During its audit, the IRS determined that the transfer price was based on a CTI calculation that did not include total costs, thereby violating the FSC
administrative pricing rules and resulting in an understatement of P&G income of $86,201,700.
the DISC commission), certain
administrative pricing rules have to be followed.
The European Union also alleged that the
administrative pricing rules of the FSC provisions constituted a separate violation of the SCM Agreement.
These are the requirement for 50% US content, and the Special
Administrative Pricing Rules (SAPR).
Different percentages apply depending on whether
administrative pricing rules are used, and whether sales are attributable to military property.
One of the most important but difficult aspects of using a FSC comes with attempting to qualify for the
administrative pricing rules of Section 925(a).
These new rules retain many of the familiar attributes of the FSC, such as determination of profits on a transactional basis, marginal costing principles, foreign economic process requirements (FEP) and safe-haven
administrative pricing rules.
Crucially, the Body declined to examine a number of issues, including
administrative pricing rules.
The transfer prices are based on either of two optional
administrative pricing rules or the arm's-length pricing rules of section 482 of the Code.
The reduction is based on a stated percentage (15/23 for corporate-owned FSCs, 16/23 for all others) of the FSC's earnings, computed using allowable
administrative pricing rules.
Under the
administrative pricing rules, transfer prices must be set so that the FSC's taxable income will not exceed the greater of (i) 23 percent of the combined taxable income (CTI) of the FSC and its related supplier (generally its U.
In most cases, it would be more beneficial to apply the
administrative pricing rules to each foreign transaction.
