Transfer pricing, or what the affiliates of multinational corporations charge one another when
exchanging goods, property and services, continues to be a controversial topic. In the United
States, Congressional critics of the Internal Revenue Service (IRS) continue to urge the agency to
crack down on transfer pricing practices that have allowed foreign corporations doing business in
this country to avoid paying U.S. taxes.Outside the United States, transfer pricing practices are a
major target of investigation by international revenue authorities, according to ErnstandYoung
Transfer Pricing Monitor, an annual study of transfer pricing issues affecting multinational
corporations.In fact, about one-half of the more than 200 multinational companies studied by
ErnstandYoung 90 percent of which were based in the United States said that they are currently
involved in audits in which transfer pricing is a central issue, a figure that remains steady from
the first pricing monitor conducted by ErnstandYoung in 1995.More than two-thirds of multinationals
surveyed consider transfer pricing to be the single most important tax issue they face today;
followed at a distant second by foreign tax credits.In the United States, General Accounting Office
auditors contend that transfer pricing abuse is responsible for the fact that 73 percent of all
foreign companies doing business in this country are able to avoid all U.S. income taxes. This
trend is reportedly costing the U.S. Treasury hundreds of millions of dollars annually, though the
exact amount of the transfer pricing-related tax avoidance is open to considerable
debate. International Transfer Pricing

