New Regulations for Intercompany Services Agreements
By Roger Royce
On August 1, 2006 the Internal Revenue Service issued new regulations on the pricing
of intercompany services, effective for tax years starting after December 31, 2006.
The new services regulations focus on the appropriate cost that a company can allocate
to an affiliate for services such as back office or administrative activities.
Importantly, the regulations outline the requirements for Shared Services Arrangements
(SSA) among related companies for “routine services.”
Generally, the regulations introduce a simplified services cost method under which
the arm’s length charge for intercompany services is the total services cost for
the qualified services. If the services do not qualify for the cost method,
the service provider must determine the arm’s length charge for such services under
another specified method. The regulations set forth detailed criteria for which
services qualify for the cost method as well as what items may be charged at cost
under this method.
Most companies will attempt to comply with the cost method in order to avoid the
administrative complexity of applying another arm’s length method. Fortunately,
most clerical and administrative services qualify for the cost method. In
addition, the parties’ allocations under a shared services arrangement will be respected
by the IRS unless they are unreasonable. In general, services must be allocated
based on reasonably anticipated benefits and the companies must comply with documentation
The new rules are easier to implement than earlier proposed rules. However, more
intercompany services (apart from clerical and administrative services) will not
qualify for the cost method, and most companies will be required to revisit or revise
their intercompany agreements as well as gather more documentation than they have
historically done. As a result of the new regulations, intercompany shared
services or administrative services agreements should be reviewed to ensure compliance
with the new rules.
Roger Royse has practiced
tax and corporate law for 22 years. He provides services to a wide spectrum of clients,
from newly formed startups to publicly traded multinationals. He is widely published
in technical tax topics, is a regular speaker for the California CPA Education Foundation,
and has been an adjunct Professor of Taxation for Golden Gate University.