The US Treasury Regulations require charges for intercompany services that provide or are intended to provide a benefit to related parties. Although the specific US rules governing the provision of services between related parties allow for many of these expenses to be charged at cost, in some cases the services are required to be charged with a mark up.
Many tax authorities outside of the United States are skeptical of these charges particularly those including a mark up and impose local requirements mandating documentation showing the direct benefit received by the local affiliate or disallow the deduction of the service fee for tax purposes at the local level completely. In many cases, these decisions are made by the foreign tax authority unilaterally, not considering that there may be potential implications under an existing income tax treaty with the United States.
When this situation arises, a company potentially could be required to pay tax twice on the same income for the same period in the local country which disallows the deduction and in the United States where the counterparty to the transaction must report the income on its tax return and pay tax on that income.