Post by FoleyManasuev on Feb 26, 2009 5:52:47 GMT 4
US Outbound: IRS issues long-awaited temporary cost sharing regulations
On the final day of 2008, the US Treasury department and the IRS issued temporary regulations addressing cost sharing arrangements (CSAs) between controlled taxpayers.
The temporary regulations replace the cost sharing regulations contained in Treasury regulation § 1.482-7, promulgated in 1995 (the 1995 regulations). The IRS has been concerned for a number of years that CSAs have been used by taxpayers to move US intangibles to low-tax jurisdictions. In August of 2005, the IRS issued proposed regulations, which were intended to dramatically revise the CSA rules, with a particular focus on the computation of buy-in payments (now termed platform contribution transactions (PCTs) under the temporary regulations) through which CSA participants pay for pre-existing intangibles contributed to the CSA. The proposed regulations were controversial with taxpayers and were the subject of numerous comments.
In response to the taxpayers' comments and criticism, the IRS made several adjustments in the temporary regulations by simplifying the terminology, providing a more comprehensive set of rules, and incorporating helpful guidance on the application of several concepts contained in the proposed regulations. The temporary regulations, however, fail to make fundamental changes and generally follow the proposed regulations. The temporary regulations are generally effective from January 5 2009 (see the discussion on transition rules below). They would sunset, unless finalised, on December 30 2011. The IRS is requesting comments on various areas and will issue supplemental guidance (for example, on the interaction with the advance pricing agreements).
The temporary regulations retain the most controversial concept introduced by the proposed regulations – the investor model. Pursuant to the proposed regulations, under the investor model controlled participants in a CSA were expected to earn an appropriate risk-adjusted return on their contributions over the development period and the life of the intangibles, taking into account the "best realistic alternative." In contrast to the proposed regulations, the temporary regulations do not require each controlled participant to expect to earn the same return on its aggregate net investment in the CSA. Rather, each participant would be expected to earn a return "equal to the appropriate discount rate for the controlled participant's CSA activity over the entire period of the CSA activity."
The IRS believes that taxpayers would not enter into a CSA if they had better realistic alternatives. As such, the temporary regulations provide that the best realistic alternative for a controlled participant making the platform contribution (PCT payee) is to develop new intangible property itself and enter into a long-term license of the make-or-sell rights to the developed intangible to its PCT payor (controlled participant that must compensate the PCT payee for the platform contribution). Thus, the temporary regulations provide that a lower bound on the amount a PCT payee would expect for a PCT would be the present value of the royalties that the PCT payee would receive from the PCT payor if the make-or-sell rights to the cost shared intangible had been licensed to the PCT payor. Importantly, the temporary regulations clarify that this comparison of alternatives is made on a post-tax basis.
The temporary regulations provide that CSAs in existence on January 5 2009 (effective date) will be granted a CSA status for the purposes of the temporary regulations (in other words, grandfathered), provided that the written agreement evidencing the CSA is revised by July 6 2009, to conform with - and the activities of the participants in the CSA "substantially comply" with - the requirements contained in the temporary regulations, with certain modifications. In particular, with respect to grandfathered CSAs, the temporary regulations provide that:
* CSTs (cost sharing transactions) and PCTs of grandfathered CSAs occurring before January 5 2009 would be governed by the 1995 regulations;
* Unless there is a material change in the scope of the CSA after effective date, PCTs under grandfathered CSAs would be subject to the periodic adjustment rule contained in the 1995 regulations;
* If there is a material change in the scope of the CSA after the effective date, PCTs occurring on or after the date of the material change would be subject to the periodic adjustment rule in the temporary regulations.
* the divisional interest rules in the temporary regulations would not apply and would not need to be included in the written agreement evidencing the CSA;
* the written agreement evidencing the CSA would need to be amended to require CSTs to cover all intangible development costs and PCTs to cover all platform contributions for transactions occurring on or after January 5 2009;
* the revised CSA would need to be signed and dated by July 6 2009;
* the time for filing a CSA statement required under the temporary regulations is extended to September 2 2009; and
* the annual return requirement would apply only for tax years ending after the filing of the CSA statement.
Taxpayers should consider carefully whether and under what circumstances to enter into new CSAs and/or whether to continue the joint development of intangibles under existing CSAs. In case taxpayers would want their CSAs be grandfathered, they should pay close attention to various requirements contained in the temporary regulations.
The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.
This article represents the views of the authors only, and does not necessarily represent the views or professional advice of KPMG LLP.
