International Finance and Accounting Handbook

(b) Severing Nontransfer Pricing Transactions from Transfer Pricing Transactions.
The second step in the gross operating expense computation is to sever nontransfer
pricing transactions from transfer pricing transactions. Consider the results for Divi-
sion C and for Division D.

Division C

Nontransfer Pricing Transfer Pricing Total

Division D

Nontransfer Pricing Transfer Pricing Total

(c) Recombining the Transfer Pricing Transactions

Division C Division D Total

Income 100,000 200,000 300,000

Operating Expenses 200,000 500,000 700,000

Ratio 50% 40%

(d) Economic Analysis. The final step in the operating expense transfer pricing
method would be to make economic adjustments, including accounts receivable, ac-
counts payable, inventories, risks, currency adjustments, life-cycle analysis, market
intangibles, technology licensing rates, and so forth. Here, the transfer pricing econ-
omist would begin with the difference in income in operating expenses of 50% in Di-
vision C in contrast with 40% in Division D. Finally, the transfer pricing economist
should ascertain whether the operating expense method is in fact the best transfer
pricing method in this situation.

29.19 TAX MALPRACTICE ATTORNEY AS YOUR ALLY. As IRS officials, you may
find that you may have an unlikely ally, the plaintiff’s tax malpractice litigator in a
malpractice claim against directors, officers, or tax professionals^21 The plaintiff’s tax
malpractice litigator may be attacking the same practices that take place in a business
as would you, especially if the business or its tax advisors have gone amuck. In
essence, in some situations, the plaintiff’s tax malpractice litigator can serve as an

600,000

1,000,000

200,000

500,000

800,000

1,500,000

100,000

300,000

100,000

200,000

200,000

500,000

200,000

500,000



800,000

1,500,000

1,000,000

2,000,000

Division C Profit

C Operating Expenses



Division D Profit

D Operating Expenses

Total Profit

Total Operating Expenses

29 • 26 TRANSFER PRICING FOR INTERCOMPANY TRANSACTIONS

(^21) Robert Feinschreiber, “Malpractice Risk in Transfer Pricing,”Transfer Pricing Handbook#2, 3rd
ed., edited by R. Feinschreiber (New York: John Wiley & Sons, 2001): Section 89.1.