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Cruising Toward Safe Harbors for Transfer Pricing?

March 1, 2013, Corporate Taxation

Patricia Gimbel Lewis
Stafford Smiley[1]

The tax world is on the brink of a game-changing tool affecting international corporate transactions – safe harbors for transfer pricing compliance.  "Transfer pricing" refers to the pricing of cross-border transactions between related entities.  Whether those transactions are product sales, services, loans, or licenses of intangibles, their prices affect the relative levels of profits in the countries involved.  The resultant division of group profit is of great significance to tax authorities around the world, and enforcement of the applicable rules is a leading priority.

The Problem

The fundamental tax principle for evaluating transfer pricing is the "arm's-length" standard, which combines a facts-and-circumstances-type approach with economic analysis of "comparable" transactions involving unrelated parties.  Despite decades of efforts by tax authorities and international organizations to provide a framework for this analysis, it remains a very imprecise and unpredictable exercise.  The wide range of possible results is a breeding ground for disagreement among taxpayers and tax authorities.  If tax authorities of the countries involved are not able to resolve these differences, the taxpayer group is faced with double taxation: one company will have income from a payment that the related company is unable to deduct.   

The pervasive globalization of business exponentially increases the number and value of cross-border transactions subject to transfer pricing regimes.  Tax authorities of necessity have devised extensive requirements to identify and govern transactions that touch their jurisdictions; compliance with reporting and documentation requirements around the world occupies cadres of taxpayer personnel and consultants.  Auditing and enforcing the rules absorbs further resources of tax authorities and taxpayers.  International tax treaties contain mechanisms for attempting to resolve inter-country disputes (referred to as "competent authority" or "mutual assistance" procedures), but these are cumbersome one-by-one undertakings that seriously threaten to overwhelm the available government facilities. 

No doubt transfer-pricing enforcement is a necessary task for governments, as the revenue amounts at stake are huge and achieving a fair fiscal balance among nations and taxpayers is essential.  Hanging on to the flow of profits from intangibles such as intellectual property is particularly important – and difficult – as intangibles are both valuable and mobile.  Yet governments are increasingly resource-constrained at the same time as they are increasingly revenue-starved.

In this setting, the need to rationalize transfer pricing regulation to manageable dimensions and prioritize enforcement targets has become urgent.  Because the arm's-length principle, rather than a formulary approach, is the prevalent standard, simplification rests on the development of "safe-harbor" approaches that emulate arm's-length results[2]. By using this mechanism to efficiently handle relatively common, routine and low-risk situations, tax authorities could direct their enforcement resources to more complex, valuable, and potentially abusive situations, such as effective expatriation of intangibles.

The Change

A recent development of enormous potential involves the transfer-pricing simplification initiative undertaken by the Organisation for Economic Co-operation and Development (OECD), a large, highly respected international organization of member countries devoted to global economic, trade and fiscal issues.  A key element emerging from the simplification project is a framework for developing safe-harbor regimes in appropriate contexts through bilateral government agreements.

With unusual alacrity after announcing its simplification project in 2011, the OECD released a discussion draft on safe-harbor approaches, through proposed revisions to its long-established transfer pricing guidelines[3].  In so doing, the OECD is poised to reverse decades of cold-shouldering safe harbors, and indications are that the Internal Revenue Service is moving in the same direction.  This is welcome news for multinational enterprises.

Among the reasons for past rejection of safe-harbor approaches were concerns that formulations might inappropriately favor one side of the transactions and fall victim to adverse selection, and perceived difficulties in assuring acceptance by the counterpart countries[4].  In a seminal 1988 transfer-pricing white paper,  the U.S. Treasury Department and IRS stated that safe harbors "all have one common element that makes them both attractive to the taxpayer and potentially troublesome to the government: they generally would serve only to reduce tax liability."

In fact, some satisfactory, if unheralded, safe harbors have evolved.  The U.S. transfer pricing rules under IRC section 482 have long included safe-harbor interest rates for intercompany loans[5] and a "cost only" safe harbor permitting routine intercompany services to be provided without a profit mark-up[6].  An OECD survey last year found similar safe harbors in ten countries, along with a few transfer pricing exemptions for small taxpayers.  As can be seen, despite the growing impetus for safe harbors, implementation has been slow and uneven.

