Cost Sharing Agreements Transfer Pricing

December 6, 2020
Admin

(1) OECD guidelines refer to `development contribution agreements`; the usual rules use the term “cost-sharing.” Functionally, the two are quite similar. Here, “cost-sharing” is used to refer to both types of agreements. The IRS today issued a Directive on Large Business and International (LB-I) which announces the withdrawal of a previous LB-I directive on the selection of transfer pricing by IRS auditors with respect to the “reasonably expected benefits” in cost-sharing agreements. In one of these structures, the company that centralizes such joint activities will assist other companies that will participate in the distribution of costs and related expenses. Finally, it should be noted that cost-sharing agreements may result in additional litigation between a subject and the IRS. In the example shown above, there is a clear distinction between the revenues received by the parent company on intangible assets prior to purchase and the revenues generated by the parent company and the portion of intangible capital expenditures after the cost-sharing agreement came into effect. In practice, it is often difficult to distinguish the revenues from these intangible assets that are obsolete over time. In this case, there are potentially difficult allocation problems in determining, for example, the amount of sub redemption gains attributable to the parent company`s intangible assets prior to the purchase. It is somewhat ironic: based on the discussions I had with IRS employees, one of the reasons the cash rules were changed to include cost-sharing agreements was to eliminate differences of opinion between irS and taxpayers on what a reasonable assessment of the market value of royalties on transferred intangible assets. Although cost-sharing agreements are able to eliminate many disputes with the tax authorities over intangible assets that were developed after the agreements came into force, they are leading to new disputes over the amount of buy-in payments. And as (1) buy-in payments are potentially very important – and are supposed to be based on the present value of all intangible preemption values – and (2) buy-in payments require the taxpayer to answer potentially controversial questions about the fraction of a party`s profits after the purchase due to intangible assets developed up to the redemption date , cost-sharing agreements have replaced a source of disagreement over intangible assets.