Method clarification. The application of Services Cost Method (SCM) has been clarified and the regulations revised to provide that the tests for SCM are conjunctive rather than disjunctive, as some had perhaps hoped. That is, all four of the requirements must be satisfied to apply the SCM:
- The service must be a “covered service;”
- The service must not be an “excluded activity;”
- The service cannot be precluded from being a “covered service” by operation of the business judgment rule; and
- Adequate books and records must be maintained with respect to the service.
As a result, it seems likely that the scope of services to which the exception would apply will be somewhat diminished. To what extent remains to be seen. However, most taxpayer-favorable exceptions tend to be narrowly construed. We doubt this will be an exception.
Business Judgment Rule clarification. The Preamble reiterates that the Business Judgment Rule (BJR) should be determined on a controlled group basis and the final regulations clarify this by noting that, “it is determined by reference to a trade or business of the controlled group.” In applying the BJR, the Preamble to the final regulations contains a helpful clarification with regard to evidencing the BJR. The final regulations answer the question of whether an executive’s representation must be preferred to the tax director’s, by clarifying that the BJR is applied on a case-by-case basis and takes into account the taxpayer’s facts and circumstances. Therefore the rank of the representative making the representation is a secondary consideration to the basis for that representation. It appears that IRS and Treasury carefully considered the comments received from the tax community in finalizing the services regulations. Only time will tell how the regulations will apply in the real world.
The final services regulations are effective for tax years beginning on or after July 31, 2009.