Taking a fresh look at the subject – and with governments' vastly expanded transfer-pricing experience providing better economic understanding of commonplace transactions – the OECD has now changed the dynamic:

"Despite [previous generally negative conclusions], a number of countries have adopted safe harbor rules. . . . They are generally evaluated favourably by both tax administrations and taxpayers, who indicate that the benefits of safe harbours outweigh the related concerns when such rules are carefully targeted and prescribed and when efforts are made to avoid the problems that could arise from poorly considered safe harbour regimes. 

Transfer pricing compliance and administration is often complex, time consuming and costly.  Properly designed safe harbour provisions, applied in appropriate circumstances, can help to relieve some of these burdens and provide taxpayers with greater certainty."

The OECD discussion draft indicates that smaller taxpayers and less complex transactions are appropriate subjects for safe harbors.  The challenge is to manage the balance between certainty and administrative simplicity on the one hand and the possibility of tax revenue erosion on the other.

The Key

Beyond a much-improved attitude, the vital aspect of the proposed OECD revisions is the provision of sample memoranda of understanding (MOUs) that income tax treaty partners can use to actually implement specific bilateral safe harbors.  By thus confronting head-on the major stumbling block to truly effective safe harbors – the need for the countries on both sides of the transaction to agree on the same result and thus automatically avoid double taxation – the OECD has jump-started the dialogue and the potential proliferation of safe harbors[7].

The Proposal

The OECD issued its discussion draft on safe harbors (hereinafter, the "Draft") in June 2012, after surveying existing safe harbor and other simplification measures in both OECD and non-OECD countries and receiving comments from many interested parties.  The key aspects of the Draft are as follows:  

  1. Objectives

     From a taxpayer perspective, the Draft stresses safe-harbor benefits in the form of simplified compliance, reduced compliance costs, and tax certainty.  For tax administrations, resource rationalization is the principal benefit mentioned.  There is also a suggestion, albeit a muted one, that safe harbors might increase compliance in ways that could enhance tax revenues. 

    Structurally, a safe harbor can either substitute simpler rules than those more generally applicable or exempt a category of taxpayers or transactions from otherwise applicable rules.  A core safe-harbor element noted in the Draft is that it is elective by taxpayers.  A less favored formulation could involve a rebuttable presumption, if combined with a treaty-based mutual agreement resolution process.  Traditionally, the safe-harbor discussion has centered on mechanisms adopted unilaterally by a single tax authority. 

  2. Concerns

    The Draft identifies a number of potential concerns with safe harbors.  Though listed separately, most derive from the possibility that the safe harbor may not be arm's length.  If the safe-harbor formulation strays too far from arm's-length results as part of the trade-off between administrability and precision, it may disadvantage the tax administration if taxpayers choose the safe harbor only when it favors them.  Ideas to moderate this effect include requiring advance notice of election or a multi-year commitment.

    Similarly, a non-arm's-length safe harbor can increase the risk of challenge by the counterpart country.  Absent an up-front bilateral or multilateral approach, e.g., through the MOU approach discussed below, the Draft stresses that mutual agreement procedures should remain available to mitigate the risk of double taxation.  Double non-taxation (i.e., a taxpayer windfall) could result if the safe harbor enables below-arm's-length levels in one country, without the mandate for the taxpayer to report (or the government to require) correspondingly above-arm's-length income in the counterpart jurisdiction.

    Other concerns include the potential for inappropriate tax planning (e.g., where taxpayers dismember business activities to satisfy safe-harbor entry criteria, or engage in "safe-harbor shopping" among countries) and issues of equity and uniformity between those eligible for the safe harbor and those who are not.

  3. The Solution

    The Draft sees bilateral or multilateral adoption of safe harbors – through treaty-based MOUs – as the solution to most of the above concerns.  Implicitly, it is envisioned that a balanced safe harbor will emerge from the effective arm's-length bargaining – between the tax authorities themselves.  As observed in the Draft, "the rigor of having two or more countries with potentially divergent interests agree … should serve to limit some of the arbitrariness that otherwise might characterize a unilateral safe harbor."

