§ 1.482-9(b)(8) Example 19.

Posted on | By Internal Revenue Service
Category: US IRC Section 482 on Transfer Pricing, § 1.482-9 Methods to determine taxable income in connection with a controlled services transaction | Tag: , , , ,
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Shared services arrangement and reliable measure of reasonably anticipated benefit (allocation key).

(i) Company P performs accounts payable services (service B) on behalf of the PXYZ Group and determines the amount charged for the services under such method pursuant to a shared services arrangement based on an application of paragraph (b)(7) of this section. Service B is a specified covered service described in a revenue procedure pursuant to paragraph (b)(3)(i) of this section. The total services costs for service B otherwise determined under the services cost method is 500.

(ii) Companies X, Y and Z reasonably anticipate benefits from service B. Company P does not reasonably anticipate benefits from service B. Assume that if relative reasonably anticipated benefits were precisely known, the appropriate allocation of charges pursuant to paragraph (k) of this section to Companies X, Y and Z for service B is as follows:

Service B

[Total cost 500]

Company
X 125
Y 205
Z 170

(iii) The total number of employees (employee headcount) in each company is as follows:

Company X – 600.

Company Y – 200.

Company Z – 200.

(iv) The total number of transactions (transaction volume) with uncontrolled customers by each company is as follows:

Company X – 2,000.

Company Y – 4,000.

Company Z – 3,500.

(v) If Company P allocated the 500 total services costs of service B based on employee headcount, the resulting allocation would be as follows:

Service B

[Total cost 500]

Allocation key Company
Headcount Amount
X 600 300
Y 200 100
Z 200 100

(vi) In contrast, if Company P used volume of transactions with uncontrolled customers as the allocation basis under the shared services arrangement, the allocation would be as follows:

Service B

[Total cost 500]

Allocation key Company
Transaction Volume Amount
X 2,000 105
Y 4,000 211
Z 3,500 184

(vii) Based on these facts, Company P may reasonably conclude that the transaction volume, but not the employee headcount, allocation basis most reliably reflects the participants’ respective shares of the reasonably anticipated benefits attributable to service B.

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