Second first?? Transfer pricing issues in secondment of personnel - deployment from one related employer to another on a temporary basis

Tax Executive, The, July-August, 2002 by Patricia Gimbel Lewis

Thus, if the services of the seconded employee are "non-integral"--which would typically be the case, assuming that no significant intangible property of the sending company is utilized--the sending company could simply charge its total costs to the receiving company and comply with section 482. The problems with complacency under this analysis are the risk of revision to the cost-only provision in the pending IRS review of the section 482 services regulations and inconsistency with the arm's-length rules in other countries. (10)

Perhaps the key to handling secondment costs can be found in an oft-cited IRS technical advice memorandum under section 482. P.L.R. 8806002 (Sept. 24, 1987) provides an extensive discussion of the allocation of intra-group services under Treas. Reg. [section] 1.482-2(b)(2). The ruling summarizes its favored "benefit test" as "presum[ing] that expenditures deducted by one affiliated corporation are properly considered expenses of that corporation unless an allocation is appropriate due to the fact that the expenditures benefitted another affiliate." This comment suggests that one takes the taxpayer's treatment of the expenses as a given and then superimposes the section 482 tests. Thus if, for instance, the subsidiary has deducted the secondment costs, the expenses stay with the subsidiary unless some portion of those expenses are for the direct benefit of the parent (per the categories delineated in P.L.R. 8806002).

Stated another way, perhaps it makes no difference whether the services in question are conducted by "common-law employees" of the parent (or the affiliate) or by seconded employees. Instead, the gist of P.L.R. 8806002 is the IRS power to reallocate deductions, however otherwise incurred, notwithstanding any inconsistent secondment arrangements.

4. Best View?

Under such a pragmatic approach, secondment would allow the parties to select the employment method that is most convenient and least complex within local employment law constraints, albeit knowing that the tax authorities retain the ability to reallocate the deductions under applicable transfer pricing rules. One could step back from seeking perfect alignment of the employment tax standards with deduction and transfer pricing principles--second first--and then revisit the employer-level income tax issues through the transfer pricing lens.

Second best (no pun intended) would be to treat the arrangement as a loan of money to pay another's expenses, with expectation of reimbursement. This approach would lead to the same ultimate result (deduction at FORCO, with little or no markup to USCO), but is more facially inconsistent with employment tax treatment of Joe as an employee of USCO.

B. Amount

After characterization is established, one must determine whether the amount of intercompany payments is correct--either because transfer pricing rules apply or because an under-or over-payment of the "correct" amount has secondary tax consequences.

Under current U.S. transfer pricing rules, a cost-only approach applies to non-integral services, with an arm's-length test applied to integral services. The OECD Guidelines (Chapter VII, [paragraphs] 7.19-7.37) rely primarily on arm's-length tests, i.e., incorporating a profit. The soon-to-be-revised section 482 services regulations are expected to provide more specific guidance on any arm's-length determinations required, presumably along the lines of those for tangible property.