Advance Pricing Agreements: A Defense against Periodic Adjustments under New Cost Sharing Regulations
Originally published March 5, 2009
Article by
Gregory L. Barton,
John C. C. Hughes,
Larry R. Langdon,
Charles S. Triplett
Keywords
advance pricing agreements, periodic adjustments, new cost
sharing regulations, IRS, cost sharing arrangements, CSAs,
multinational taxpayers, Advance Pricing Agreement (APA), periodic
adjustments, -7T regulations
Under long-anticipated regulations published by the US Internal
Revenue Service (IRS) at Section 1.482-7T,1 cost sharing
arrangements (CSAs) remain an effective tool that multinational
taxpayers can use to efficiently develop and manage ownership of
valuable intangible property among subsidiaries. Taxpayers familiar
with CSAs, however, will see that valuations of pre-existing,
"platform" intangibles contributed to CSAs will be
scrutinized by the IRS going forward.
The new regulations expand upon principles and methods found in
the IRS's cost sharing guidance promulgated over the last three
years, creating a complex set of rules for determining whether the
compensation received by the licensor (often a US parent) in these
"platform contribution transactions" (PCTs) is arm's
length.
Moreover, just as it had under the former Section 1.482-4
regulations, the IRS has the authority to enforce the arm's
length standard through "periodic adjustments," which
will be triggered if a participant's (usually a foreign
subsidiary's) profitability is too high relative to its PCT
payments (or "buy-in" payments under the former Section
1.482-7 regulations) for the rights it acquires to develop the
pre-existing intangible pursuant to the CSA. The consequences of
tripping this trigger are significant: in many potential cases,
substantially all of the foreign subsidiary's income arising
from the CSA could be allocated back to its US parent. A misstep in
the PCT valuation could thus nullify many of the advantages of cost
sharing.
However, the -7T regulations include a carrot that can mitigate
the harshness of the periodic-adjustment stick. The preamble
announces that guidance will be forthcoming in the form of a
revenue procedure detailing how an Advance Pricing Agreement (APA)
could provide an exception to periodic adjustments. In recent
public comments, IRS representatives have encouraged taxpayers to
consider applying for APAs under the existing revenue procedure
(Rev. Proc. 2006-9), even before this promised supplemental
guidance is published. In light of the possible consequences of
triggering the periodic adjustment...
To continue reading
Request your trial