According to the ErnstandYoung survey, Canada, Australia and the United Kingdom continue to
lead the list of nations demanding that companies provide documentation of the transfer prices
applied to specific transactions, an onerous and potentially expensive task. Of all the requests
for transfer pricing documentation reported by multinational corporations, 44 percent were
generated by the tax authorities of Canada, compared to 22 percent from Australia and 19 percent
from the United Kingdom.On December 7, 1998, Argentinas legislature enacted major transfer pricing
legislation that will, according to its sponsors, bring Argentinas transfer pricing regime closer
to Organization for Economic Cooperation and Devel-opment (OECD) pricing guidelines.Transfer
pricing reforms were needed in Argentina because under prior law, the national tax agency,
Administracion Federal de Ingresos Publicos (AGIP), had the authority to determine taxable income
in transactions between economically linked parties and to make income adjustments. However, there
were no specific rules regarding transfer pricing on specific methods to test transfer pricing
among related entities, practitioners said.In Mexico, an August 1998 deadline for that countrys new
transfer pricing documentation rules was extended for seven months when tax authorities realized
that few of the thousands of foreign firms operating in the country were ready to comply.Mexicos
deadline extension was accompanied by a warning to companies that the audits and fines for
non-compliance would be swift and expensive. Penalties for violations will range up to 100 percent
of the amount of tax not paid originally, plus the tax itself.The message is clear. Mexico is
intent on becoming the latest country to join a movement by many of the worlds governments to gain
more control over the taxes paid by global companies, ranging from the largest multinationals to
small manufacturers. Battling Tax EvasionMany government regulators the United States being
the most vocal argue that multinational parent companies shift income from high-tax to low-tax
jurisdictions through such methods as overpricing sales to subsidiaries. In the past, the IRS has
not been among the most aggressive when it comes to pursuing transfer pricing manipulators.To
ensure that companies pricing policies with affiliates abroad are conducted on an arms length
basis, the IRS established new transfer pricing rules in 1993. Known as Section 482 and buried deep
within the U.S. tax code, these opaque regulations touched-off an international firestorm with
other countries that do not agree with the IRSs views.The IRSs intercompany pricing penalty
regulations were intended to stop what the U.S. government perceived as abuses by multinational
taxpayers in determining their intercompany transfer prices. Companies that have not reviewed their
transfer pricing methodology or those companies whose documentation is insufficient to meet IRS
requirements, are now subject to stringent penalties, should the IRS find reason to to make an
intercompany transfer-pricing adjustment.As already mentioned, the OECD has established a series of
transfer pricing guidelines and recommendations for multinational enterprises. However, that
ErnstandYoung survey revealed some 50 percent of multinational companies continue to use
profit-based pricing methods such as the Comparable Pricing Method (CPM), which was set forth
originally by the IRS but that the OECD considers to be a methodology of last resort. The
widespread use of the IRS-endorsed calculation method is not surprising considering that 89 percent
of multinationals surveyed pointed to potential IRS penalties as their primary motivation for
documenting the prices used for intercompany transactions. Sixty-four percent reported that they
sought to document appropriate transactions in anticipation of an actual IRS audit. Under the
current U.S. tax rules, the IRS is authorized to make adjustments to a companys income, deductions,
credits or allowances. It is also authorized to assess substantial penalties from 20 to 40 percent
against those taxpayers who understate or overstate their intercompany transfer prices by certain
amounts.The tax regulations contain specific documentation requirements divided into two parts
principal documents and background documents. This documentation must be gathered prior to filing
the operations income tax returns, and is substantial and must be provided to the IRS within 30
days of a request.According to the tax rules, a substantial valuation misstatement occurs where the
IRS makes an intercompany transfer pricing adjustment and (1) the intercompany transfer price for
any property or services on the tax return is 200 percent or more, or 50 percent or less, of the
determined price (transaction penalty), or (2) the total intercompany pricing adjustments are
greater than the lesser of $5 million or 10 percent of gross receipts (net adjustment penalty).A
gross valuation misstatement occurs where the IRS makes an intercompany transfer-pricing adjustment
and (1) the transfer price for any property or services on the tax return is 400 percent or more,
