Simon Webber and Rod Koborsi in Bloomberg Tax – Functional Cost Diagnostic Model

Simon Webber, Managing Director and Rod Koborsi, Director in Duff & Phelps’ Transfer Pricing practice, authored a recent article in Bloomberg Tax concerning the IRS’s New Transfer Pricing Functional Cost Diagnostic Model. The model is intended to be prepared by taxpayers that are seeking an advance pricing agreement (APA).

The release of the FCD model seems to be in response to growing use of (or reference to) the results of profit split models in an increasingly complex transfer pricing environment within companies and between taxing authorities. At minimum, it may be used as a sanity check on the results of ultimately agreed methods.
 
The FCD model instructs taxpayers to identify and list historical and projected functional costs to (i) contributions that are routine in nature, and (ii) contributions that are non-routine in nature or that develop and support non-routine intangible assets. The costs associated with routine functions are treated as same period expense, while the cost and expenses associated with non-routine contributions are capitalized and amortized as economic assets, of which the amortization is treated as a period expense.

While the FCD model is quite prescriptive, it’s clearly a useful start point for a transfer pricing analysis in more complex situations.

Read the full article here.

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