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Note: This user guide is intended to help clarify the concepts and identify issues in the application of the U.S. regulations. It does not constitute legal advice, and should not be relied on as such. For professional transfer pricing consulting services, contact Economic Consulting Services at 202-466-7720.

A. Authority

Sec. 482 of the United States Internal Revenue Code, in its entirety, states:

"In any case of two or more organizations, trades, or businesses (whether or not incorporated, whether or not organized in the United States, and whether or not affiliated) owned or controlled directly or indirectly by the same interests, the Secretary may distribute, apportion, or allocate gross income, deductions, credits, or allowances between or among such organizations, trades, or businesses, if he determines that such distribution, apportionment, or allocation is necessary in order to prevent evasion of taxes or clearly to reflect the income of any of such organizations, trades, or businesses. In the case of any transfer (or license) of intangible property (within the meaning of section 936(h)(3)(B)), the income with respect to such transfer or license shall be commensurate with the income attributable to the intangible."

The last sentence of the section, which was added to the code by the Tax Reform Act of 1986, applies to taxable years beginning after Dec. 31, 1986, but only with respect to intangibles transferred after Nov. 16, 1985, or licenses granted after such date, or before such date with respect to property not in existence or owned by the taxpayer on such date, except that for purposes of section 936(h)(5)(C) of this title, such amendment applicable to taxable years beginning after Dec. 31, 1986, without regard to when the transfer or license was made.

B. Overview and Full Text of the Sec. 482 Regulations

The Sec. 482 regulations are generally effective for taxable years beginning after October 6, 1994. The regulations interpreting and applying Sec. 482 are organized as follows:

Table of Contents – Reg. Sec. 1.482-0

1. Procedural rules – Reg. Sec. 1.482-1 – Rules which apply to all controlled transactions, including general descriptions of the scope and purpose of the regulations, and of the arm’s length standard.

2. Determination of income in specific situations – Reg. Sec. 1.482-2 – Rules covering (a) loans and advances, (b) services, and (c) use of tangible property.

3. Methods to determine taxable income in connection with a transfer of tangible property – Reg. Sec. 1.482-3 – CUP, Resale Price, Cost Plus, and unspecified methods.

4. Methods to determine taxable income in connection with a transfer of intangible property – Reg. Sec. 1.482-4 – Definition of an intangible, CUT and unspecified methods, periodic adjustments, and ownership rules.

5. Comparable Profits Method – Reg. Sec. 1.482-5 – Rules for CPM, including tested party, adjustments, arm’s length range, profit level indicators, and comparability and reliability considerations.  Note: Includes Section(c)(2)(iv), which states that it may be appropriate to make adjustments for stock based compensation.

6. Profit Split Method – Reg. Sec. 1.482-6 – Comparable Profit Split and Residual Profit Split.

7. Sharing of Costs – Reg. Sec. 1.482-7 – Rules for sharing the costs of the development of intangibles, including requirements for a qualified cost sharing arrangement, treatment of participants and non-participants, measurement of benefits, pre-existing intangibles. Note: Includes Section (d)(2), which states that operating expenses include stock-based compensation costs (effective for taxable years beginning on or after August 26, 2003).(See also ECS User Guide on Cost Sharing.)

8. Examples of the best method rule – Reg. Sec. 1.482-8

For professional transfer pricing consulting services, contact Economic Consulting Services at 202-466-7720.
Or email jerrie.mirga@economic-consulting.com