or 25 percent or less, of the determined price (transaction penalty) or (2) the total intercompany
pricing adjustments are greater than the lesser of $20 million or 20 percent of gross receipts (net
adjustment penalty). Obviously, even relatively small companies with intercompany transactions can
have transfer-pricing adjustments that exceed these present thresholds.The overall costs of
documenting a companys transfer pricing practices, according to the ErnstandYoung survey, depended
largely upon the company’s sales and intercompany transactions. For example, a large multinational
with an overall sales volume of between $1 billion and $5 billion spent a median of $100,000 while
a smaller company with a sales volume between $500 million and $1.5 billion spent a median of
$50,000.Survey results also showed that foreign multinationals spent approximately 50 percent more
than U.S. multinationals ($75,000 and $50,000 respectively) in documenting transfer
pricing. What To DoThe ErnstandYoung survey reported that external economists and/or tax
advisors were rated among the most useful documentation tools for multinationals, used by 62
percent of those surveyed. Over three-quarters of the 62 percent said that they were satisfied with
the results of the documentation assistance received.In order to avoid the penalties associated
with a transfer pricing adjustment, U.S. textile, apparel and fiber companies must prepare, or have
prepared, contemporaneous documentation of the following: a description of their industry and both
the parent and subsidiarys operations in the business, including an analysis of the economic and
legal functions that affect their intercompany transfer pricing policies (i.e., a functional
analysis); an organizational chart showing how the company and its affiliate(s) are linked;
documents required by transfer-pricing regulations such as cost-sharing agreements, economic
analysis, financial data, etc.; a description of why a specified transfer pricing method was
employed; an explanation of why each other pricing method that was considered, but not used, was
rejected. Nothing else needs to be disclosed if no other methods were considered; a description of
all terms associated with the sale of products from the U.S. company to the subsidiary, including
payment terms, warranties, adjustments for currency fluctuations, etc.; a description of
third-party data used to form the resale price; an explanation of the economic analysis or other
projections relied upon in establishing the resale price and how those projections were used in
conjunction with the data on comparable resellers in forming the resale price; and an index to the
principal and background documents and a description of the record keeping system used to catalog
and access those documents.Examples of background documents required by an IRS auditor might
include invoices, canceled checks, contracts, articles of incorporation, bylaws, minutes of board
of directors meetings, annual reports, current transfer-pricing studies, prior transfer-pricing
studies and data on comparables. The selection and application of any transfer pricing method will
be judged reasonable only if, in the eyes of the IRS, the textile company reasonably concluded that
the method used provided the most accurate measure of an arms length price.Transfer pricing audits
have traditionally been focused on the largest of companies. In Mexico, the focus has also been on
large companies, with an emphasis on maquiladoras.Increasingly, tax authorities around the world
are training inquiring eyes on smaller size companies. There is one positive note: the IRS has
introduced rules to allow these smaller firms to avail themselves of a tax planning tool that until
recently was used mainly by only the largest multinationals. Advanced Pricing AgreementOne way
in which a U.S. company can limit exposure to both intercompany transfer-pricing adjustments and
valuation misstatement penalties is to participate in the IRSs Advanced Pricing Agreement (APA)
program. The APA process allows the taxpayer and the IRS to discuss matters in advance, in a less
stressful setting.Since the programs inception, the IRS has considered APAs involving intercompany
transactions dealing with the sale of goods, the provision of services and the transfer of
intangibles in a wide variety of industries.While, in general, an APA is intended to be
prospective, the transfer-pricing methodology agreed to can also be applied to prior years. The
program also offers taxpayers the possibility of avoiding international economic double taxation of
income. The IRS is continuing to encourage U.S. tax treaty partners to enter into bilateral advance
pricing agreements or similar measures, as Canada has recently done.An APA assures everyone that
the IRS will not question their intercompany transfer pricing methodologies and likewise prevent
any exposure to penalties relating to intercompany transfer pricing adjustments. Whether this
ammunition will reduce or increase the transfer pricing battles now raging remains to be seen.

