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IRS Resumes Examinations of Stock Based Compensation in Cost Sharing Agreements

On July 31, 2019, the Internal Revenue Service (IRS) Large Business and International (LB&I) division formally withdrew its Directive (LB&I-04-0118-005) instructing examiners on transfer pricing selection related to stock based compensation (SBC) in Cost Sharing Arrangements (CSAS). See here for IRS Notice of Withdrawal. The Directive was issued January 12, 2018, after the Tax Court’s opinion in Altera which invalidated Treasury Regulation § 1.482-7A(d)(2). The IRS appealed Altera and issued Directive LB&I-04-0118-005, which we previously discussed here. The Directive instructed examiners to “[s]top opening issues related to stock-based compensation (SBC) included in cost-sharing arrangements (CSAS) intangible development costs (IDCs) until the Ninth Circuit issues an opinion in the Altera case on appeal.” At the time, the IRS indicated that it would issue further guidance once Altera was finally decided. On June 7, 2019, the Ninth Circuit...

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IRS Releases Several Transfer Pricing Directives

The Internal Revenue Service (IRS) Large Business and International (LB&I) Division recently released several directives (LB&I Directives) geared toward transfer pricing. LB&I acknowledges that significant LB&I resources are devoted to transfer pricing issues, and such issues make up a substantial portion of the LB&I inventory. It appears that these directives are aimed at ensuring that LB&I resources are utilized in the most efficient and effective manner on transfer pricing issues. A link to each LB&I Directive and a short summary is provided below. Interim Instructions on Issuance of Mandatory Transfer Pricing Information Document Request (IDR) in LB&I Examinations This LB&I Directive advises LB&I examiners that it is no longer necessary to issue the mandatory transfer pricing information document request (IDR) to taxpayers that have filed Form 5471, Information Return of U.S. Person with Respect To Certain Foreign...

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IRS Practice Unit Advises Examiners to Use Aggregate Approach in Valuing Outbound Transfers

On January 4, 2017, the Internal Revenue Service (IRS) released a new “International Practice Unit” (IPU) on the value of intangibles in IRC Section 367(d) transactions in conjunction with cost sharing arrangements (CSA). See IPU here. The IPU notes that transferring highly valuable intangibles offshore has become a routine tax strategy for reducing a company’s effective tax rate for financial statement and tax purposes. Typically, questions concerning the value of intangibles arise where a US taxpayer enters into a CSA with a controlled foreign corporation (CFC) in a low or no tax jurisdiction, and contributes resources, rights and capabilities (which may include IRC Section 936(h)(3)(B) intangibles) to the CSA. An arm’s length payment to the US taxpayer is then required for the contribution. Simultaneously with, or shortly before entering into a CSA, the US taxpayer transfers certain intangible property to the CFC in an IRC Section 351 or 361 transaction,...

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