Risk Allocation Presentation Draft 10.18.22.pptx Comparing U.S. Tax Jurisprudence and OECD Approaches to Risk Allocation in the Post-BEPS Era of Transfer Pricing. Today, I had a great time presenting at the Amsterdam Centre for Transfer Pricing. Please find the slides I used to present attached. Thus, there is not anything “new” in my slides. It’s relating the facts and the method of interpretation for transfer pricing cases. Presented in my capacity as a PhD student at the University of Groningen

1. Comparing U.S. Tax Jurisprudence
and OECD Approaches to Risk
Allocation in the Post-BEPS Era of
Transfer Pricing
Charles Lincoln

2. Company
Taxed
Individual
Taxed
Taxed Per
OECD/BEPS
Traditionally
Taxed

3. Six Step Arm’s Length Allocation of Risk: Conduct
Trumps Contracts – Summary of Paragraph 1.60
• Step 1: Identify economically significant risks with specificity
• Step 2: Analyze the contractual assumption of risks
• Step 3: Functional Analysis
• Step 4: Interpretation
• Step 5: Risk allocation
• Step 6: Pricing of the transaction in accordance with risk allocation
analysis
Rutger Hafkenscheid, The BEPS Report on Risk Allocation: Not So Functional, International Transfer Pricing Journal,
2017 (Volume 24), No. 1

4. Step 5: Interpretation and Risk Allocation
• “Control over risk”
• ¶ 1.65:
• “Capability to make decisions” regarding risk
• “Capability to make decisions on whether and how to respond to risk”
• “Whether the party assuming risk has the capacity to absorb [risk]
consequences”
• ¶ 1.86:
• “Financial capacity to assume risk”
Rutger Hafkenscheid, The BEPS Report on Risk Allocation: Not So Functional, International Transfer Pricing Journal,
2017 (Volume 24), No. 1

5. U.S. Tax Jurisprudence

6. Veritas v. Commissioner (2009)
• Tax Years – 1999, 2000, 2001
• $2.5b buy-in payment needed
• $704m + $54m deficiencies
• Advanced storage management software
• Data loss, corruption, rapid recovery, large file, back-up systems without interruption,
improve performance
• Goal: expanded in EMEA
• Regulations at issue – 1995 Finalized US Transfer Pricing Regulations
(not current 2009 regulations)
• Here, IRS analyzes intangibles in aggregate
• Here, Taxpayer analyzes intangibles individually

7. Veritas Court’s Analysis
• The following are the court’s steps of analysis
• Steps:
1. Functions
2. Contract terms
3. Risks
4. Economic conditions
5. Property/service
• This decision was not made based on the 2009 Regulations. . .

8. CUT is Best Method
• Tax Payer Expert:
• Intangibles expected economic life
• 2 to 4 years
• Annual rate of obsolescence
• Ramp-down at 33%
• Royalty rate as a % of revenue, list price, or profits
• 20 to 25%
• Discount rate
• Comparable [functions, contract terms, risks, economic conditions, property/service]
• Select original equipment manufacturers – essentially the same intangibles
• 90+ selected in expert report
Same/ different – Ireland is not a distributor
8

9. Court Results – all separate not aggregate
• Royalty for Technology Licensing Agreement – based on sales:
• 32% off list – year 1
• 21% off list – year 2
• 14% off list – year 3
• 10% off list – year 4
• Trademarks –
• $9.6 m (over a 7 year period)
• Sales agreements –
• Computation by parties – needed more data
• IRS wanted to value all together – aggregation not allowed

10. Approaches compared
OECD US Tax Court Analysis in Veritas
Step 1: Identify economically significant risks with
specificity
Functions
Step 2: Analyze the contractual assumption of risks Contract terms
Step 3: Functional Analysis Risks
Step 4: Interpretation Economic conditions
Step 5: Risk allocation Property/service
Step 6: Pricing of the transaction in accordance with
risk allocation analysis

11. Xilinix (2010)
• Xilinix v. Commissioner (2010)
• Issue – Can stock based compensation be a business expense?
• Taxpayer won – stock based compensation can be a business expense
• Arm’s length standard - cost sharing stock based compensation issue
• Would companies share costs of stock based compensation? Court says
no – because no comparable contract would provide for such
compensation.
• You can’t imagine a rival company paying stock based compensation for another
company.
• Initial analysis on statutory and regulatory interpretation – but heavy
emphasis on comparable contracts

12. Amazon. Commissioner (2017)
• Taxpayer won
• Court examined services/property/intangibles in aggregate – citing to
Veritas methodology.
• Veritas valued contracts over economic conditions.
• The Court wrote:
• "By definition, compensation for subsequently developed intangible property
is not covered by the buy-in payment. Rather, it is covered by future cost
sharing payments, whereby each [cost sharing] participant pays its ratable
share of ongoing [intangible development costs].”
• “By valuing ‘short-lived intangibles ... as if they have a perpetual life,’ the
Commissioner's buy-in computation improperly took into account the value of
‘intangibles that were subsequently developed rather than pre-existing.”

13. U.S. Tax Court Jurisprudence

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