    Through bilateral implementation, safe harbors could be limited to transactions involving countries with "similar transfer pricing concerns" and, preferably, similar tax rates, and would result in consistent reporting in both countries.  Most importantly, such safe harbors would avoid problems with double taxation or double non-taxation. 

    As noted earlier, the Draft favors focusing safe harbors on small taxpayers or less complex transactions.  More complex and higher-risk transfer pricing matters are felt to deserve "a rigorous, case by case application of the arm's length principle."

  4. The MOUs

    The sample treaty MOUs address three kinds of transactions, described as "important classes of transfer pricing cases that now take up a great deal of time and effort when processed on a case by case basis": low-risk distribution functions; low-risk manufacturing functions; and low-risk research and development functions.  The Draft observes that bilateral guidance on normal settlement ranges in situations like these, where margins may be relatively consistent, could substantially reduce controversy, whereas unilateral safe harbors in these situations might exacerbate double-tax and windfall concerns.  Bilateral safe harbors can also be tailored to the economics of a particular market and circumstances in furtherance of the arm's-length principle.  The Draft references the 1999 mutual agreement between the United States and Mexico regarding safe-harbor profit levels for maquiladora operations in Mexico[8] as a notable example.

    The MOUs are intended as a starting point for tax authorities, not to be mandatory or prescriptive.  They could initially be limited to small taxpayers and small transactions to mitigate revenue concerns, and then be modified over time consonant with pertinent developments.

    Suggested elements of an MOU include: eligibility criteria; determination of the applicable arm's-length range; reporting and monitoring procedures; a dispute resolution mechanism; and applicable years.  The sample MOUs suggest fairly detailed criteria designed to limit eligibility to low-risk, limited-function, situations.  At first blush, application of all of the indicated criteria could be quite restrictive.  For example, the distribution MOU requires sales to be predominantly to customers in the host country, and the R&D MOU precludes the use of intangibles other than those made available by the related enterprise.  The MOUs describe the mechanics for electing the safe harbor through a notice, containing specified information, filed by the due date for the tax return for the subject year.

    Two particularly important ancillary features of the sample MOUs are:
    • agreement that the related party to the qualifying transaction is not deemed to have a permanent establishment in the country of the qualifying enterprise by virtue of the performance of the pertinent low-risk activities on its behalf, and

    • relief from the obligation to comply with otherwise applicable transfer pricing documentation requirements of both countries with respect to the qualifying transactions

The Reaction

The OECD invited comments on the Draft and received 34 written submissions from accounting, law and consulting firms as well as industry groups[9].  With little exception, the comments enthusiastically supported the spread of safe-harbor provisions and commended their facilitation through bilateral MOUs.  Some particular comments were:

  • Extend MOUs to support services and headquarters services
  • Enable divisional, not just single-purpose entity, qualification for MOUs
  • Increase specificity of MOU definitions for clarity of application
  • Eliminate suggested MOU requirements for taxpayer to submit audited financial statements and to have had no recent transfer pricing audits
  • Limit safe-harbor reporting requirement to non-use of safe harbors
  • Issue common position paper, possibly specifying acceptable mark-ups for common activities such as headquarters services, logistical centers, mere reinvoicing, etc.
  • Cover indirect taxes
  •  Include "safety buffers" to accommodate things like foreign currency variations
  • Incorporate exemption approach for small taxpayers
  • Recognize value of unilateral safe harbors for less-developed countries

Negative comments were rare, but included perceived concerns about the governmental burden of negotiating (and the taxpayer burden of complying with) multiple bilateral safe harbors, a potential for tax rate arbitrage, and an impetus to relocate activities.  A few commentators favored rebuttable, rather than elective, safe harbors.

