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

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT