tax notes international - Tuck School of Business - Dartmouth College

More documents

Recommendations

Info

could not reasonably conclude that their agreement was a CSA. Nevertheless, the arrangement closely resembles a CSA, and the Service may apply the CSA rules and make appropriate adjustments. In Example 4, the facts are the same as in Example 1, except that P does not own proprietary software and P and S determine that the arm’s-length amount for PCT payments is $10 million. The IRS determines that the PCT payments should be $100 million. To determine the $10 million present value, P and S assumed a useful life of eight years for the platform contribution, because that is when the relevant patent expires. However, use of the PCT patent rights in research is expected to lead to benefits attributable to exploitation of the cost-shared intangibles extending many years beyond expiration of the PCT patent. P and S expect to apply for additional patents. The method used by P and S also uses a declining royalty based on an application of the CUT method in which the purported CUTs all involve licenses to manufacture and sell the current generation of the product. These make or sell rights are fundamentally different from use of the PCT patent rights to generate a new product. This further reduces the reliability of the method used by P and S. The example concludes that the method used by P and S is so unreliable and so contrary to the provisions of the CSA rules that P and S could not reasonably conclude that they had contracted to enter into a CSA. Accordingly, the Service is not required to apply the CSA rules. Nevertheless, if the Service concludes that the CSA rules provide the most reliable measure of an arm’s-length result, it may apply the CSA rules and make appropriate adjustments. Territorial Interests The proposed regulations required the controlled participants in a CSA to receive nonoverlapping territorial interests that entitled each controlled participant to the perpetual and exclusive right to the profits in its territory attributable to cost-shared intangibles. Commentators said this was overly restrictive and did not align with common business models. The temporary regulations thus permit use of a new basis — a field of use division of interests — in addition to the territorial division of interests. The regulations also authorize other nonoverlapping divisional interest, provided that the basis used meets criteria: (1) the basis must clearly and unambiguously divide all interests in cost-shared intangibles among the controlled participants; (2) the consistent use of this basis can be dependably verified from the participant’s records; (3) the rights of the controlled participants to exploit cost-shared intangibles are nonoverlapping, exclusive, and perpetual; and (4) the resulting benefits associated with each controlled participant’s interest in cost-shared intangibles are predictable with reasonable reliability. SPECIAL REPORTS If the CSA divides all interests in cost-shared intangibles on a territorial basis (territorial divisional interests), the entire world must be divided into two or more nonoverlapping geographic territories. Each controlled participant must receive at least one such territory, and in the aggregate all the participants must receive all of the territories. Each controlled participant must be assigned the perpetual and exclusive right to exploit the cost-shared intangibles through the use, consumption, or disposition of property or services in its territories. Thus, compensation will be required if other members of the controlled group exploit the costshared intangibles in that territory. If the CSA divides all interests in the cost-shared intangibles on the basis of all uses (whether or not known at the time of the division) to which the costshared intangibles are to be put (field of use divisions interests), all anticipated uses of the cost-shared intangibles must be identified. Each controlled participant must be assigned at least one such anticipated use, and in the aggregate all the participants must be assigned all of the anticipated uses. Each controlled participant will be assigned a perpetual and exclusive right to exploit the cost-shared intangible through the use or uses assigned to it, and one controlled participant must be assigned the exclusive and perpetual right to exploit the cost-shared intangibles through any unanticipated uses. Three examples illustrate these rules. In Example 1, P receives the interest in Product Z in the U.S., and S receives the interest in the product in the rest of the world. Both P and S have plants for manufacturing Product Z located in their respective geographic territories. For commercial reasons, Product Z is nevertheless manufactured by P in the U.S. for sale to customers in certain