The Seemingly Strange Case of the Negative PCT Payment

Reproduced with permission from Tax Management Transfer Pricing Report, Vol. 24 No. 7, 8/6/2015. Copyright
஽ 2015 by The Bureau of National Affairs, Inc. (800-372-1033) http://www.bna.com
The Seemingly Strange Case of the Negative PCT Payment
When Cost Sharing Under the Income Method
The authors offer a detailed analysis that shows how the income method in U.S. transfer
pricing regulations allows for the possibility that a U.S. multinational making platform con-
tributions to a controlled foreign corporation in the form of valuable intangible rights
would be required to compensate the foreign corporation to induce it to agree to enter into
the cost sharing arrangement.
BY MARCO FIACCADORI, JOSEPH L. TOBIN AND
PHILIPPE G. PENELLE, DELOITTE TAX LLP
T
his article presents some important results in ap-
plying the income method specified in the cost
sharing provisions under Regs. §1.482-7(g)(4).
These results are useful in understanding the relation-
ship between the reasonably anticipated benefit (RAB)
shares selected and the sign and magnitude of the plat-
form contribution transaction (PCT) payment. In par-
ticular, these results establish a necessary and sufficient
condition (an ‘‘if and only if’’ condition) such that proj-
ects with strictly positive expected consolidated gross
intangible income will result in a strictly positive PCT
payment. When that necessary and sufficient condition
is violated, a negative PCT payment is required because
the allocation of consolidated intangible development
costs (IDCs) to the controlled foreign participant (CFP)
exceeds the gross intangible income it can reasonably
expect from exploiting the cost shared intangibles (see
the discussion of the ‘‘FTP condition’’ below). As a cor-
ollary to the main result, the ratio of the expected gross
intangible income of the CFP to the expected consoli-
dated gross intangible income always is equal to the
same ratio net of IDCs (see the discussion of FTP
Lemma). This result is important in applying the defini-
tions in Regs. §1.482-7(j)(1)(i) and -7(e)(1)(i).
One of the most striking results is that one RAB
share is not more reliable than any other in producing
an arm’s-length result—defined in this context as the ex
ante indifference of both participants between the li-
censing alternative and the cost sharing alternative, as
required under the realistic alternative concept in Regs.
§§1.482-7(g)(2)(iii)(A) and (g)(4)(i)(A). In fact, the in-
come method specified in the regulations will produce
an arm’s-length result for any RAB share 0 < α < 1, in-
cluding randomly selected ones, as long as the PCT
payment is allowed to take any value on the real line
(including negative values) to ensure achieving the
regulatorily mandated indifference between the licens-
ing alternative and the cost sharing alternative (see the
discussion of the IRS paradox below).
However, this article also will show (in Figure 4)
that, under the requirements of Regs. §1.482-7(e)(1)(ii),
the Fiaccadori-Tobin-Penelle (FTP) RAB share always
will be more reliable than any other RAB share that re-
sults in a strictly negative PCT. Strictly negative PCTs
therefore cannot be ruled out for violating the arm’s-
length standard under Regs. §1.482-1(b)(1), but argu-
ably they can be ruled out for violating Regs. §1.482-
7(e)(1)(ii).
Marco Fiaccadori, Ph.D., and Joe Tobin are
senior managers, and Philippe Penelle, Ph.D.,
is a principal, in Deloitte Tax LLP’s Wash-
ington National Tax office. Tobin finalized the
cost sharing regulations while at the Internal
Revenue Service’s Office of Associate Chief
Counsel (Branch 6) in 2011. The authors are
grateful for feedback on a previous version
of this article received from Shanto Ghosh,
Jay Das, Robin Hart and Juan Sebastian Lle-
ras, and have benefited from discussions on
this and related topics over the years with
Alan Shapiro, Arindam Mitra, Larry Powell,
Larry Shanda, Mike Bowes, Sajeev Sidher and
Gretchen Sierra.
