cost sharing arrangements Archives

IRS Resumes Examinations of Stock Based Compensation in Cost Sharing Agreements

by McDermott Will & Emery, Kevin Spencer and McDermott Will & Emery | Aug 8, 2019 | IRS Audits, IRS Guidance, Transfer Pricing Resource, Uncategorized

On July 31, 2019, the Internal Revenue Service (IRS) Large Business and International (LB&I) division formally withdrew its Directive (LB&I-04-0118-005) instructing examiners on transfer pricing selection related to stock based compensation (SBC) in Cost Sharing Arrangements (CSAS). See here for IRS Notice of Withdrawal.

The Directive was issued January 12, 2018, after the Tax Court’s opinion in Altera which invalidated Treasury Regulation § 1.482-7A(d)(2). The IRS appealed Altera and issued Directive LB&I-04-0118-005, which we previously discussed here. The Directive instructed examiners to “[s]top opening issues related to stock-based compensation (SBC) included in cost-sharing arrangements (CSAS) intangible development costs (IDCs) until the Ninth Circuit issues an opinion in the Altera case on appeal.” At the time, the IRS indicated that it would issue further guidance once Altera was finally decided. On June 7, 2019, the Ninth Circuit reversed the Tax Court’s decision. (more…)

IRS Releases Several Transfer Pricing Directives

by Lowell D. Yoder and McDermott Will & Emery | Jan 17, 2018 | IRS Audits, IRS Guidance, Transfer Pricing Resource, Uncategorized

The Internal Revenue Service (IRS) Large Business and International (LB&I) Division recently released several directives (LB&I Directives) geared toward transfer pricing. LB&I acknowledges that significant LB&I resources are devoted to transfer pricing issues, and such issues make up a substantial portion of the LB&I inventory. It appears that these directives are aimed at ensuring that LB&I resources are utilized in the most efficient and effective manner on transfer pricing issues. A link to each LB&I Directive and a short summary is provided below.

Interim Instructions on Issuance of Mandatory Transfer Pricing Information Document Request (IDR) in LB&I Examinations

This LB&I Directive advises LB&I examiners that it is no longer necessary to issue the mandatory transfer pricing information document request (IDR) to taxpayers that have filed Form 5471, Information Return of U.S. Person with Respect To Certain Foreign Corporations, or Form 5472, Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business, or engaged in cross-border transactions. An update to Part 4.60.8 of the Internal Revenue Manual will be made in the future to further explain this change. (more…)

IRS Practice Unit Advises Examiners to Use Aggregate Approach in Valuing Outbound Transfers

by McDermott Will & Emery and Kristina Novak | Jan 12, 2017 | IRS Guidance, Uncategorized

On January 4, 2017, the Internal Revenue Service (IRS) released a new “International Practice Unit” (IPU) on the value of intangibles in IRC Section 367(d) transactions in conjunction with cost sharing arrangements (CSA). See IPU here. The IPU notes that transferring highly valuable intangibles offshore has become a routine tax strategy for reducing a company’s effective tax rate for financial statement and tax purposes.

Typically, questions concerning the value of intangibles arise where a US taxpayer enters into a CSA with a controlled foreign corporation (CFC) in a low or no tax jurisdiction, and contributes resources, rights and capabilities (which may include IRC Section 936(h)(3)(B) intangibles) to the CSA. An arm’s length payment to the US taxpayer is then required for the contribution. Simultaneously with, or shortly before entering into a CSA, the US taxpayer transfers certain intangible property to the CFC in an IRC Section 351 or 361 transaction, which is taxable under IRC Section 367(d). Again, there is an arm’s length charge for the use of that intangible property.

Oftentimes in these transactions, the US taxpayer values the intangibles transferred in the IRC Section 367(d) transfer separately from the platform contributions, even though, the IRS says, the intangibles conveyed in both transactions will be exploited on a combined basis. Based on the aggregation principles in the IRC Section 482 regulations, the IPU warns that a non-aggregate approach may not provide an arm’s length result. Moreover, despite taxpayer arguments to the contrary, the IPU maintains that the scope of intangible property for purposes of IRC Section 367(d) is just as broad as the scope of platform contributions.

Practice Point: The IPU is a good source of information of what the IRS’s examination division will consider when auditing an outbound transfer of intangible rights for use in a CSA. If you have or intend to engage in such a transaction, you should study the IPU to ensure that you have adequately documented the arm’s length payments for the transfer.