Sean Foley (sffoley@kpmg.com) and Alexey Manasuev (amanasuev@kpmg.com), Washington, DC
On the final day of 2008, the US Treasury department and the IRS issued temporary regulations addressing cost sharing arrangements (CSAs) between controlled taxpayers.
The temporary regulations replace the cost sharing regulations contained in Treasury regulation § 1.482-7, promulgated in 1995 (the 1995 regulations). The IRS has been concerned for a number of years that CSAs have been used by taxpayers to move US intangibles to low-tax jurisdictions. In August of 2005, the IRS issued proposed regulations, which were intended to dramatically revise the CSA rules, with a particular focus on the computation of buy-in payments (now termed platform contribution transactions (PCTs) under the temporary regulations) through which CSA participants pay for pre-existing intangibles contributed to the CSA. The proposed regulations were controversial with taxpayers and were the subject of numerous comments.
In response to the taxpayers' comments and criticism, the IRS made several adjustments in the temporary regulations by simplifying the terminology, providing a more comprehensive set of rules, and incorporating helpful guidance on the application of several concepts contained in the proposed regulations. The temporary regulations, however, fail to make fundamental changes and generally follow the proposed regulations. The temporary regulations are generally effective from January 5 2009 (see the discussion on transition rules below). They would sunset, unless finalised, on December 30 2011. The IRS is requesting comments on various areas and will issue supplemental guidance (for example, on the interaction with the advance pricing agreements).
The temporary regulations retain the most controversial concept introduced by the proposed regulations – the investor model. Pursuant to the proposed regulations, under the investor model controlled participants in a CSA were expected to earn an appropriate risk-adjusted return on their contributions over the development period and the life of the intangibles, taking into account the "best realistic alternative." In contrast to the proposed regulations, the temporary regulations do not require each controlled participant to expect to earn the same return on its aggregate net investment in the CSA. Rather, each participant would be expected to earn a return "equal to the appropriate discount rate for the controlled participant's CSA activity over the entire period of the CSA activity."
The IRS believes that taxpayers would not enter into a CSA if they had better realistic alternatives. As such, the temporary regulations provide that the best realistic alternative for a controlled participant making the platform contribution (PCT payee) is to develop new intangible property itself and enter into a long-term license of the make-or-sell rights to the developed intangible to its PCT payor (controlled participant that must compensate the PCT payee for the platform contribution). Thus, the temporary regulations provide that a lower bound on the amount a PCT payee would expect for a PCT would be the present value of the royalties that the PCT payee would receive from the PCT payor if the make-or-sell rights to the cost shared intangible had been licensed to the PCT payor. Importantly, the temporary regulations clarify that this comparison of alternatives is made on a post-tax basis.
The temporary regulations provide that CSAs in existence on January 5 2009 (effective date) will be granted a CSA status for the purposes of the temporary regulations (in other words, grandfathered), provided that the written agreement evidencing the CSA is revised by July 6 2009, to conform with - and the activities of the participants in the CSA "substantially comply" with - the requirements contained in the temporary regulations, with certain modifications. In particular, with respect to grandfathered CSAs, the temporary regulations provide that:
* CSTs (cost sharing transactions) and PCTs of grandfathered CSAs occurring before January 5 2009 would be governed by the 1995 regulations;
* Unless there is a material change in the scope of the CSA after effective date, PCTs under grandfathered CSAs would be subject to the periodic adjustment rule contained in the 1995 regulations;
* If there is a material change in the scope of the CSA after the effective date, PCTs occurring on or after the date of the material change would be subject to the periodic adjustment rule in the temporary regulations.
* the divisional interest rules in the temporary regulations would not apply and would not need to be included in the written agreement evidencing the CSA;
* the written agreement evidencing the CSA would need to be amended to require CSTs to cover all intangible development costs and PCTs to cover all platform contributions for transactions occurring on or after January 5 2009;
* the revised CSA would need to be signed and dated by July 6 2009;
* the time for filing a CSA statement required under the temporary regulations is extended to September 2 2009; and
* the annual return requirement would apply only for tax years ending after the filing of the CSA statement.
Taxpayers should consider carefully whether and under what circumstances to enter into new CSAs and/or whether to continue the joint development of intangibles under existing CSAs. In case taxpayers would want their CSAs be grandfathered, they should pay close attention to various requirements contained in the temporary regulations.
The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.
This article represents the views of the authors only, and does not necessarily represent the views or professional advice of KPMG LLP.
Sean Foley (sffoley@kpmg.com) and Alexey Manasuev (amanasuev@kpmg.com), Washington, DC