Transfer Pricing Methods: An Applications Guide
by Robert Feinschreiber
ISBN 0-471-57360-4
Hardcover, February 2004
320 pages

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Transfer Pricing Methods: An Applications Guide is the third of a trilogy of John Wiley & Sons, Inc. transfer pricing products, beginning with the comprehensive Transfer Pricing Handbook and then continuing with International Transfer Pricing: A Country-by-Country Guide.

Transfer Pricing Methods: An Applications Guide is specifically designed to assist midsized businesses facing transfer pricing issues, whether now or in the future.

Transfer Pricing Methods is divided into five parts:

  • Part One: Understanding Transfer Pricing

  • Part Two: Applying Specific Transfer Pricing Techniques

  • Part Three: Focus on International Transfer Pricing Issues

  • Part Four: Avoiding Transfer Pricing Penalties

  • Part Five: Advanced Transfer Pricing Issues

We address business issues and general principles tax and guidelines in Part One. We do so with midsized businesses specifically in mind. Governments designed transfer pricing regulations with large multinational corporations in mind, but they failed to exempt midsized businesses from their scope. These transfer pricing regulations, as implemented, can overwhelm the midsized business's capacity to create and retain viable information. With this issue clearly in mind, we endeavor to provide midsized businesses with practical transfer pricing advice.

Transfer pricing is complex because variations in business circumstances dictate transfer pricing methods. Part Two examines the specifics of each transfer pricing method. The selection of the transfer pricing method is often an area of dispute, as is the basic data that would apply in each instance. We begin with the comparable uncontrolled cost method, the resale method, and the cost plus method. We then turn our attention to the popular but often misapplied comparable profits method. Later, we address the comparable uncontrolled transaction method for intangibles and transfer pricing for services. Then we address cost sharing and profit split alternatives.

In Part Three we turn our attention to international and foreign issues. We begin with the impact of the foreign-owned U.S. corporation provisions that often serve as a backstop to transfer pricing regulations. Then we turn our attention to the transfer pricing regulations issued by the Organisation for Economic Cooperation and Development. Finally, we turn our attention to the transaction net margin method, which is not an acceptable transfer pricing method in the United States but generally applies elsewhere.

Taxpayers can be subject to penalties for transfer pricing errors or just for bad guesswork. Part Four discusses these penalties and potential escapes from these penalties. Then we examine the transfer pricing penalty for contemporaneous documentation infractions.

Finally, we address advanced transfer pricing topics, including, for example, the ownership of intangibles, cost analysis, life cycle issues, and antitrust considerations.

I am pleased that John Wiley & Sons, Inc. selected me to be the editor of Transfer Pricing Methods: An Applications Guide, whether this selection is based on my practical transfer pricing experience as a practitioner during the past 30 years or because of the advice I provided to the U.S. Treasury and the IRS. I am grateful to Sheck Cho at John Wiley & Sons, Inc. for developing the transfer pricing trilogy, bringing the first edition of the Transfer Pricing Handbook to fruition, developing the supplements, and encouraging me to develop the second edition, and more recently the third edition. Furthermore, I am grateful to him for helping me develop the companion volume, International Transfer Pricing: A Country-by-Country Guide.

In addition, I have a debt of gratitude to Natu Patel, the principal tax official at John Wiley & Sons, Inc. for encouraging me to undertake this project as well as to Tim Burgard and Stacey Rympa at John Wiley & Sons, Inc., who worked with me on the specifics of the transfer pricing trilogy.

We will be continuing the supplement process. Readers are welcome to contact me to suggest additional topics or suggestions or to inform me about transfer pricing planning or audit experiences and litigation techniques. I can be reached at Feinschreiber & Associates, 1121 Crandon Boulevard, Key Biscayne, FL 33149, telephone 305-361-5800, e-mail:

Key Biscayne, Florida
December 2003


Advanced praise for Transfer Pricing Methods

"Feinschreiber and a team of renowned executives have provided the definitive transfer-pricing guide to this challenging area. At a time when many companies are reviewing documents, policies, and procedures, it's wonderful to have a concise, clearly written reference focused on what may be the most critical corporate tax issue."
­Charles R. Goulding, Managing Director, Tax
Cooper Industries, Inc.

