Therefore, it meets the threshold requirement for limited safe haven. Moreover, the provision of medical services appears to fall under the qualifications of the SCM that services be a controlled service transaction or a group of transactions. This provision of services is not one of the prohibited services including manufacturing, production, extraction of mineral resources, construction, reselling, research and development, engineering, financial, or insurance.
In United Parcel Service of America, Inc. v. Commissioner, 254 F.3d 1014 (11th Cir. 2001), the plan seemed designed for the purposes of tax evasion. UPS sought to shift income to a wholly owned subsidiary in Bermuda through the purchase of insurance on excess value charges for parcels with a value greater than $100. UPS distributed shares of the Bermuda subsidiary (OPL) as a taxable dividend to UPS shareholders. UPS then purchased an insurance policy for its customers from National Union, which then entered into a reinsurance contract with OPL. In other words, National Union served as a pass-through for OPL. The court determined that the transaction was not a sham because National Union and UPS had genuine contractual obligations to one another as did OPL and National Union. The limited safe haven option would not be available in this scenario because it is specifically prohibited when the purpose of the subsidiary corporation is to provide reinsurance. However, there was a real contractual obligation between UPS and National Union, which was recognized by the tax court. I would need more information about the ownership of National Union to understand why it would function as a straw man for UPS and OPL, because the conditions, as stated, which is that National Union paid all of its fees to OPL means that National Union made no profit off of its transaction. If it did not profit from the transaction, it would be difficult to make any type of comparability argument.
In the GAC produce scenario, GAC was one of several companies in Mexico and the United States owned by a single family. GAC entered into a contract with an unrelated company, Sun Country Produce, under which Sun Country paid a commission to GAC for the distribution and marketing of Sun Country Products. GAC repeatedly took a loss on its relationship with Sun Country, and the court determined that even though Sun Country was not owned by the same group as GAC, that the losses benefitted other members in the controlled group of companies, and therefore failed the arm's length standard. The arguments to defend GAC would simply be that it had made a bad bargain; sometimes companies do make contracts that involve losses, and I would attempt to put forth evidence that GAC was simply involved in that type of scenario by demonstrating contractual comparability between GAC's contract with Sun Country and other similar produce distribution contracts.
There have been significant changes to the tax code since the United States Steel Corp decision. In fact, even at the time that the decision was made, the courts were not unanimous in their approaches to the tax regulations, which created significant confusion due to the taxpayer having the bear the burden of proof (M.S.R., 1981). This is further complicated by the 1986 tax reforms, which changed transfer pricing methods. One of the problems that these regulations sought to deal with was the valuation of intangibles between related parties and how those should be taxed, which is becoming an increasing problem as intellectual property grows in relative economic value (Williams, 1991).
While many corporations have been globalized for years, the increase in globalization is leading to increasing double-taxation problem, which present issues even for companies that are not formed for income-tax avoidance purposes but for wholly legitimate business purposes. One commentator, Robert Clark, suggests that the U.S. income tax regulations, alone, will be inadequate to deal with the transfer pricing disputes that are sure to result from increasing globalization. According to Clark, "The problem of transfer pricing disputes is not new, but it is expanding at an ever-increasing rate. International unity will be the only means to avoid an avalanche of double taxation disputes. Surviving that upheaval will require learning the lessons taught by previous disputes. That in turn will require open communication among tax authorities and taxpayers in ways that are not yet available under international conventions" (Clark, 1993).
26 C.F.R. § 1.482(d)(3)(i).
26 C.F.R. § 1.482(d)(3)(ii).
Clark, R. (1993). Comment: Transfer pricing, section 482, and international tax conflict: Getting harmonized income allocation measures from multinational cacophony. The American University Law Review, 42, 1155-1212.
M.S.R. (1981). Note & comment: Du Pont and U.S. Steel: Different approaches to Section 482