Clark Armitage Speaks to Bloomberg BNA: Services a Possible Sticking Point in GOP Cash Flow Tax Plan

Income from services—consulting, legal representation, advertising, finance and the like—could throw a monkey wrench into the destination-based tax overhaul plan being promoted by House Republicans.

Proponents of the plan claim it would end complex profit-shifting transactions overnight by tying income to where a final good is consumed. But services, especially intercompany or business-to-business, may present vexing challenges in determining that location. When global conglomerates pay millions for advertising, or legal representation, the final destination of those sales isn't easily identified.

Where Was Service Provided?

The trickiness may come when distinguishing whether a service has been provided to a U.S. or a foreign entity.

“If the service provider is in the U.S., the question is whether the sale is to a U.S. consumer or a foreign consumer,” said J. Clark Armitage, a transfer pricing lawyer with Caplin & Drysdale in Washington. “That's certainly more flexible than for tangible goods. It's easier to trace those, more difficult to game.”

Armitage imagined a U.S. firm that provides research and development to a foreign pharmaceutical firm on a drug created overseas. It might seem like a clear-cut exported service—but suppose the purpose of the R&D was to gain approval to the U.S. market?

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Excerpt taken from the article “Services a Possible Sticking Point in GOP Cash Flow Tax Plan” by Alex M. Parker for Bloomberg BNA.