• Service: Tax, Global Transfer Pricing Services, Global Compliance Management Services
  • Type: Regulatory update
  • Date: 8/26/2013

United States - Differential income stream for cost sharing arrangements 

August 26:  The Treasury Department and IRS today released for publication in the Federal Register final regulations (T.D. 9630) that implement the use of the differential income stream as a consideration in assessing the best method in connection with a cost sharing arrangement and as a specified application of the income method.

With today’s final regulations [PDF 93 KB], regulations that were proposed in December 2011 on application of the differential income stream approach are finalized “without change,” and corresponding temporary regulations are removed.


The final regulations on cost sharing arrangements (2011) reserved certain guidance because Treasury and the IRS believed it appropriate to solicit public comments.

According to the December 2011 proposed regulations, some taxpayers were taking “unreasonable positions” in applying the income method by using relatively low licensing discount rates, and relatively high cost sharing discount rates, without sufficiently considering the appropriate interrelationship of the discount rates and financial projections—thus deriving PCT payments that were not in accordance with the arm’s length standard.

Accordingly, the December 2011 proposed and temporary regulations provided further guidance on:

  • Comparing the financial projections associated with the cost sharing alternative discounted at a rate appropriate for the cost sharing alternative with the financial projections associated with the licensing alternative discounted at the rate appropriate for the licensing alternative, and for evaluating reliability considerations associated with such a comparison (reflection of similar risk profiles in cost sharing alternative and licensing alternative)
  • Evaluating results of application of the income method (implied discount rates and use of differential income stream as a consideration in assessing the best method)
  • A new specified application of the income method for directly determining the arm’s length charge for PCT payments (application of income method using differential income stream)

Contact a tax professional with KPMG's Global Transfer Pricing Services.

©2013 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved.

The KPMG logo and name are trademarks of KPMG International.

KPMG International is a Swiss cooperative that serves as a coordinating entity for a network of independent member firms. KPMG International provides no audit or other client services. Such services are provided solely by member firms in their respective geographic areas. KPMG International and its member firms are legally distinct and separate entities. They are not and nothing contained herein shall be construed to place these entities in the relationship of parents, subsidiaries, agents, partners, or joint venturers. No member firm has any authority (actual, apparent, implied or otherwise) to obligate or bind KPMG International or any member firm in any manner whatsoever.

The information contained in herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

Direct comments, including requests for subscriptions, to
For more information, contact KPMG's Federal Tax Legislative and Regulatory Services Group at:

+ 1 202 533 4366

1801 K Street NW
Washington, DC 20006.


Share this

Share this


Subscribe to receive the latest TaxNewsFlash email alerts (you must select the option for TaxNewsFlash)

Already a Subscriber? Login

Not a member? Subscribe now