$2 million would be divided by the 4,000 domestic units, or $500 per unit. Total costs
would then be $1,500 ($1,000 in variable costs plus $500 for overhead.) Corporation
X would then show profits of $1,200,000 ($300 ×4,000 units) for its domestic sales,
assuming the $1,800 price.
The international examiner reviews the $1,800 intercompany transfer, the market-
ing intangibles of the U.S. affiliate, and the sale to the ultimate customer of $2,000.
The U.S. corporate tax director exclaims, “The entire profit is $250 per unit, of which
$200 is in the United States. Do you want blood from a stone?” The international ex-
aminer views the transaction as a resale transaction, and elects not to pursue the mat-
ter further in light of the company’s SIC code. The U.S tax director makes no men-
tion of the cost shift overseas, and in fact the U.S. tax director may not know of that
cost shift.
(b) Example Postscript. It is our view that the IRS does not have the facility to pay
adequate attention to overseas cost structures.^4 There are two reasons for this gap:
1.The transfer pricing economist, being trained in marginal costing, is well suited
to analyze the business’s cost system, and the transfer pricing economist is well
equipped to examine a crucial component of the cost system—excess produc-
tion capacity. Nevertheless, the transfer pricing economist rarely, if ever, has
the opportunity to delve into the specifics of the business cost system under re-
view. In addition, the transfer pricing economist for the most part lacks the skill
set to address allocation and apportionment issues under Regulation Section
1.861-8.
2.International examiners and attorneys lack the skill set to address cost systems
or excess production capacity. Nevertheless, international examiners have the
facility and skill set to address allocation and apportionment issues under Reg-
ulation Section 1.861-8. As a practical matter, the international examiner is un-
likely to have the opportunity to address excess capacity issues, as these issues
are likely to be buried within the company’s cost accounting system.29.9 ADVANCE PRICING AGREEMENTS. It is our belief that the central transfer
pricing issues for taxpayers and the IRS is foregone opportunities on the part of both
parties as well as with their foreign counterparts.^5
(a) Unilateral, Bilateral, and Multinational Agreements. We support the APA
process, whether unilateral, bilateral, or multilateral. It is our belief that the acceler-
ation of the APA process should be a goal of the United States as well as a goal of
U.S. taxpayers. The best way to achieve this goal is through increased use of e-mail
and Internet technologies to access and review databases of the business originating
from disparate locations.
29.9 ADVANCE PRICING AGREEMENTS 29 • 15(^4) Todd J. Wolosoff and Maja M. Arcyz, “Cost Plus Method,” 18.5.
(^5) Robert Feinschreiber, “Using Advance Pricing Agreements for Transfer Pricing,” Transfer Pricing
Handbook#2, 3rd ed., edited by R. Feinschreiber (New York: John Wiley & Sons, 2001): Section 77.1.
See also, E.Miller Williams, Jr., “Evaluating Whether to Use the Advance Pricing Agreement Program,”
Transfer Pricing Handbook#2, 3rd ed., edited by R. Feinschreiber (New York: John Wiley & Sons,
2001): Section 78.1.