Cost Sharing Arrangements – The 2009 Temporary Regulations – July 6, 2009 Deadline!

By Ron Cohen, CPA, MST
Partner
Greenstein, Rogoff, Olsen & Co., LLP

Cost Sharing Arrangements (“CSA”) allow a taxpayer to legally move and exploit intellectual property outside the U.S. when it’s related to products sold outside the U.S.  This reduces the U.S. tax liability of a multi-national company in legal and appropriate ways…without getting into politics for purposes of this discussion.

The Internal Revenue Bulletin on this is:  http://www.irs.gov/irb/2009-07_IRB/ar04.html#d0e147

The I.R.S. has written so many regulations over the years on how to legally implement a CSA, that the opportunity requires a Ph.D in taxation, accounting, finance and economics to diligently implement the strategy.  This is another example of the I.R.S. choking a good idea to death with endless rules.

The controlling 2009 Temporary Regulations (Temp. Reg. Sec. 1.482-7T), including the important explanatory and often cited preamble, run more than 55,000 words (96 pages in my printout).  This serves as a “price point” where only larger companies with expensive CPAs and lawyers can even attempt to understand and implement such rules…as we need to read and understand the regulations before we sign a tax return implementing such rules.

The heart of the Temporary Regulations is the valuing of “platform contribution transactions” (“PCT”) which were previously known as, the “buy-in.”   This is a determination of payments required to move existing intellectual property offshore related to future research and development.  The I.R.S. wants a high PCT and the taxpayer wants it low.  The regulations discuss in mind-numbing, endlessly computational detail how the PCT should be determined…however it all hangs on the taxpayer’s projections of future profits. See Temp. Reg. Sec. 1.482-7T(g)(2)(vi) if you dare.

I can tell you from 18 years of internal corporate experience, that most of the time, management of a high-tech company cannot project what will happen six months into the future, much less five years.  Therefore, the whole projection exercise is largely guessing, pre-loaded for tax audit controversy and adjustments.

One need only look at the Xilinx case at http://www.groco.com/readingroom/pdf/Xilinx.pdf  to see how a company can get into serious controversy over a reasonable dispute regarding I.R.S. CSA regulations.

The Temporary Regulations provide that a CSA in existence on January 5, 2009, that also complied with the 1995 Regulations will be considered to be a CSA under the Temporary Regulations, provided the written contract 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 rules of the Temporary Regulations as modified by paragraphs (m)(2) and (m)(3) of the Temporary Regulations.  Thus, please be advised, your CSA written contracts need to be reviewed and revised, so call your tax lawyer with regards to contract drafting…in addition to otherwise “substantially” complying with the 2009 Temporary Regulations.

My above comments aside, we would be happy to assist you in updating or implementing a CSA if we determine it will provide significant, long-term and permanent tax benefits.

I can be reached any time for questions or comments at (510) 797-8661 x237.