September 1999

The Dixie Group Inc., Chattanooga, Tenn., recently announced it has completed the sale of its
remaining textile facilities in Chattanooga, and Mebane, N.C., to R.L. Stowe Mills Inc. This is the
last, and largest, of four separate transactions, completing the companys plan to exit the textile
business and focus exclusively on its rapidly growing floorcovering business.As previously
announced, the four transactions will generate cash proceeds totalling in excess of $65 million,
with $11 million having been received in 1998.The Dixie Group will also receive an $8 million
long-term note.It is anticipated that the completion of these transactions will result in a
one-time recovery of previous charges, which, will be reflected in Dixies non-operating
earnings.The sale of these assets allows us to focus on profitable growth in the floorcovering
business and provides cash for investment and debt reduction, said Daniel K. Frierson, Dixies
chairman and CEO.As a result of these actions, Dixie has a stronger balance sheet and more solid
earnings prospects.

August 1999

Mary T. ORourke, Andrew V. Jassin and Mahoney CohenandCo., CPA, P.C., recently announced they have
joined together to form the Jassin-ORourke Group LLC, a strategic consulting firm specializing in
all areas of the fiber, textile, apparel and home furnishings industries.Jassin-ORourke will be
headquartered in New York, offering global business solutions to companies in these sectors through
its offices in North America, Asia and Europe.According to company officials, Jassin-ORourke will
focus on five principal areas of expertise: corporate strategy, global manufacturing and sourcing,
brand management/licensing, mergers and acquisitions/strategic alliances and organizational
structure.We are seeing more and more fiber and textile companies and related businesses seeking
partnerships through joint venture, strategic alliance or acquisition as a means of adding value to
their traditional core product line and we expect these kinds of partnerships to continue
throughout the chain, ORourke said. We believe Jassin-ORourke is uniquely positioned to help
companies form these kinds of strategies and help implement them.Jassin was formerly managing
director of the Marketing Management Group, a consulting company he founded in 1989 specializing in
the apparel, accessories, jewelry and home furnishings.ORourke was previously vice president of
strategy and marketing at Werner International, a consulting firm that serves the global fiber,
textile, apparel and home furnishings sectors.

August 1999

The photo caption on page 8 of the ITMA Special Report (ATI June 1999) should have read: Dornier introduced two completely new weaving machines.
One of these is the A-Type air-jet loom with dobby, shown here.The sub-heading for Camstar Shines (ATI June 1999) should have read: Camstars prior success leads to InSite implementation at
Unifi.The photo caption on page 47 of the same article should have read: At Unifi, Automated Guided
Vehicles are dispatched by Camstar’s InSite MES at key points in the production cycle.”

