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USA Competitive advantage - shared services arrangements in the USA As businesses seek to increase their “bottom line” there are numerous obstacles blocking their way. One of the ways companies find a competitive advantage is through reengineering or converting their supply chain through the use of a technique called “shared services arrangements”. In a shared services arrangement, the core business processes are pulled out of each business unit and consolidated into a separate operating unit that runs these supporting processes as its core business. Taking advantage of economies of scale in this fashion can lead to increased efficiencies and lower costs. It must be noted that in the United States (and other jurisdictions), shared services arrangements are differentiated from so- called “cost sharing arrangements” involving intangible asset development (i.e. cost sharing arrangements are subject to a completely different set of requirements). The risk profile of shared services is generally low, typically in the low to mid section of the first quartile of the risk distribution chart. Shared services arrangements require a significant culture change for the company and its entire way of doing business will change. This process can be time consuming and requires a considerable amount of effort combined with senior management energy to move the mindset of a company from decentralised management of support services within each business unit to a partnership between each business unit and the consolidated shared services organisation. Shared services arrangements require all controlled taxpayers that benefit from one or more of the covered services be included as participants. In addition, each service1 must benefit at least one participant. Taxpayers cannot selectively include or exclude participants or key relevant covered services. The US regulations allow for some services to be aggregated for purposes of allocating costs and any allocation methods used must be consistently applied to each participant. Transfer pricing documentation is strongly recommended and needs to be maintained to defend the shared services arrangement in case of a tax audit. Best practices would be to have a written contractual agreement in place. The documentation should include a list of the participants, a description of the services, the basis for allocations, detailed descriptions of any aggregations used and a statement showing the intent to apply the “cost only” provisions of the Services Cost Method (SCM). The SCM evaluates the arm’s length nature of the services transaction by reference to the total costs of providing the service with no markup. To qualify for the SCM, the taxpayer must reasonably conclude in its business judgment (which the IRS should respect) that the services do not contribute significantly to the success or failure of its business. In seeking a competitive advantage in the current economic climate, acting as a single unit increases flexibility to all of the business operations within the company. By implementing a shared services arrangement, senior management can keep and maintain the global perspective needed to compete while allowing regional and (if desired) country specific business unit leaders to keep and retain a local customer focus thereby adding value to the business units. For more information please contact Jim Wall, Principal and Director of J.H. Cohn’s International Tax Practice, at firstname.lastname@example.org or +1-646-254-7460, or David Slemmer, a director of J.H. Cohn’s Transfer Pricing Practice, at email@example.com or +1-646-625- 5732, J.H. Cohn LLP, USA 1 Shared services arrangements apply to “covered services.” Covered services include services specifically identified by the Internal Revenue Service through Revenue Procedure 2007-13 (e.g., services such as accounting, IT and treasury activities) as well as certain low margin services (i.e., services which the median comparable markup on total services costs is less than or equal to 7%). In addition, certain types of activities such as manufacturing, production, extraction, construction, research and development, engineering, etc., are excluded from qualifying as a covered service.
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