analysis because, quite simply, the transfer pricing regulations do not directly
address life-cycle analysis.- In contrast, transfer pricing economists within the IRS have a different skill set,
making them, for the most part, quite familiar with this business cycle analysis.
In essence, the transfer pricing economist treats business cycle analysis as a
given.
As such, because of the disparity between the approaches of the international exam-
iner and the transfer pricing economist, the taxpayer desperately needs the attention
of the transfer pricing economist.
(a) Life-Cycle Analysis Under IRS Audit. Life-cycle analysis reflects activities that
are dynamic and continuous, and have many gradations, such as:
- Start up
- Growth
- Maturity
- Decline
- Termination
Transfer pricing, by its nature, comes to be an issue in the middle three life-cycle
phases. The third of these three life-cycle phases, the decline phase, becomes prob-
lematical in the transfer pricing context, because the international examiner relies on
(or, from our standpoint, overrelies on) the prior years’ data base.
(b) Declining Businesses and the CRT Example. Consider, for example, a business
that produces cathode ray tube (CRT) computer monitors. This CRT industry is de-
clining, as flat screen monitors are becoming increasingly prevalent. This decline in
CRT’s means increased emphasis on engineering and production, as efficiency be-
comes the byword. Prior data is no longer relevant in ascertaining subsequent year
results, but the international examiner, not being attuned to life-cycle analysis,
chooses to ignores this life-cycle issue.
29.14 OVERRELIANCE ON EXTERNAL DATA. Over the past decade, transfer pricing
analysis has become increasingly dependent on external data. Both taxpayers and the
IRS have viewed the CPM as the transfer pricing method of choice. As a result, both
taxpayers and the IRS expend considerable time and effort in including or excluding
corporate data that could or could not be treated as comparables.
This quest for comparables has become increasingly suspect. The data being
sought by taxpayers and the IRS is accounting and financial data, as opposed to tax
data. This accounting data is coming under increasing scrutiny after the Enron–An-
dersen debacle for three reasons:
1.The populace and the financial community’s increasing distrust of the account-
ing rules prescribed by the Securities and Exchange Commission (SEC) and by
the Financial Accounting Standards Board (FASB).
2.The populace and the financial community’s increasing challenge to the inde-
pendence of the financial auditors.29 • 20 TRANSFER PRICING FOR INTERCOMPANY TRANSACTIONS