jurisdictions just outside the U.S. in close proximity to P’s U.S. manufacturing plant. Because S owns the territorial rights outside the U.S., P must compensate S to ensure that S realizes all the cost-shared intangible profits from P’s sale of products in S’s territory. Benefits projected for these sales will be included for purposes of estimating S’s reasonably anticipated benefits (RAB) share. In Example 2, the facts are the same in Example 1, except that P and S agree to divide their interests in Product Z based on site of manufacturing. P will have exclusive and perpetual rights in Product Z manufactured in facilities owned by P. S will have exclusive and perpetual rights to Product Z manufactured in facilities owned by S. Both facilities that will manufacture Product Z, and the relative capacities of these sites, are known. All facilities are operating at near capacity and are expected to continue to operate at near capacity when Product Z enters production, so it will not be feasible to shift product between P’s and S’s facilities. P and S also have no plans to build new facilities. The basis for the division of interest is unambiguous and clearly defined and can be dependably verified. TAX NOTES INTERNATIONAL FEBRUARY 2, 2009 • 461 (C) Tax Analysts 2009. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content.
SPECIAL REPORTS In Example 3, the facts are the same as in Example 2, except that P’s and S’s manufacturing facilities are not expected to operate at full capacity when Product Z enters production. Production of Product Z can be shifted at any time between sites owned by P and sites owned by S, although neither P nor S intends to shift production as a result of the agreement. In this case, the production of interests based on manufacturing sites is not a division that is satisfactory because the parties’ relative shares of benefits are not predictable with reasonable reliability. Platform and Other Contributions The proposed regulations described external contributions for which compensation was due from other controlled participants. Under the proposed regulations, an external contribution (buy-in) generally consisted of the rights in a ‘‘reference transaction’’ in any resource or capability reasonably anticipated to contribute to developing cost-shared intangibles. The reference transaction, a concept that is not in the temporary regulations, essentially was a non-arm’s-length hypothetical comparable. A platform contribution is any resource, capability, or right that is reasonably anticipated to contribute to developing cost-shared intangibles. The temporary regulations replace the term ‘‘external contribution’’ with the term ‘‘platform contribution’’ and use the term ‘‘platform contribution transaction.’’ The temporary regulations define a platform contribution as any resource, capability, or right that a controlled participant has developed, maintained, or acquired externally to the intangible development activity (whether before or during the course of the CSA) that is reasonably anticipated to contribute to developing cost-shared intangibles. A resource, capability, or right reasonably determined earlier not to be a platform intangible may be reasonably determined later to be a platform intangible. The PCT obligation regarding a resource or capability or right once determined to be a platform contribution does not terminate merely because it may later be determined that the resource or capability or right has not contributed, and is not longer reasonably anticipated to contribute, to developing cost-shared intangibles. For purposes of a PCT, the PCT payee’s provision of a platform contribution is presumed to be exclusive. It also is presumed that the platform resource, capability, or right is not reasonably anticipated to be committed to any business activities other than the CSA activity. The controlled participants may rebut the presumption. For example, if the platform resource is a research tool, the controlled participants could rebut the presumption by establishing to the Service’s satisfaction that as of the date of the PCT, the tool is reasonably anticipated not only to contribute to CSA activity but also to be licensed to an uncontrolled taxpayer. To the extent a controlled participant contributes the services of its research team for purposes of developing cost-shared intangibles under the CSA, the other controlled participant would owe compensation for the services of the team under temp. Treas. reg. section 1.482-9T, just as would be the case in a contract service arrangement. 