In November, the OECD held a Public Consultation on the Draft.  Testimony focused on the desirability and feasibility of safe harbors, as well as the potential for inappropriate use or effect.  Preferences for multilateral solutions, particularly through centralized OECD standardization, were expressed, though the OECD Secretariat felt these to be overambitious at this stage.  Mechanisms for confirming in advance one's eligibility for a safe harbor were advocated, to avoid adverse consequences (e.g., from lack of full documentation) in the event eligibility was ultimately denied.  The OECD Secretariat noted that the Draft had consciously been issued prior to reaching consensus among the Working Party members in order to solicit input on the more debatable aspects, but the sense was that the Draft would be finalized without drastic change.

Over the Waves: Implications for Corporate Taxpayers

Most observers believe that well-designed safe-harbor approaches can enhance compliance and administration of transfer pricing regimes by significantly reducing burdens on taxpayers and tax administrations alike, and will facilitate cross-border business.  The concomitant effect on fiscal revenues is more of an open question.  In this context, the OECD's increased policy openness to safe harbors and its sample MOU tool provide a particularly constructive approach for moving the debate forward.  Proposal of bilateral MOUs adroitly resolves many concerns about safe harbors.  Such MOUs allow governments and taxpayers to test drive safe-harbor concepts in whatever portions or patterns suit them.  

The safe-harbor debate is at a pre-implementation, but increasingly intense, stage.  Potential implications for corporate taxpayers are summarized below.

  1. Key Benefits (and Downsides) of Safe-Harbor Regimes

    At the heart of the history and discussion above are the potential reductions of double tax risk and compliance costs offered by safe harbors.  Reduction or elimination of tax adjustments and double taxation has taken on an extra dimension in today's FIN 48/Schedule UTP context.  FIN 48[10] and analogues in other countries require identification, quantification and financial statement disclosure of uncertainties with respect to tax positions, with attendant income statement and balance sheet effects.  Identification and ranking of transfer pricing risks now required of corporate taxpayers by the IRS on Schedule UTP (Uncertain Tax Positions) increases IRS audit risks as well as administrative compliance costs even in relatively conventional situations.  The elimination of tax uncertainties afforded by safe harbors would considerably reduce these burdens and exposures.  

    Conversely, if safe-harbor regimes work as intended, tax authorities will be able to focus their attention on large, complex and potentially abusive situations.  With tax examiners less distracted by common cross-border transactions, taxpayers may find it advisable to take a more conservative attitude in their other transfer pricing practices.

    There could also be some initial effort involved in identifying and coordinating taxpayer safe-harbor opportunities, but hopefully this will dissipate over time.

  2. Importance of Sample MOUs

    Safe harbors, by definition, must be prescribed by tax authorities.  By both endorsing the concept of treaty-based agreements and giving tax administrations an at-hand tool so they don't have to start from scratch, the OECD approach skips over the inertia to which task-laden tax administrations are prone.  Initiating discussions with like-minded governments (or even those that are not) ought to be greatly facilitated. 

    The MOUs enable governments to target situations where the trade-offs are relatively known and controllable – for example, as to trade balances, relative tax rates, and the scale and mix of transactions.  Once in place, the MOUs serve as "class" bilateral APAs (advance pricing agreements), expanding the impact of a pricing solution without the negotiating and processing burdens of one-by-one resolutions. 

    Substantively, of course, bilateral agreements solve the biggest taxpayer concern – double taxation emanating from differing rules or views of the countries at the ends of the cross-border transactions.  And, as discussed above, the bilateral approach ameliorates many of the governmental concerns that have plagued the safe-harbor concept in the past, such as inequities and adverse selection due to potential non-arm's-length results. 

  3. Potentially Subject Transactions

    The sample MOUs focus on low-risk versions of common business operations: distribution, manufacturing, and research.  This is understandable in terms of fiscal risk, but the breadth of availability will depend on the definition of "low risk".  The tension between effectively nullifying the effort through inordinate narrowness and over-extending the benefit through vagueness is obvious.  Aiming the testing formulation at an arm's-length result should, however, mitigate the risks of over-breadth.  

