tax notes international - Tuck School of Business - Dartmouth College

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