USA Law and Practice Contributed by: Kim Marie Boylan, Nicholas Wilkins, Christina Culver and Kiara Williams, White & Case LLP
• profit split method; and • unspecified methods.
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 antici - pated benefits ( “RAB shares” ). Further, the par - ticipants 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 intan - gible. The sharing of development costs and pay - ments for PCTs must generally adhere to the arm’s length principle (ie, the terms of the arrangement reflect those that independent parties would have agreed to under similar cir - cumstances). 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 notable 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 con - ditions. 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 “set-off” adjustment relating to a different controlled transaction between the same controlled entities. Further, once the
Section 482 of the Code also provides that income from a transfer or licence must be com - mensurate with the income attributable to the intangible property. 4.2 Hard-to-Value Intangibles The USA applies the commensurate with income rules to all intangibles, including hard-to-value intangibles, because these items may be diffi - cult to accurately value. In cases where an intan - gible is transferred at a price that is not con - sistent with the arm’s length standard, the IRS may make transfer pricing adjustments. These adjustments can involve increasing or decreas - ing 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 conditions 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 obliga - tion to compensate another participant for the interest). That is, 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
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