tax notes international - Tuck School of Business - Dartmouth College
tax notes international - Tuck School of Business - Dartmouth College
tax notes international - Tuck School of Business - Dartmouth College
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Treas. reg. section 1.482-9T if entered into by controlled<br />
parties. The applicable method for determining<br />
the arm’s-length value <strong>of</strong> the compensation obligation<br />
under the PCT will be governed by those regulations as<br />
supplemented by the CSA rules.<br />
The platform contribution is presumed to be the exclusive<br />
provision <strong>of</strong> the benefits by Company P <strong>of</strong> its<br />
research team to the development <strong>of</strong> Vaccine Z. Because<br />
the intangible development costs (IDCs) include<br />
the ongoing compensation <strong>of</strong> the researchers, the compensation<br />
obligation under the PCT is only for the<br />
value <strong>of</strong> the commitment <strong>of</strong> the research team by P to<br />
the CSA’s development efforts net <strong>of</strong> the researcher<br />
compensation. The value <strong>of</strong> the compensation obligation<br />
<strong>of</strong> S for the PCT will reflect the full value <strong>of</strong> the<br />
provision <strong>of</strong> services as limited by S’s RAB share.<br />
Intangible Development Activity and Costs<br />
The scope <strong>of</strong> the intangible development activity<br />
(IDA) includes all activities that could reasonably be<br />
anticipated to contribute to developing the reasonably<br />
anticipated cost-shared intangibles. The IDA cannot be<br />
described merely by a list <strong>of</strong> particular resources, capabilities,<br />
or rights that will be used in the CSA, since<br />
the IDA is a function <strong>of</strong> what are the reasonably anticipated<br />
cost-shared intangibles.<br />
The scope <strong>of</strong> the IDA may change as the nature or<br />
identity <strong>of</strong> the reasonably anticipated cost-shared intangibles<br />
or the nature <strong>of</strong> the activities necessary for their<br />
development becomes clearer. For example, the relevance<br />
<strong>of</strong> certain ongoing work to developing reasonably<br />
anticipated cost-shared intangibles or the need for<br />
additional work may become clear only over time.<br />
Regarding stock options and other stock-based compensation,<br />
the IRS and Treasury continue to consider<br />
the technical changes and issues described in Notice<br />
2005-99, 2005-22 C.B. 1214, and comments they have<br />
received and intend to address the issue in a subsequent<br />
regulations project.<br />
Changes in Participation<br />
A change in participation under a CSA occurs when<br />
there is either a controlled transfer <strong>of</strong> interests or a capability<br />
variation. A controlled transfer occurs when a<br />
participant in a CSA transfers all or part <strong>of</strong> its interest<br />
in cost-shared intangibles under the CSA in a controlled<br />
transaction, and the transferee assumes the associated<br />
obligations under the CSA. In that case, the<br />
transferee will be treated as succeeding to the transferor’s<br />
prior history under the CSA as it relates to the<br />
transferred interest, including the transferor’s cost contributions,<br />
benefits received, and PCT payments attributable<br />
to such rights or obligations.<br />
A capability variation occurs when, in a CSA in<br />
which interests in cost-shared intangibles were divided<br />
on a basis such as plant capacity, the controlled participants’<br />
division <strong>of</strong> interests, or their relative capabilities<br />
or capabilities to benefit from the cost-shared intan-<br />
SPECIAL REPORTS<br />
gibles are materially altered. The capability variation is<br />
considered to be a controlled transfer <strong>of</strong> interests.<br />
If there is a change in participation, the arm’slength<br />
amount <strong>of</strong> consideration must be determined<br />
consistent with the reasonably anticipated incremental<br />
change in returns to the transferee or transferor resulting<br />
from the change in participation.<br />
In one <strong>of</strong> the examples, P and S agree to divide<br />
their interests based on the site <strong>of</strong> manufacturing. Two<br />
years after formation <strong>of</strong> the CSA, because <strong>of</strong> a change<br />
in plans not reasonably foreseeable at the time the<br />
CSA was entered into, S acquires additional facilities<br />
for the manufacture <strong>of</strong> the product. The acquisition is<br />
a capability variation. Accordingly, there was a compensable<br />
change in participation.<br />
RABs<br />
RAB shares must be updated to account for changes<br />
in economic conditions, the business operations and<br />
practices <strong>of</strong> the participants, and the ongoing development<br />
<strong>of</strong> intangibles under the CSA. For purposes <strong>of</strong><br />
determining RAB shares at any given time, reasonably<br />
anticipated benefits must be estimated over the entire<br />
period, past and future, <strong>of</strong> exploitation <strong>of</strong> the costshared<br />
intangibles, and must reflect appropriate updates.<br />
Indirect bases for measuring anticipated benefits<br />
include units used, produced, or sold; sales; operating<br />
pr<strong>of</strong>its; and other bases.<br />
Other bases for measuring anticipated benefits may<br />
in some circumstances be appropriate, but only to the<br />
extent that there is expected to be a reasonably identifiable<br />
relationship between the basis <strong>of</strong> measurement<br />
used and additional income generated or costs saved by<br />
use <strong>of</strong> the cost-shared intangibles.<br />
In one example, operating pr<strong>of</strong>it is determined to be<br />
appropriately used to determine RABs because the<br />
pharmaceutical product will be sold by USP at a<br />
higher pr<strong>of</strong>it than FS will be able to sell the product in<br />
foreign countries. In another example, sales are inappropriate<br />
for determining RABs because FP distributes<br />
the product directly to customers while the U.S. subsidiary<br />
sells to independent distributors. Sales could be<br />
used only if adjustments were made to account for differences<br />
in market levels at which the sales occur.<br />
General Principles and Best Method Considerations<br />
The proposed regulations articulated ‘‘general principles’’<br />
— such as the realistic alternatives principle —<br />
applicable to any method to determine the arm’s-length<br />
charge in a PCT. These provisions were intended to<br />
provide supplementary guidance on the application <strong>of</strong><br />
the best method rule to determine which method, or<br />
application <strong>of</strong> a method, provides the most reliable<br />
measure <strong>of</strong> an arm’s-length result in a CSA context.<br />
That is, these principles provide best method considerations<br />
to aid in the competitive evaluation <strong>of</strong><br />
methods or applications, and they were not intended<br />
themselves to be methods or trumping rules.<br />
TAX NOTES INTERNATIONAL FEBRUARY 2, 2009 • 463<br />
(C) Tax Analysts 2009. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content.