The recent Xilinx case says:
“Purpose is paramount. The purpose of the regulations is parity between taxpayers in uncontrolled transactions and taxpayers in controlled transactions. The regulations are not to be construed to stultify that purpose. If the standard of arm’s length is trumped by 7(d)(1), the purpose of the statute is frustrated. If Xilinx cannot deduct all its stock option costs, Xilinx does not have tax parity with an independent taxpayer.” http://www.ca9.uscourts.gov/datastore/opinions/2010/03/22/06-74246.pdf
On the surface, parity between deals involving related parties and deals involving unrelated parties can be achieved by ignoring the relationship. That line of thinking would lead to the repeal the related party sales rules, because “If Dad cannot deduct his loss on the sale of closely held stock to Son, Dad does not have parity with an independent taxpayer.” But that repeal would not make sense. Neither does that Xilinx result.
Whatever the Government’s regulations or litigating position may say, a low-taxed subsidiary is not in the position of a contract manufacturer in a world full of contract manufacturers.