The CPM is a profit- based method that generally aims at arm's- length profitability at an operating income level for intercompany transactions. 482- 5, and is known as the transactions- net- margin method under OECD rules). One transfer- pricing method commonly used to determine an arm's- length price for tangible property, intangible property, and services transactions is called the comparable- profits method (CPM, under Regs. 482 to arrive at an arm's- length price for tangible property, intangible property, cost sharing, and intercompany services transactions (similar methods are generally available for transactions in foreign countries, under OECD guidelines). Various methods are available in the regulations under Sec. Thus, an arm's- length price eliminates the shifting of profits from one country to another by underpricing or overpricing intercompany transactions. Most follow the " arm's- length standard," whereby the price between related parties should be set as if the related parties were dealing with unrelated parties, as addressed in Regs. Most countries impose their own set of transfer- pricing rules or adopt the transfer- pricing guidelines provided by the Organisation for Economic Co- operation and Development (OECD). Transfer- pricing rules and regulations are provided under Sec. Intercompany transactions include tangible property, intangible property, services, and financing. Transfer pricing refers to the pricing of transactions between enterprises under common ownership or control (referred to as "related party" or "intercompany" transactions). Some states, including Connecticut, New Mexico, New York, South Dakota, Texas, and Washington have more expansive tax bases than other states.īecause each state operates its own independent sales and use tax regime, and transfers between related parties, including disregarded entities for income tax purposes, may be taxable under the sales and use tax, determining whether a particular transaction is taxable or exempt on a multistate basis is challenging and often leads to nonuniform conclusions. On a multistate basis, most professional services (such as legal, accounting, financial, and other similar types of transactions) are exempt from sales/use tax. A number of states also impose tax on the receipts for the provision of services such as software as a service (SaaS), information/data services, digital goods, repair/maintenance, and telecommunications. States generally impose tax on receipts from the sale of tangible personal property (though many states have specific use- based exemptions such as equipment used for manufacturing/ research- and- development purposes, customer- based exemptions, or sales for resale). The types of product and service transactions that require the collection of sales/use tax, and the exemptions that may apply to such transactions, are based on the laws of each state. In contrast to the federal and state corporate income tax regimes, which often eliminate intercompany transactions as a condition of a combined or consolidated filing, the sales and use tax can be imposed on intercompany transactions. Tax is generally imposed on taxable sales based on the location where the property is delivered/used by the purchaser and/or where the benefit of the taxable services is received. The complementary use tax is typically imposed on the purchaser (generally at the same rate as sales tax) when a company purchases taxable property/services from a vendor (including non- U.S. Sales tax is a tax on transactions involving any sale, transfer, or exchange of tangible personal property and/or certain services to consumers. This discussion first outlines the basics of sales and use tax and transfer pricing, then considers how intercompany transfer pricing may unintentionally lead to sales tax exposure, and concludes with the steps a taxpayer can take to avoid audit assessments and penalties. Based on the multistate sales/use tax rules relating to intercompany transactions, and the real possibility of state and local tax audit examinations, this issue should be considered while implementing transfer- pricing policies that aggregate intercompany transactions. It is common to determine a single transfer price by aggregating multiple intercompany transactions, which may expose taxpayers to sales and use tax assessments. Tax professionals do not always recognize the sales and use tax implications of certain transfer- pricing policies implemented for intercompany transactions undertaken between two or more related entities.
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