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One invoice can contain several activities
A parent may license a name, train staff, provide ongoing technical support, lend capital and supply products. Identify what each company actually does, what it supplies and who benefits. One invoice does not make the underlying activities identical.
In a fictional case, a single royalty covers the brand, initial training and quarterly support. The subsidiary also performs its own sales and support work. Those facts matter before copying a rate paid by an unrelated franchisee with different rights and services.
What the general rule requires
The arm’s-length standard compares results with dealings between unrelated taxpayers in comparable circumstances. Under the best-method rule, the most reliable measure depends on comparability, data quality and assumptions—not a universal preferred percentage.
For intellectual property, identify who develops, owns, funds and maintains it. For services, identify the work, staff time, costs and beneficiaries. Functions, assets and risks mean what each company does, uses and bears. This does not mean every activity must be separately priced or every cost is chargeable.
Price and withholding are different questions
Transfer pricing concerns the controlled price. Withholding concerns what tax the payer deducts from the payment. A supported price does not itself settle treaty relief or the foreign country’s rules.
Scope
- This covers the general standard in §1.482-1(a)–(c), not a selected method, royalty rate, valuation, complete documentation rule or penalty defence.
Next step
Explain what the U.S. company receives and what both companies actually do before fixing the intercompany rate.
Sources & review notes
Department of the Treasury
Passage, dates and research notes
primary · §1.482-1(a)–(c)
arm's length result
Substantive review limited to purpose, arm’s-length standard and best-method/comparability principles in (a)–(c). Transaction-specific royalty, services and intangible methods and all examples were not comprehensively analysed.
Detailed rule records (1)
Section 1.482-1 applies the arm’s-length standard to controlled transactions and requires the most reliable method under the facts and circumstances, considering comparability and data quality.
26 CFR §1.482-1: controlled transactions and arm’s-length resultsKeep this reading in your learning library.
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