    At the moment, some of the eligibility criteria suggested in the sample MOUs seem overly narrow.  For example, the samples require the predominant business activity of the qualifying enterprise to be the covered low-risk activity, and also require the enterprise to conduct business operations exclusively in the pertinent treaty country.  Perhaps suggestion of these requirements was intended to illustrate the ability to avoid abuse or revenue loss so that governments would be less nervous about starting to row toward safe harbors, while allowing practical considerations to surface during the negotiating (and business commentary) process.

    One such consideration  is that constraints of this sort may require corporate group restructuring in order to qualify for the safe harbor.  In itself that would generate secondary tax considerations[11], along with businesses inconveniences.  Hopefully intergovernmental negotiations can find ways to work with divisional or ring-fenced results and modest functional imprecision (perhaps through an anti-abuse rule, infra) so as to recognize current corporate organizational formats and avoid inefficient single-purpose reorganizations. 

    Surprisingly, the sample MOUs do not cover routine support services, which account for most of the safe harbors (other than loan interest) that exist today[12].  Perhaps the need was considered less pressing for that reason or because such services present relatively low audit risk.  However, centralized service functions, which have proliferated for business reasons, pose particular challenges from a transfer pricing perspective.  While the mark-up level itself may not be particularly contentious, a number of countries currently require difficult-to-show proof of actual use of specific services by the payers, and coordinating the different rules of multiple countries – which, by the nature of a centralized structure, are involved – can be daunting.  The OECD is aware of this difficulty, but eager to find a path to resolve it.  Multilateral agreements with key countries could set an example, but might not include the divergent countries.  Some commentators have suggested promulgation of central OECD standards (which might, inter alia, include target mark-ups, a global uniformity requirement, and/or some kind of benefit assumption) or some kind of "sign-up sheet" or pre-formatted treaty annex for cooperative governments.  A comprehensive solution will not be easy.  

    It is logical that routine, non-core, non-entrepreneurial activities would be the most appealing to both taxpayers and tax authorities, as such situations are more likely to present a high ratio of bothersome documentation to risk.  To capitalize on this attraction, one hopes that size limits – a tempting non-functional eligibility criterion for cautious early adopters – should be unnecessary, or at least generous.  At the other end of the spectrum, perhaps negotiated MOUs would include an exemption-type safe harbor for the smallest transactions of the subject type.

    Size limitations might be more appropriate if safe-harbor provisions eventually move toward higher-risk transactions, such as full-fledged distribution or manufacturing or even intangibles licensing.  Limitations in those cases could relate to the size of the taxpayer or of the transaction.

    Standing back, it must be kept in mind that the MOUs are (1) only samples and (2) only part of the equation.  Unilateral safe harbors can address situations that do not make it to the bilateral table.  However, unilateral safe harbors entail additional risk for taxpayers, unless competent authority remedies – perhaps on an expedited basis – are available. 

  4. Potentially Applicable Methodologies

    The sample MOUs suggest that the covered transactions be tested on the basis of single-year operating margins or returns on total cost.  Although simple, this differs from the common multi-year average approach under the section 482 regulations, which allows some variation for business cycles.  Admittedly, multi-year approaches may be considered incompatible with single-year safe-harbor elections, but might be viable if a safe harbor imposes a minimum temporal commitment.

    Moreover, the sample MOUs do not contain any mechanisms for updating the target ranges or other features.  This may again be intended for simplicity or may reflect the sentiment expressed by some involved in the OECD project (though not apparent in the Draft itself) that the MOUs would primarily be used to memorialize experiences of two Competent Authorities with specific kinds of cases for a limited period.  Regardless, absence of such mechanisms may make the safe harbors vulnerable to obsolescence, and less arm's-length, if business conditions change significantly.  It is thus conceivable that MOU negotiations may lead to embedding some dynamic features, either through authorized administrative procedures or external indices.  Unilateral safe harbors would be inherently more flexible – for better or for worse – in this regard.

  5. Potentially Applicable Conditions

    Governments will naturally be inclined to consider ways to avoid abuse of safe harbors.  Examples would include: requiring advance elections, imposing a multiple-year commitment, or requiring coverage of all eligible transactions of the same taxpayer or all similar transactions engaged in by related entities within the jurisdiction. 

