• (A) meet certain narrow conditions and
• (B) be “covered services."

Further, the SCM will apply only if the taxpayer elects to use it.

The aforementioned conditions include four elements:

1. Services may be covered by the SCM only if the taxpayer reasonably concludes that the covered services do not contribute significantly to key competitive advantages, core capabilities, or fundamental risks of success or failure in one or more trades or businesses of the renderer, the recipient, or both.
2. The service renderer must keep adequate books and records relating to the services.
3. The taxpayer must place in those books and records a statement showing that the taxpayer intends to apply the SCM to these services.
4. The following types of transactions, in whole or part, are not covered services:

• Manufacturing
• Production
• Extraction, exploration, or processing of natural resources
• Construction
• Reselling, distribution, acting as a sales or purchasing agent, or acting under a commission or other similar arrangement
• Research, development, or experimentation
• Engineering or scientific activities
• Financial transactions, including guarantees
• Insurance or reinsurance (For these types of services, allocation on a cost basis is not permitted, and a mark-up has to be computed based on a method other than the service cost method.)

Covered services are controlled services that qualify as either:

• Specified controlled services
• Low-margin covered services

Specified controlled services are controlled services transactions that the Service specifies as such from time to time. In fact, Revenue Procedure 2007-13 specifies 101 types of services that may be covered services and that fall into the following general categories: Payroll services; handling premiums for unemployment, disability, and workers compensation; handling accounts payable and receivable; general administrative services; corporate and public relations; meeting coordination and travel planning; accounting and auditing; tax services; handling health, safety, environmental, and regulatory affairs; budgeting; treasury activities; statistical assistance; staffing and recruiting; training and employee development; information technology services; legal services; insurance claims management; and purchasing.

Low-margin covered services are controlled services transactions for which the median comparable mark-up on total services costs is less than or equal to seven percent.

In the event that the SCM does not apply, then the taxpayer must use the alternative method that is most appropriate for the particular service being rendered. This requirement creates the possibility that a taxpayer might have to employ a number of pricing approaches depending upon the type(s) of services at issue.

All taxpayers to which the regulations apply should revisit the nature and pricing of their intercompany charges for services as soon as practicable. It is now likely that many service charges will require a profit mark-up and the IRS will expect that sufficient analysis and documentation be available for their review at the time of an audit.

The new regulations also attempt to clarify related issues including the determination of the owner of intangible property, the treatment of services connected with the development of intangibles, and contingent payment services arrangements.

Our experienced transfer pricing team is well prepared to assist our clients with transfer pricing planning, practices, and documentation needs. If you have questions or require further information, please contact your Baker Tilly tax advisor or send an e-mail to tax@bakertilly.com