partakes in this process. Both the taxpayer and the examiner spend much of their time
questing for comparables. The company and the comparables may rely on question-
able codification, possibly erroneous numbers, and the possibility the comparables
may be erroneous. We agree that the comparable profits method is the method of last
resort for transfer pricing purposes.
Each business believes that its business is unique and special. The quest for com-
parables is antithetical with that belief. A better result would be to examine each seg-
ment or division of a business to determine the profit split. This process requires
staffing, and we suggest that the profit split analysis be first developed by the tax-
payer in each instance.
(c) Jingoism Can Shift Transfer Pricing Results. The CPM assumes that the data used
would be neutral between jurisdictions, that U.S. manufacturers could be equated
with foreign manufacturers, and that U.S. resellers could be equated with foreign
manufacturers. In fact, a multinational organization has a tendency to shift profits to
the home country. There are two facets of this tendency:
1.Pure patriotism—decisions made independent of the tax effects
2.Tax decision making—taking the cost of withholding into accountThe transfer pricing regulations have not come to grips with the jingoism shift.
The shift can be significant if, for example, all manufacturers are located in one coun-
try and the retailers are located in a different country. Return for a moment to the ki-
mono example.
Assume that all of the kimonos are produced outside the United States, that very
limited profits are left in the United States, and virtually all of the profits are located in
the country of the manufacturer. These results will be distortive to a new U.S. manu-
facturer of kimonos. The same situation could well occur in any industry when most
of the manufacturers are located overseas except for the tested party, or when all of the
manufacturers are located in the United States except for a foreign-located tested party.
29.16 SELECTION OF THE BEST TRANSFER PRICING METHOD. It is our view that
many international examiners give short shrift to the best method process, thus ig-
noring functional analysis and risk in particular. We believe that the CPM is not au-
tomatically the best transfer pricing method.^18 Instead, the traditional transfer pricing
methods may be more fully applicable.
All too often, it appears to us that the CPM is chosen because it is easier for the
international examiner to apply it solely because of the availability of SIC code data-
base. As litigators, it is our view that disparity between the Regulations as to best
method provisions and present audit techniques leads to increased vulnerability on
the part of the IRS.
29.17 “COMPARISON OF FUNCTIONS EMPLOYED” METHODOLOGY. We b e -
lieve the Regulations approached the creation of viable profit split regulations at the
29 • 22 TRANSFER PRICING FOR INTERCOMPANY TRANSACTIONS(^18) Barbara N. McLennan, “Finding and Applying Arm’s Length Comparables under the Comparative
Profits Method,” Transfer Pricing Handbook#1, 3rd ed., edited by R. Feinschreiber (New York: John
Wiley & Sons, 2001): Section 11.1.