I blogged the other day about the new transfer pricing regulations adopted by the IRS. Cfo.com has a good article about the new regs and a particular issue that some multinational corporations will face.
According to the article, the IRS may be headed for a showdown with multinationals that have shared service centers where compensation is a pay-for-performance arrangement. If a contract with an affiliate provides for variable payments depending on the results achieved, corporations may have a tough time proving to the IRS that the transactions are on an arm's length basis.
The expert quoted in the article notes that so long as the contingent payments result in a positive tax flow to the U.S., the IRS isn't likely to challenge the arrangements. When the converse occurs,though, the IRS is far more likely to argue that the transactions were not at arm's length.