    Subject to applicable legal constraints, it would not be surprising to see unilateral safe harbors being limited to situations where the counterpart country has a similar tax rate or is a treaty partner.  The prospect of draining revenues to tax haven jurisdictions despite best efforts to set an arm's-length safe-harbor standard is anathema to tax authorities. 

    One clearly contentious point in the OECD study is the concept of a "mandatory" safe-harbor range incorporating a "rebuttable" presumption.  While touted as intended to minimize adverse selection, the difficult burden of proof on taxpayers may well result, as a practical matter, in a formulary approach inconsistent with the arm's-length standard.  Public comments to date have generally advocated strongly against this type of approach.

  6. Potentially Applicable Compliance Mechanisms

    The MOUs envision a straightforward notice of election incorporating information describing the transactions and parties together with pertinent financial information.  Beyond that, the electing enterprise must stand ready to provide to its residence country tax authority, on 60 days notice, any additional information necessary to verify qualification for the safe harbor.  The treaty's information exchange provisions would also apply.

    The MOUs focus on reporting the appropriate amount of income on timely filed tax returns.  They do not directly address the distinction between financial and tax accounting, even though the U.S. transfer pricing rules, and others, generally rely on financial accounting for testing purposes.  This aspect bears further consideration.  Moreover, there is no explicit reference to post-year-end adjustments to get within range (e.g., like self-initiated adjustments under Regs. §1.482-1(a)(3)).  As a practical matter, such a safety valve is essential where the test depends on actual financial results for the year.  

    The sample MOUs are fairly detailed, and additional features may well be considered in design and negotiation of actual MOUs.  Balancing simplicity with legitimate tax authority concerns will be a challenge.  One possible antidote to excessive detail would be to include an anti-abuse rule.  As always, anti-abuse provisions make taxpayers nervous because of the inherent difficulty of articulating their contours and the fear of overzealous tax administrators.  Transparency of intent, e.g., through examples in pertinent texts or explanations, would be helpful, and striking the right balance will be in the interests of the tax authority as well. 

  7. Impact on Ineligible or Non-Electing Taxpayers

    The Draft emphasizes that safe-harbor rates would not apply to ineligible or non-electing taxpayers; rather, such taxpayers would be subject to the regularly applicable transfer pricing and documentation rules.  It is probably nevertheless inevitable that some taxpayers may argue that what's good enough (and implicitly roughly arm's-length) for eligible taxpayers should be good enough for them.  Unless the tax authorities provide guidance as to factors (such as risk) that distinguish regular from safe-harbor situations – particularly where eligibility is size-limited – this seems not an unreasonable view.  Tax auditors may also informally be influenced by the established safe-harbor rates.  These considerations underscore the need to be as arm's-length as possible in designing safe harbors.

  8. Some Considerations in Choosing Safe Harbors

    The proof will be in the pudding, but it is conceivable – and, indeed, desirable – that many taxpayers will take advantage of safe-harbor certainty even if they perceive they have an arm's-length argument for reporting less income in a particular jurisdiction.  In many cases, taxpayers will not know with any precision where their transactions fall on the arm's-length scale, especially if relieved of the need to figure it out.  Achieving certainty, combined with a gut check for reasonableness, may drive the use of particular safe harbors. 

    For companies in relatively volatile businesses or situations, a single-year testing methodology or minimum time commitment in the safe-harbor provisions may be problematic. 

    Initially, it is possible that tax authorities may adopt certain types of safe harbors to attract business investment.  These could be either unilateral or bilateral, though the reciprocal nature of an bilateral MOU might weaken the marketing effect.  Companies considering attractive unilateral safe harbors would need to be particularly mindful of the potential for double taxation.

  9. Timing

    The OECD project has created momentum favoring the institution of safe harbors, but implementation – as with any regulatory, legislative, or inter-governmental undertaking – will undoubtedly take time.  Finalization of the OECD Draft, though not yet scheduled, could occur in 2013[13],  but the paper merely provides guidelines, not rules.  Fiscal and administrative pressures in individual jurisdictions will play a large role in the timetable, though prioritization of projects vs. limited resources could cut either way.  In a positive vein, public comments by IRS officials indicate that informal discussions with treaty partners could start at any time.

