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.
[TEXT] [PDF]
(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.
[TEXT] [PDF]
(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.
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:
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.