August 1999

Carpet OverviewBy Peggy Whaley, Carpet Editor Wall-To-Wall Innovations
Consolidation, technology and versatility combine to shape the future ofthis challenging and
ever-changing market. Consolidation in the floorcoverings industry has been massive in
the last few years. There were over 250 separate corporations about five years ago now there are
60. In the last few months, $2.5 billion of an $11 billion industry have been consolidated into
mills that were already doing over $5 billion. Five to seven companies produce about 80 to 90
percent of the carpet market. Today there are fewer individual companies to make decisions that
affect the entire industry. This creates even stronger competition between the major
competitors.Fortunately, growth has been strong for the carpet industry in the past few years. This
years projections are strong again. The rug portion of the business continues to grow as well.
Carpet corporations are growing in other ways and taking advantage of its existing distribution
capabilities and expanding product offerings to include wood, ceramic tile, laminates and other
home furnishings products, such as comforters, throws and table textiles. CRI – Issue Driven

The CarpetandRug Institute (CRI), Dalton, Ga., is the national trade association for the
carpet and rug industry. CRIs membership consists of manufacturers and suppliers representing over
90 percent of all carpets and rugs produced in the United States. CRI is led by Ron VanGelderen,
president, and Dan Frierson, CEO, the Dixie Group, who is chairman of the CRI Board.According to
VanGelderen, CRI will be issue driven with an outreach attitude. The focus will be on: various
technical issues in fields of health, the environment and schools; issues addressed with
governmental agencies; and communication of all the findings on these issues.CRI has many
challenging roles. For instance, carpet in the school market is being challenged because there is a
perception that carpet is more difficult to clean. The fact is, nationwide, maintenance tends to be
lacking and budgets are diminished because of added demands for budget and other issues, such as
security. CRI and the industry will focus on communicating the facts to schools and assisting them
in knowing how to specify appropriate carpets for school, and how to care for carpet and other
floorcoverings effectively and efficiently, VanGelderen said. The Bigger Get BetterWith hard
surface flooring growing dramatically and getting stronger with many carpet manufacturers as well,
diversification appears to be the name of the game. Even Shaw Industries Inc., Dalton, Ga., is now
marketing ceramic and laminate floorings as well as carpets and rugs.If you include Armstrong World
Industries, a dominant vinyl floorcovering business, in total North American floorcovering sales,
youll see four dominant floorcovering players: Armstrong, Shaw, Mohawk and Beaulieu. They control
60 percent of the total North American floorcovering sales.Shaw Industries is considered the
largest carpet mill in the world with 1998 sales of over $3.5 billion. After trying the retail
business for a few years, its retail operations were sold to the Maxim Group. The firms addition of
Queen Carpet and its commercial divisions, Designweave and Patcraft, gave a tremendous boost in the
commercial market. Mohawk Industries, Calhoun, Ga., made even bigger in-roads after purchasing
Aladden Mills in 1994. Several others mills were acquired and then last year, it made another
significant move by acquiring World Carpets. Mohawk then acquired Image Carpets, the nations
largest producer of polyester carpet, and Durkan Patterned Carpet. Mohawk is also strong in both
residential and commercial carpets. The firms 1998 sales were over $2.6 billion.Beaulieu of
America, Dalton, Ga., had 1998 sales of about $1.5 billion. Beaulieu, a privately owned firm, has
also made several acquisitions in 1998. It acquired Marglen Industries, Columbus Mills and Peerless
Carpet of Canada. Strong in both the residential and commercial markets, Beaulieu is the only
carpet manufacturer in the United States that makes its own polypropylene polymer.Carpet mills are
now manufacturing various sizes of carpets including: modules or carpet tiles for the constantly
changing office; 6-foot goods for ease of handling; the traditional 12- and 15-foot broadloom
goods; and 4-meter carpet for export.These new systems and products are answers to end users desire
for a variety of products that meet various performance and installations needs. An example of this
is the need for a moisture-impervious carpet for health-care and educational use, or a more
sectioned surface for walking comfort and insulation and sound abating qualities in retail
installations. Fiber AdvancementsCarpet mills and fiber manufacturers are having research and
development successes in producing new fibers. There are advancements in old fibers; new backing
systems which includes advancements in soft backing, attached cushions, PVC (polyvinylchloride)
backings and hard backing that are alternatives to PVC and entirely new products, such as Sollenium
from Interface.Fiber companies are still where a large majority of the action takes place. They
definitely keep pace with whats happening and todays technologies. These companies dont just adapt
to change, they sometimes lead it.And where would the industry be without marketing Relationship
marketing abounds and has been around since we bartered with fur pelts and salt. But there is a
difference. Its now also about continually reinforcing your brand name so goods or services are
continually seen.BASF realized this and has started a marketing campaign with a new direction. The
campaign is centered around a new adaptation of its familiar slogan, We dont make the carpet, we
make the carpet better and focuses on advantages accountability, sustainability, versatility and
durability. This new campaign was launched at the recent NeoCon market in Chicago. BASF is among
the top 10 producers of chemicals and related products in the United States, Canada and Mexico,
with sales of $7.2 billion in 1998.With its reputation for innovations for solution-dyed nylon,
BASF has introduced 10 new colors for its contract nylon carpet products. Designers and specifiers
will be excited about the versatility these new colors bring to our current color pallet, said Ian
Wolstenholme, sales and marketing manager for BASFs carpet fiber products said. BASF is also
incorporating recycled content in all of its branded Zeftron® solution-dyed and natural nylon
carpet yarn products. Additionally, it is extending its 6ix Again® carpet recycling program to all
mill extruders who use BASF Ultramid® Nylon 6 polymer containing recycled content as part of BASFs
ongoing commitment to environmental responsibility and sustainable development.DuPont Flooring
Systems is a fully integrated flooring product and services distribution network. Dedicated to
delivering total customer satisfaction, it is a single source for floorcovering needs, including
products, installation, maintenance and reclamation.Most of the new technology at DuPont improves
styling capabilities of Antron® Legacy nylon and Antron Lumena® solution nylon. Dave Findlay,
director, DuPont Chemical Flooring, related that DuPont has concentrated on developing new tools to
help mill customers create carpets with deeper, richer, more vivid colors with its Antron Legacy
nylon. We have introduced nearly 20 new colors in a smaller fiber size to provide more versatility
with both color and design, Findlay said. A new innovation for Antron Lumena is the DuPont
ColorLink technology that creates a random pattern of color throughout the carpet, a styling
capability that has not previously been possible with solution-dyed nylon fiber.Continuing to lead
the industry in surface energy technology, DuPonts DuraTech® patented soil-resistance treatment is
the most durable fluorochemical/soil-release product available today. DuraTech is an integral part
of Antron Legacy nylon and Antron Lumena solution-dyed nylon. Findlay says that DuPont continually
takes steps to improve their environmental offering.More than 50 percent of the production of
Antron Lumena solution-dyed nylon contains recycle-content nylon. In addition, DuPont Flooring
Systems is committed to keeping all carpet removed out of landfills. Since Carpet Reclamations
Programs inception, approximately 44 million pounds of carpet have been reclaimed, Findlay
said. New TechnologyThe carpet industry has countless combinations of carpet patterns,
textures and fibers. New technology is making the fashion side of the industrys products very
exciting. The advancements in tufting technology allow many more patterned and textured carpet
styles. The advancements now offer fashion-oriented choices instead of the majority of products
being a commodity of beige plush.VanGelderen noted that this is happening in residential as well as
commercial business and seems to be the norm instead of the exception. The challenge on the
residential side will be to encourage traditional carpet retailers to stock the new patterns and
assist the consumer in knowing how to decorate with them.On the commercial side, the designers are
embracing the patterns easily and quickly.

August 1999