Section 482, Methods to Determine Taxable Income in Connection with a Cost Sharing Arrangement

Section 482, methods to determine taxable income in connection with a cost sharing arrangement: Section 482: Methods To Determine Taxable Income in Connection With a Cost Sharing Arrangement, Federal Register, January 5, 2009, Volume 74, Number 2, Rules and Regulations, Page 339, Part II, 26 CFR Parts 1, 301, and 602, TD 9441, RIN 1545-BI46, Final and temporary regulations.

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(These final and temporary regulations are effective January 5, 2009. For dates of applicability, see Sections 1.482-1T(j)(6)(i), 1.482-2T(f), 1.482-4T(h), 1.482-7T(l), 1.482-8T(c), 1.482-9T(n)(3), and 1.301-7701-1(f) in the linked document.)

SUMMARY: The Internal Revenue Service (IRS) provides temporary regulations for further guidance and clarification regarding methods under Section 482 to determine taxable income in connection with a cost sharing arrangement (CSA) to address issues that have arisen in administering the current regulations. These temporary regulations affect domestic and foreign entities that enter into cost sharing arrangements described in the temporary regulations. The text of these temporary regulations also serves as the text of the proposed regulations in the Proposed Rules section in the January 5, 2009 issue of the Federal Register.

PURPOSE OF CSAs: Corporations with many subsidiaries or divisions (called “controlled participants” as in controlled by the parent corporation) may find cost savings, and boosting profitability from buying goods and services internally. The transfer price is the cost of these internal transfers and the IRS regulates these transactions because many transfers occur across tax jurisdictions. The IRS requires that these transactions be negotiated at an arms-length and be provided at market based prices. CSAs are internal corporate arrangements which allow the initial transfer of goods or services for less than the market price and at a price that best suits the corporation.

IntangibleS and CSAs: Where an entity provides the goods and services that create a subsidiary’s identity, business practices, etc., before a CSA is created the subsidiary must make a one time “buy-in” payment for the market based cost of those goods and services. After the buy-in payment is made the CSA allows the ongoing transfer of goods and services at reduced (because shared) cost. Intangibles include marketing know-how, development plans and other service based transfers that do not have external, market based alternatives.

The arm’s length standard: A CSA produces an arm’s length result if each controlled participant’s intangibles development costs (IDC) share equals its rate of anticipated benefit (RAB) share, and each controlled participant compensates its RAB share of the value of all platform contributions by other controlled participants.

DETERMINATION OF A CSA: A CSA is an arrangement by which controlled participants share the costs and risks of developing cost shared intangibles in proportion to their RAB shares, and must meet the following requirements:

1. All controlled participants must engage in cost sharing transactions (CST) where the participants make payments to each other (CST Payments) as appropriate, so that in each taxable year each controlled participant’s IDC share is in proportion to its respective RAB share.

2. All controlled participants must engage in platform contributions transactions (PCTs) where each controlled participant (PCT Payor) makes arm’s length payments (PCT Payments) to each controlled participant (PCT Payee) that provides a platform contribution.

3. Each controlled participant must receive a non-overlapping interest in the cost shared intangibles without further obligation to compensate another controlled participant for the interest. Each controlled participant must be entitled to the perpetual and exclusive right to the profits from transactions of any member of the controlled group that includes the controlled participant with uncontrolled taxpayers to the extent that the profits are attributable to the interest in the cost shared intangibles.

THIS REGULATION IS NOT FURTHER ANALYZED HERE. IF YOU NEED MORE INFORMATION, PLEASE SEE THE FULL TEXT OF THE REGULATION IN THE LINKED DOCUMENT.

PROPOSED REGULATIONS

INTERNAL REVENUE SERVICE (IRS)

Section 482, methods to determine taxable income in connection with a cost sharing arrangement: Section 482: Methods To Determine Taxable Income in Connection With a Cost Sharing Arrangement, Federal Register, January 5, 2009, Volume 74, Number 2, Proposed Rules, Page 236, 26 CFR Parts 1 and 301, REG-144615-02, RIN 1545-BI47, Notice of proposed rulemaking by cross-reference to temporary regulations, notice of proposed rulemaking, and notice of public hearing.

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(Any written or electronic comments must be received by April 6, 2009. Any outline of topics to be discussed at the public hearing scheduled for April 21, 2009 must be received by April 6, 2009.)

SUMMARY: In the Rules and Regulations section of this issue of the Federal Register, the Internal Revenue Service (IRS) issues temporary regulations that provide further guidance and clarification regarding methods under Section 482 to determine taxable income in connection with a cost sharing arrangement to address issues that have arisen in administering the current regulations. These temporary regulations potentially affect controlled taxpayers within the meaning of Section 482 that enter into cost sharing arrangements as defined in that section. The text of those temporary regulations also serves as the text of these proposed regulations. This document also provides notice of a public hearing on those proposed regulations.

4. All controlled participants must engage in cost sharing transactions (CST) where the participants make payments to each other (CST Payments) as appropriate, so that in each taxable year each controlled participant’s IDC share is in proportion to its respective RAB share.

5. All controlled participants must engage in platform contributions transactions where each controlled participant (PCT Payor) makes arm’s length payments (PCT Payments) to each controlled participant (PCT Payee) that provides a platform contribution.

6. Each controlled participant must receive a non-overlapping interest in the cost shared intangibles without further obligation to compensate another controlled participant for the interest. Each controlled participant must be entitled to the perpetual and exclusive right to the profits from transactions of any member of the controlled group that includes the controlled participant with uncontrolled taxpayers to the extent that the profits are attributable to the interest in the cost shared intangibles.

THIS REGULATION IS NOT FURTHER ANALYZED HERE. IF YOU NEED MORE INFORMATION, PLEASE SEE THE FULL TEXT OF THE REGULATION IN THE LINKED DOCUMENT.