§ 1.482-7(g)(2)(vii)(B) Example 1.

Category: (g) Supplemental guidance on methods applicable to PCTs, Transfer Pricing Guidelines, US IRC Section 482 on Transfer Pricing, § 1.482-7 Methods to determine taxable income in connection with a cost sharing arrangement | Tag: , , , , , ,
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(i) USP, a U.S. corporation and FSub, a wholly-owned foreign subsidiary of USP, enter into a CSA in Year 1 to develop software programs with application in the medical field. Company X is an uncontrolled software company located in the United States that is engaged in developing software programs that could significantly enhance the programs being developed by USP and FSub. Company X is still in a startup phase, so it has no currently exploitable products or marketing intangibles and its workforce consists of a team of software developers. Company X has negligible liabilities and tangible property. In Year 2, USP purchases Company X as part of an uncontrolled transaction in order to acquire its in-process technology and workforce for purposes of the development activities of the CSA. USP files a consolidated return that includes Company X. For accounting purposes, $50 million of the $100 million acquisition price is allocated to the in-process technology and workforce, and the residual $50 million is allocated to goodwill.

(ii) The in-process technology and workforce of Company X acquired by USP are reasonably anticipated to contribute to developing cost shared intangibles and therefore the rights in the in-process technology and workforce of Company X are platform contributions for which FSub must compensate USP as part of a PCT. In determining whether to apply the acquisition price or another method for purposes of evaluating the arm’s length charge in the PCT, relevant best method analysis considerations must be weighed in light of the general principles of paragraph (g)(2) of this section. The allocation for accounting purposes raises an issue as to the reliability of using the acquisition price method in this case because it suggests that a significant portion of the value of Company X’s nonroutine contributions to USP’s business activities is allocable to goodwill, which is often difficult to value reliably and which, depending on the facts and circumstances, might not be attributable to platform contributions that are to be compensated by PCTs. See paragraph (g)(5)(iv)(A) of this section.

(iii) Paragraph (g)(2)(vii)(A) of this section provides that accounting treatment may be a starting point, but is not determinative for purposes of assessing or applying methods to evaluate the arm’s length charge in a PCT. The facts here reveal that Company X has nothing of economic value aside from its in-process technology and assembled workforce. The $50 million of the acquisition price allocated to goodwill for accounting purposes, therefore, is economically attributable to either of, or both, the in-process technology and the workforce. That moots the potential issue under the acquisition price method of the reliability of valuation of assets not to be compensated by PCTs, since there are no such assets. Assuming the acquisition price method is otherwise the most reliable method, the aggregate value of Company X’s in-process technology and workforce is the full acquisition price of $100 million. Accordingly, the aggregate value of the arm’s length PCT Payments due from FSub to USP for the platform contributions consisting of the rights in Company X’s in-process technology and workforce will equal $100 million multiplied by FSub’s RAB share.






Related Guidelines

  1. TPG2022 Chapter VIII paragraph 8.39As indicated in paragraph 8.9, the economically relevant characteristics of the arrangement identified under the guidance in Section D of Chapter I may indicate that the actual transaction differs from the terms of the CCA purportedly agreed by the participants. For example, one...
  2. TPG2022 Chapter VIII Annex example 2Example 2 12. The facts are the same as Example 1, except that the per-unit value of Service 1 is 103 (that is, both Service 1 and Service 2 are low-value services). Assume, therefore, that the calculation of the costs and value of the...
  3. TPG2022 Chapter VIII paragraph 8.27While all contributions should be measured at value (but see paragraph 8.28 below), it may be more administrable for taxpayers to pay current contributions at cost. This may be particularly relevant for development CCAs. If this approach is adopted, the pre-existing contributions should...
  4. TPG2022 Chapter VIII Annex example 417. Company A and Company B are members of an MNE group and decide to undertake the development of an intangible through a CCA. The intangible is anticipated to be highly profitable based on Company B’s existing intangibles, its track record and its...
  5. TPG2022 Chapter VIII Annex example 521. The facts are the same as in Example 4 except that the functional analysis indicates Company A has no capacity to make decisions to take on or decline the risk-bearing opportunity represented by its participation in the CCA, or to make decisions...
  6. TPG2022 Chapter VIII Annex example 1a8. The facts are the same as Example 1. In accordance with the guidance in paragraph 8.27, an alternative way to achieve the identical result under Example 1 is through the use of a two-step process as set out below 9. Step 1...
  7. TPG2022 Chapter VIII paragraph 8.31For development CCAs, contributions in the form of controlling and managing the CCA, its activities and risks, are likely to be important functions, as described in paragraph 6.56, in relation to the development, production, or obtaining of the intangibles or tangible assets and...
  8. TPG2022 Chapter VIII paragraph 8.28Whereas it cannot be assumed that the value of pre-existing contributions corresponds to costs, it is sometimes the case that cost could be used as a practical means to measure relative value of current contributions. Where the difference between the value and costs...
  1. Additional guidance on the attribution of profits to permanent establishmentsThe OECD has released additional guidance on the attribution of profits to permanent establishments. This additional guidance sets out high-level general principles for the attribution of profits to permanent establishments arising under Article 5(5), in accordance with applicable treaty provisions, and includes examples...
  2. Italien Transfer Pricing Guidelines, Ministerial Decree of 14 May 2018, published in the Official Gazette no. 118/2018Italien legislation on transfer pricing is contained in Article 110, paragraph 7 of the Consolidated Income Tax Act, where the first sentence states that “the components of income deriving from transactions with companies not resident in the territory of the State, which directly...

Related Case Law

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  2. US vs Altera Corp, July 2018, US Court of Appeal, Nos 16-704996In this case, the US Court of Appeal reversed a decision from the Tax Court that 26 C.F.R. § 1.482-7A(d)(2), under which related entities must share the cost of employee stock compensation in order for their cost-sharing arrangements to be classified as qualified...
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