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Details

  • 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.

Background

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)


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