USA Law and Practice Contributed by: Kevin Spencer, Kim Marie Boylan, Nicholas Wilkins and Christina Culver, White & Case LLP
gibles, because these items may be difficult to accu - rately value. In cases where an intangible is trans - ferred at a price that is not consistent with the arm’s length standard, the IRS may make transfer pricing adjustments. These adjustments can involve increas - ing or decreasing the reported taxable income of the parties involved in the transaction. 4.3 Cost Sharing/Cost Contribution Arrangements Cost sharing arrangements (CSAs) are governed by Treasury Regulation Section 1.482-7. This regulation provides detailed rules that define CSAs, set the con - ditions for their application, and specify how costs and benefits should be shared between parties. For a CSA to exist, each controlled participant must: • engage in the cost sharing transaction; • engage in platform contributions transactions; and • receive a non-overlapping interest in the cost- shared intangibles (without an obligation to com - pensate another participant for the interest). In a CSA, the participants divide up the interests in the cost-shared intangible (typically by territory, but potentially by field of use or on another basis). This division is not subject to the arm’s length concept, with interests divided however the participants choose – so long as they are exhaustive and mutually exclusive ‒ and the division generally cannot be challenged by the IRS. However, the participants must share costs in proportion to their reasonably anticipated benefits (“RAB shares”). Further, the participants must make payments to each other for any platform contribution transactions (PCTs). A PCT is the contribution of any intangible that will be used to help develop the cost- shared intangible. The sharing of development costs and payments for PCTs must generally adhere to the arm’s length prin - ciple (ie, the terms of the arrangement reflect those that independent parties would have agreed to under similar circumstances). The regulations, however, provide some specific rules on what is considered arm’s length, even where independent parties would not have reached the same agreement. Most nota - ble among these is the requirement to share stock- based compensation costs. The US tax rules allow for
adjustments if it is found that the CSA does not reflect these modified arm’s length requirements.
5. Adjustments 5.1 Upward Transfer Pricing Adjustments Taxpayers in the USA are allowed to make upward transfer pricing adjustments after filing their tax returns only under very limited conditions. As a general rule, taxpayers may not make transfer pricing adjustments after filing tax returns. There are exceptions when the IRS asserts adjustments, particularly that the tax - payer may assert a “set-off” adjustment relating to a different controlled transaction between the same controlled entities. Further, once the IRS asserts an adjustment to a transaction, the courts may determine an arm’s length allocation even if that would result in a taxpayer-favourable adjustment. 5.2 Secondary Transfer Pricing Adjustments The US transfer pricing regulations provide rules for both correlative adjustments (adjusting the results for other parties to the transaction adjusted by the IRS to match that adjustment) and conforming adjustments (adjusting accounts to address the portion of a pay - ment that was not at arm’s length). 6. Cross-Border Information Sharing 6.1 Sharing Taxpayer Information There are several methods available to the USA to fur - ther co-operation in the sharing of taxpayer informa - tion across jurisdictions. The USA has signed bilateral tax treaties with numerous countries, creating a vast treaty network. These treaties allow for the exchange of taxpayer information (eg, information related to income, assets and financial transactions) between the USA and agreeing countries. Further, tax information exchange agreements (TIEAs) allow the USA to request information from and send information to other countries on individuals or enti - ties suspected of evading taxes. Additionally, the USA can also operate through multilateral treaties such as the Convention on Mutual Administrative Assistance in Tax Matters and the Hague Evidence Convention.
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