Section 482 of the US Internal Revenue Code authorises the reallocation of income deductions and credits among entities and businesses that are under ‘common control’ if necessary to prevent the evasion of tax or clearly to reflect income.
Importantly for these purposes ‘control’ does not mean a specific level of equity ownership but rather the existence of a controlling relationship.
This broad grant of authority is given form in Treasury Regulations that require transactions between affiliates to be on ‘arm’s-length’ terms. Specifically these regulations provide benchmarks – the term used is ‘methods’ – against which the terms of various types of transactions are determined to be conducted on an arm’s-length basis.
The determination of the applicable method is complex. The ‘best method’ generally must be used. Two factors determine the best method: the ‘comparability’ of the transaction being analysed with a hypothetical benchmark transaction ...