3 When there is a combined contribution of research services, intangibles in process, or other resources, capabilities, or rights, the temporary regulations provide for an aggregate valuation where that would provide the most reliable measure of an arm’s-length result. Any right to exploit an existing intangible without further development, such as the right to make, replicate, license, or sell existing products, does not constitute a platform contribution to a CSA, and the arm’slength consideration for such rights (make or sell rights) does not satisfy the compensation obligation under a PCT. In an example, P and S enter into a CSA to develop the second generation of ABC, a computer software program. Before that arrangement, P had incurred substantial costs and risks to develop ABC. P executed a license with S as the licensee by which S may make and sell copies of the existing ABC. This make or sell right does not constitute a platform contribution. In another example, P and S enter into a CSA in accordance with which P will commit to the project its research team that has developed a number of other vaccines. The expertise and existing integration of the research team is a unique resource or capability of P that is reasonably anticipated to contribute to the development of the cost-shared product. Therefore, P’s provision of the capabilities of the research team constitutes a platform contribution for which compensation is due from S as a part of the PCT. The controlled parties designate the platform contribution as a provision of services that would otherwise be governed by temp. 3 Interestingly, the treatment available under the cost-sharing rules for the contribution of the services of a research team as controlled services is stated to be ‘‘without any inference’’ concerning the potential status of workforce-in-place as an intangible under section 936(h)(3)(B). The status of workforce-in-place as an intangible, of course, has arisen as an issue in the context of section 936 exits. 462 • FEBRUARY 2, 2009 TAX NOTES INTERNATIONAL (C) Tax Analysts 2009. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content.
Page 1 and 2:
tax notes international Volume 53,
Page 3 and 4:
ARGENTINA 387 Buenos Aires’ New S
Page 5 and 6:
President and Publisher: Christophe
Page 7 and 8:
HIGHLIGHTS from the tax accounts in
Page 9 and 10:
HIGHLIGHTS However, if the firm rec
Page 11 and 12:
HIGHLIGHTS NEWS ANALYSIS Multinatio
Page 13 and 14:
HIGHLIGHTS check by full tax on any
Page 15 and 16:
HIGHLIGHTS U.S. Widens Investigatio
Page 17 and 18:
HIGHLIGHTS is required to withhold
Page 19 and 20:
HIGHLIGHTS by a Canadian taxpayer a
Page 21 and 22:
HIGHLIGHTS Personal Tax Measures Th
Page 23 and 24:
ARGENTINA the most significant exem
Page 25 and 26:
CHINA (P.R.C.) On December 16, 2008
Page 27 and 28:
EUROPEAN UNION ensure that there is
Page 29 and 30:
GERMANY confessed to his wrongdoing
Page 31 and 32:
INDIA Addressing the assessee’s d
Page 33 and 34:
INDONESIA As of January 1 and conti
Page 35 and 36:
JAPAN insistence that the bill incl
Page 37 and 38:
OECD OECD OECD Group Addresses CIVs
Page 39 and 40:
OECD Furthermore, a source country
Page 41 and 42:
PORTUGAL Extension of Portuguese Ho
Page 43 and 44:
SPAIN tax authorities interpret the
Page 45 and 46: 410 • FEBRUARY 2, 2009 TAX NOTES
Page 47 and 48: FEATURED PERSPECTIVES We, the taxpa
Page 49 and 50: FEATURED PERSPECTIVES he has to pay
Page 51 and 52: BOOK REVIEW smaller government. But
Page 55 and 56: PRACTITIONERS’ CORNER for German
Page 57 and 58: SPECIAL REPORTS reports were of the
Page 59 and 60: SPECIAL REPORTS that either avoids
Page 61 and 62: SPECIAL REPORTS U.S. Germany Switze
Page 63 and 64: SPECIAL REPORTS The operations carr
Page 65 and 66: SPECIAL REPORTS the profits that ma
Page 67 and 68: SPECIAL REPORTS In essence, the fir
Page 69 and 70: SPECIAL REPORTS Figure 6. Single Ta
Page 71 and 72: SPECIAL REPORTS Table 1. Comparison
Page 73 and 74: SPECIAL REPORTS Singapore India pre
Page 75 and 76: SPECIAL REPORTS such a case, the tr
Page 77 and 78: SPECIAL REPORTS If the single taxpa
Page 79 and 80: SPECIAL REPORTS agent would be as i
Page 83 and 84: SPECIAL REPORTS create unintended b
Page 85 and 86: SPECIAL REPORTS country of organiza
Page 87 and 88: SPECIAL REPORTS regulations make cl
Page 89 and 90: SPECIAL REPORTS manufacturing is th
Page 91 and 92: SPECIAL REPORTS FS A B C Designs X
Page 93 and 94: SPECIAL REPORTS are performed in Co
Page 95: SPECIAL REPORTS the intangible deve
Page 99 and 100: SPECIAL REPORTS The investor model
Page 101 and 102: SPECIAL REPORTS The licensing alter
Page 103 and 104: SPECIAL REPORTS The second exceptio
Page 105 and 106: SPECIAL REPORTS provides the most r
Page 107 and 108: SPECIAL REPORTS The taxpayer assert
Page 109 and 110: SPECIAL REPORTS the elimination of
Page 111 and 112: TAX CALENDAR financially distressed
Page 113: Africa: Zein Kebonang Albania: Adri
show all

tax notes international - Tuck School of Business - Dartmouth College

You also want an ePaper? Increase the reach of your titles

Delete template?

Save as template?