"It is refreshing to find a treatise on transfer pricing that combines practical business considerations, economic theory, and a discussion of technical tax rules in a way that is meaningful not only for large corporate enterprises but also small and medium-sized businesses."
­Vikram A. Gosain, JD, CPA, Director of Transfer Pricing
General Electric Capital Corporation

"This well-written book will be useful both to attorneys new to the practice area and to older hands. It includes very helpful discussions on valuation issues that will be particularly useful for in-house counsel and accountants."
­Joseph C. Mandarino, Partner
Troutman Sanders, LLP

"Feinschreiber and his contributors have cogently explained hundreds of useful facets in the transfer pricing field that have taken others volumes to articulate. The busy professional should consider this book in his or her quest for knowledge in the scintillating tax specialty."
­Charles L. Crowley, Partner

ITS/Customs and International Trade Practice, Ernst & Young, LLP

"Transfer Pricing Methods . . . should become a standard tool for every owner-managed and mid-cap multinational."
-Enrique MacGregor, Principal-in-Charge, Transfer Pricing Services
Grant Thornton LLP

"Bob's vast experience in transfer pricing matters has again been captured between the covers of a book. Thank you, Bob, and your contributing colleagues, for producing another valuable helpmate."
­Alan Getz, Vice President and General Manager, Tax
Mitsui & Co., Inc. (U.S.A.)

"Feinschreiber's current publication is a practical handbook that presents transfer pricing tools that can assist tax professionals of mid-sized companies to optimize profits, manage cash flows, and moderate taxes in a defensible manner."
­Per H. Hasenwinkle, National Practice Leader, Transfer Pricing
BDO Seidman, LLP




Table of Contents


Understanding Transfer Pricing


  • Practical Aspects of Transfer Pricing

  • Comparison or Division

  • Relationship of the Parties

  • Overview of the Tax Changes

  • Approaches to Transfer Pricing

  • Penalties

  • Transfer Pricing Strategies

  • Parameters to Substantiating Transfer Pricing


  • Business Facets of Transfer Pricing

  • Basic Distinctions

  • Selecting a Pricing Strategy

  • Division and Profit Center Accounting

  • Autonomous Transactions

  • Vertical Integration and Mandated Transactions

  • Mandated Sales versus Autonomous Sales

  • Administrative Aspects of Transfer Pricing

  • Corporate and Divisional Vantage Points

  • Determining the Number of Profit Centers

  • By-Products and Joint Products

  • Costing Alternatives

  • Applying Mandated Full-Cost Transfer Pricing

  • Full Standard Cost Transfer Prices

  • Behind the Standard Cost System

  • Mandated Market-Based Transfer Pricing

  • Cost-Plus Markups

  • Applying the Resale Method to Intracompany Transfers

  • Transfer Pricing Implications for Autonomous Business Units

  • Conclusion


  • General Principles and Guidelines

  • Background

  • Overview

  • Best Method Rule

  • Comparability Analysis

  • Arm's-Length Range


  • Transfer Pricing Basics

  • Transfer Pricing as a Decision-Making Process

  • Tax and Nontax Considerations

  • Ascertaining Who Is at Risk

  • Foreign Country Participation in Transfer Pricing

  • Basics of the Transfer Pricing Inquiry

  • Transfer Pricing Reference Materials

  • Transfer Pricing Methodologies

  • Transfer Pricing Penalties in the United States

  • Foreign-Owned Businesses Doing Business in the United States

  • Introducing the Advance Pricing Agreement Process

Applying Specific Transfer Pricing Techniques


  • Comparable Uncontrolled Price Method, Resale Price Method, and Cost-Plus Method

  • Comparable Uncontrolled Price Method

  • Resale Price Method

  • Cost-Plus Method

  • Conclusion


  • Comparable Profits Method

  • No Safe Harbor

  • Best Method Rule

  • Comparable Profits Method

  • Comparability

  • CPM Examples

  • Conclusion



  • Comparable Uncontrolled Transaction Method for Intangibles

  • General Principles and Guidelines

  • Eligible Methods

  • "Intangible" and Its Definitions

  • Comparable Uncontrolled Transaction Method

  • Comparison of the Transactions

  • Comparable Intangible Property

  • Comparable Circumstances

  • Examples

  • Applying Unspecified Methods for Intangible Property

  • Coordination Between Tangible Property and Intangible Property

  • Special Rules for Transfers of Intangible Property

  • Form of the Consideration

  • Periodic Adjustments

  • Exceptions to Periodic Adjustment Provisions

  • Applying the Periodic Adjustment Rule

  • Ownership of the Intangible Property

  • Intangible Ownership Examples

  • Limits on Consideration

  • Lump Sum Payments

  • Applying the Lump Sum Payment Rule

  • Planning Opportunities



  • Transfer Pricing for Services

  • Overview

  • Characterization Considerations

  • Implementing the Services-Property Distinction

  • Ancillary and Subsidiary Services

  • Collateral Concerns

  • Whose Expense Is It?

  • When Arm's Length Can Equal Cost

  • Fair Market Value of Services

  • Future Developments


  • Cost Sharing

  • Conceptual Overview

  • Background

  • Treasury's Concerns

  • Historical Perspective

  • Scope, Application, and Limitations of the Final Regulations

  • Qualified Cost-Sharing Arrangement Defined

  • Controlled and Uncontrolled Participants Distinguished

  • Costs

  • Benefits

  • Measuring Benefits

  • Comparing Projected to Actual Benefits

  • Testing Projected to Actual Benefits

  • Consequences of Failing the 20 Percent Test

  • Buy-Ins and Buyouts

  • Character of Payments

  • Conclusion


  • Profit Methods

  • Changes in the Regulations

  • Basic Premise for the Use of Profit Splits

  • Comparable Profit Split Method

  • Residual Profit Method

  • Best Method Analysis for the Profit Split Approach

Focus on International Transfer Pricing Issues


  • Foreign-Owned U.S. Corporations Reporting

  • Background

  • Regulations

  • Parties Affected

  • Reporting Corporations and Related Parties

  • Tax Reporting Requirements

  • Records and Computations

  • Penalties

  • Mandatory Agency Agreements

  • Summons Procedure

  • Conclusion


  • Organization for Economic Cooperation and Development Guidelines

  • History

  • Access to the Guidelines

  • Organization of the Guidelines

  • Definitions

  • Arm's-Length Standard

  • Comparability

  • Arm's-Length Range

  • Transfer Pricing Methods

  • Transfer Pricing Administration

  • Documentation

  • Intangible Property

  • Services

  • Cost Contribution Arrangement (CCA)


  • Transactional Net Margin Method

  • Introduction to Transactional Net Margin Method

  • Weaknesses and Strengths of TNMM

  • Comparison with TNMM and Comparable Profits Method

  • Conclusion

Avoiding Transfer Pricing Penalties


  • Transfer Pricing Penalties

  • Planning

  • Overview

  • Determination of an Underpayment

  • Transactional Penalty

  • Net Adjustment Penalty

  • Setoff Allocation Rule

  • Net Adjustment Penalty Examples

  • Net Section 482 Exculpatory Provisions

  • Application of a Specified Section 482 Method

  • Specified Method Requirement

  • Documentation Requirements


  • Transfer Pricing Penalty Exclusion for Contemporaneous Documentation

  • Overview

  • General Requirements for Specified Section 482 Methods

  • Principal Documents

  • Background Documents

  • Tax Return Documentation

  • Documenting Unspecified Methods

  • Conclusion

Advanced Transfer Pricing Issues


  • Advanced Transfer Pricing

  • Proposals for Revising the Transfer Pricing Audit Structure

  • Using Data Sources

  • Cost Issues, Excess Capacity, and Cost Structures Overseas

  • Advance Pricing Agreements

  • Gray Market Considerations

  • Corporate Goals and Structure

  • Determining Who Owns the Intangibles

  • Life-Cycle Business Analysis

  • Overreliance on External Data

  • Dependence on SIC Code Analysis

  • Selection of the Best Transfer Pricing Method


  • Unfolding Transfer Pricing Issues

  • "Comparison of Functions Employed" Methodology

  • Using Total Operating Expenses

  • Tax Malpractice Attorney as Your Ally

  • Developing the Standard Initial Transfer Pricing Information Document Request

  • Transfer Pricing Information Document Request for Acquisitions

  • Proposed Second Standard Transfer Pricing Information Document Request


Feinschreiber & Associates
Robert Feinschreiber & Margaret Kent
1121 Crandon Blvd. F301
Key Biscayne, FL 33149
Primary Phone: 305.361.5800
or 305.505.9200
Fax: 305.365.2276