Page 5 - Altera And Cost-Sharing Requirements Under Section 482 By Jerald David August

As provided under the Section 482 regulations, generally a taxpayer may not apply Section 482 at any time or force the Service to apply Section 482.19 A taxpayer may, however, report on a timely filed return the tax impacts of transactions between controlled per- sons based on prices which vary from those actually charged when necessary to reflect the required arm’s-length stan- dard, even if such reported exchange of value were not the prices contained in its books and records.20
Commensurate with Income Stan- dard. In the Tax Reform Act of 1986 Congress added language to Section 482 in announcing a new “commensurate with income” standard with respect to related party transfers of intangible prop- erty, including direct transfers, licensing transfers, and other arrangements. 21
In any case of two or more organi- zations, trades, or businesses (whether or not incorporated, whether or not organized in the United States, and whether or not affiliated) owned or controlled directly or indirectly by the same interests, the Secretary may distrib- ute, apportion, or allocate gross income, deductions, credits, or allowances between or among such organizations, trades, or businesses, if he determines that such distribu-
1 145 TC No. 3 (2015).
2 598 F.3d 1191, 105 AFTR 2d 2010-1490 (CA-9,
2010).
3 133 TC 297 (2009), nonacq. AOD 2010-005, 2010-
49 IRB.
4 Section 7805(b). See 5 U.S.C. § § 553(b), 706(2)(A).
5 See Section 263; Reg. 1.263(a)-5. As a foreign subsidiary, Altera International was not permitted to be part of the consolidated group for U.S. fed- eral income tax purposes (Sections 1504(a), 1504(d)). As such it was a controlled foreign cor- poration of Altera U.S. with respect to its Subpart F income. See Sections 951, 952, 956.
6 Motor Vehicle Mfrs. Ass’n v. State Farm Mutual Auto Ins. Co., 463 US 29 (1983).
7 467 U.S. 837 (1984).
8 5 U.S.C. § 553(b).
9 In 1984, Congress enacted several fundamental
changes to Section 367. With respect to transfers of intangible property, Section 367(d) was amend- ed to provide that the transfer of intangible prop- erty to a foreign corporation would be treated as a sale for U.S. tax purposes. The transferor would be treated as receiving amounts that reasonably reflected the amounts that would have been received under an agreement providing for pay-
tion, apportionment, or allocation is necessary in order to prevent eva- sion of taxes or clearly to reflect the income of any of such organizations, trades, or businesses. In the case of any transfer (or license) of intangible property (within the meaning of § 936(h)(3)(B)), the income with respect to such transfer or license shall be commensurate with the income attributable to the intangible.” (emphasis added)
The “commensurate with income” standard applied in the context of intan- gible property transfers, requires that related parties share profits on a basis that reasonably reflect their respective contributions with due regard to each party’s obligations and economic risks under a related party transfer, licens- ing, or cost-sharing arrangement. At that time Congress was aware of the migra- tion out of the U.S. of intangibles in their early stage of development could be highly exploitative of the U.S. source profits that would later be attributable to an MBE conducting business operations within and outside of the U.S.22 As to bona-fide cost sharing agreements, Con- gress wanted the regulations to reflect not only that a foreign affiliate or affil- iates of a U.S.-based company should not only share in profits in proportion to costs incurred and economic risk,
ments contingent on productivity, which would be received over the useful life of the intangible property on an annual basis. These amounts would be treated as U.S.-source income for for- eign tax credit and other purposes. The legislative history provided that these provisions were to apply only in the case of an outright transfer of an intangible to a foreign corporation within the meaning of Section 351. Where only a license was involved, Section 482 would apply rather than new Section 367(d).
10 Where the Service allocates income to a U.S.- based taxpayer, it will want a foreign tax credit in the year of the adjustment to reduce any associ- ated interest cost on a tax deficiency as well as to match the FTC with foreign source taxable income in the same year. Section 901(b)(1); Reg. 1.901-2(a). See Rev. Rul. 72-371, 1972-2 CB 438 (domestic parent corporation is entitled to a credit for foreign tax withheld from its wholly-owned foreign subsidiary on royalty income allocated to the parent that would have been subject to for- eign tax if actually received by it); Schering Corp. & Subsidiaries, 69 TC 598 (1978).
11 The Organization for Economic Co-operation and Development (OECD) is an international group of 34 countries formed in 1961 to stimulate world trade. Its predecessor organization was the Organization for European Economic Co-
but had to obligate the foreign affiliate to bear the costs of unsuccessful R&D projects. The intangible transfer rules apply not only to outbound transfers but also to inbound transfers between related parties. 23
Reg. 1.482–4(a) provides:
(a) In general. The arm’s length amount charged in a controlled transfer of intangible property must be determined under one of the four methods listed in this paragraph (a). Each of the methods must be applied in accordance with all of the provi- sions of § 1.482–1, including the best method rule of § 1.482–1(c), the comparability analysis of § 1.482–1(d), and the arm’s length range of § 1.482–1(e). The arm’s length consideration for the transfer of an intangible determined under this section must be commensurate with the income attributable to the intangible. See § 1.482–4(f )(2) (Periodic adjustments).
The available methods are:
1. The comparable uncontrolled trans-
action method (Reg. 1.482-1(c)).
2. The comparable profits method (Reg.
1.482-5).
3. The profit split method (Reg. 1.482-6). 4. Unspecified methods (Reg. 1.482-
1(d)).
operation (OEEC) for the reconstruction of Europe. The OECD, in additional to promulgating model tax conventions or treaties with com- mentary, has promulgated white papers on transfer pricing. Transfer Pricing Guidelines for MBEs and Tax Administrations were originally approved by the OECD Committee on Fiscal Affairs in 1995. They were completed with addi- tions for cross-border services, intangibles, costs contribution arrangements and advance pricing agreements in 1996-1999. New editions were issued in 2009 and 2010. The OECD Model Tax Convention, originally published in 1963, revised substantially in 1977 and reissued in 1992, sets forth rules for transfer pricing in Article 9 (taxation of profits from associated enterprises) and also Articles 24-26 as well.
12 Section 936(h)(3)(B) provides that “intangible property” means any patent, invention, formula, process, design, pattern, or know-how, copyright, literary, musical or artistic composition, trade- mark, trade name, or brand name, franchise, license, or contract, method, program, system, procedure, campaign, survey, study, forecast, estimate, customer list, or technical data, or “any similar item,” which has substantial value inde- pendent of the services of any individual (italics added for emphasis).
COST-SHARING
8 BUSINESS ENTITIES
January/February 2016