Conclusion

Transfer pricing safe harbors are gaining considerable traction, thanks to the OECD, and may be the next big thing for corporate taxpayers in terms of resource efficiency, tax minimization, and tax certainty.  Opportunities to nudge tax authorities in this direction and enlighten them as to practical considerations ought not be missed. 


[1] Mrs. Lewis is a Member of the law firm of Caplin & Drysdale, Chartered, Washington, D.C.  Mr. Smiley is Professor, Graduate Tax Program, at the Georgetown University Law Center, and Senior Counsel to Caplin & Drysdale. 
[2] Documentation simplification is another key element, addressed to date largely by exemption approaches for small taxpayers, but also increasingly under review and part of the current OECD simplification initiative discussed infra.
[3] Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, Organisation for Economic Co-operation and Development, July 2010 (most recent version) ("OECD Guidelines").  The OECD discussion draft on safe harbors was issued June 6, 2012, by Working Party No. 6 of the Committee on Fiscal Affairs within the OECD Center for Tax Policy and Administration.
[4] See, OECD Guidelines, Chapter IV, ¶¶ 4.120-4.122; Treasury, IRS, "A Study of Intercompany Pricing," Notice 88-123, 1988-2 C.B. 458 (10/18/88), chapter 9, "The Need for Certainty: Are Safe Harbors the Solution?"; and preamble to 1994 section 482 regulations.   Decades earlier, Stanley S. Surrey, Assistant Secretary of the Treasury for Tax Policy, stated: "A typical suggestion is that the Regulations should supply a 'mechanical safe haven' … Much as this solution appeals as blissful to our tax administration as to the taxpayers who suggest it, we have not taken this route. The reason is that no satisfactory device has yet been suggested or worked out." "Treasury's Need to Curb Tax Avoidance in Foreign Business Through Use of Section 482," 28 Journal of Taxation 75 (February 1968).
[5] Regs. §1.482-2(a)(2)(iii).
[6] Initially, the safe harbor applied to services that were not an "integral part" of a controlled entity's business activity (Regs. §1.482-2(b)(3) (1968)); this approach was replaced by a similar, albeit more detailed, regime, referred to as the "services cost method," when the intercompany services regulations were revised in 2009 (Regs. §1.482-9(b)).
[7] Additional detail on the history and suggested structure of safe harbors and the OECD Discussion Draft can be found in Lewis, "Short Cuts for Small Fry: Why the IRS Should Reconsider Transfer Pricing Safe Harbors for Small Taxpayers and Transactions," Tax Management Transfer Pricing Report (BNA) Vol. 19 No. 24, 4/21/2011; and Lewis, "Safe at Last?  Transfer Pricing Safe Harbors on the Horizon," Tax Management Transfer Pricing Report
[8] See IRS News Release IR-INT-1999-13, October 29, 1999; IRS News Release IR-2000-56, August 11, 2000 (re Addendum to 1999 Competent Authority Agreement).
[9] OECD website (www.oecd.org) October 29, 2012.  Twenty-two written comments were submitted the prior year in response to the OECD's initial invitation for comment on safe harbors and other simplification measures in general (OECD website July 8, 2011).
[10] Financial Accounting Standards Board (FASB) Interpretation No. 48, codified in Accounting Standards Codification (ASC) 740-10.
[11] See OECD Guidelines Chapter  IX on business  restructurings.
[12] The section 482 services cost method described in fn. 5 above is a prime example.  Support services were the subject of a 2011 European Union Joint Transfer Pricing Forum report, which contains a detailed set of guidelines for evaluating such services.
[13] Another current OECD transfer-pricing project dealing with the extremely complex, contentious and important subject of intangibles – the other extreme from safe harbors – could get in the way.


"Cruising Toward Safe Harbors for Transfer Pricing?", published in Corporate Taxation, Volume 40, Issue 02, March/April 2013.  © 2013 by Thomson Reuters/Tax & Accounting.  Reprinted with permission.  All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of Thomson Reuters/Tax & Accounting.