Copyright ௠ 2015 Deloitte Development LLC
Copyright ஽ 2015 TAX MANAGEMENT INC., a subsidiary of The Bureau of National Affairs, Inc. ISSN 1063-2069
Tax Management
Transfer Pricing Report™

Results
This section begins and ends with two fundamental
results. The first result establishes a necessary and suf-
ficient condition for a PCT payment to be strictly posi-
tive. The second result establishes that any RAB share,
including randomly selected ones, produces an arm’s-
length result. This leads to the legal discussion pre-
sented in the next section, and the illustrative example
developed in the third and last section.
Fiaccadori-Tobin-Penelle (FTP) Condition: Let the pres-
ent value of the expected gross intangible income of the
foreign participant in a cost sharing arrangement be
strictly positive. The platform contribution transaction
payment calculated under Regs. §1.482-7(g)(4)(2011) is
strictly positive if and only if the reasonably anticipated
benefit share of the foreign participant is strictly less
than the ratio of the present value of the expected gross
intangible income of the foreign participant to the pres-
ent value of the expected consolidated intangible devel-
opment costs.
Proof:
Let Rt denote the expected gross consolidated intan-
gible income at date t resulting from the intangible de-
velopment activities under the cost sharing arrange-
ment. Let Rt
FX
> 0 and Rt
US
> 0 denote the CFP and
U.S. gross intangible income at date t resulting from the
intangible development activities, respectively.1
It fol-
lows that
Let IDCt denote the expected consolidated intangible
development costs at date t. Let IDCt
FX
denote the ex-
pected intangible development costs allocated to the
CFP at date t ε {1,2,. . .,T}.2
Following the definition of
the platform contribution transaction payment under
Regs. §1.482-7(g)(4)(i)(A)(2011), one has the equation
below.
This formula to calculate the PCT payment always
holds true because the regulations mandate under
Regs. §1.482-7(g)(4)(i)(C) that ‘‘the analysis under the
licensing alternative should assume a similar allocation
of the risks of any existing resources, capabilities, or
rights, as well as of the risks of developing other re-
sources, capabilities, or rights that would be reasonably
anticipated to contribute to exploitation within the par-
ties’ divisions, that is consistent with the actual alloca-
tion of risks between the controlled participants as pro-
vided in the CSA in accordance with this section.’’ Fur-
thermore, Regs. §1.482-7(g)(4)(vi)(F)(1) provides that
‘‘the financial projections associated with the licensing
and cost sharing alternatives are the same, except for
the licensing payments to be made under the licensing
alternative and the cost contributions and PCT Pay-
ments to be made under the cost sharing alternative.’’
This is one of the most commonly overlooked require-
ments in the application of the income method under
Regs. §1.482-7(g)(4), as it forces a structure such that,
for example, any differences in discount rates between
the licensing and cost sharing alternative can only pos-
sibly be driven by the operating leverage (the IDC in the
cost sharing alternative being less variable than the roy-
alty in the licensing alternative) of the IDC in this appli-
cation of the income method.
In the following equation, rL
denotes the licensing al-
ternative discount rate, and rIDC
denotes the intangible
development cost discount rate. Note that rIDC
< rL
.4
Let 0 < α < 1 denote the share of IDC allocated to the
foreign participant.5
It follows that
Substituting this equation in the definition of the
platform contribution transaction payment, one obtains
the equation below.6
It follows that
1
Under Regs. §1.482-7(g)(4)(iii), Rt
FX
and Rt
US
are esti-
mated using a comparable uncontrolled transaction (CUT) or
a comparable profits method (CPM).
2
Where T can be a natural number or ∞.
4
See Philippe G. Penelle, ‘‘The Mathematics of Cost Shar-
ing under the Income Method,’’ 21 Transfer Pricing Report
665, 11/1/12. The discount rates are assumed to be those of
market participants (this is an application of the arm’s-length
standard) and, without loss of generality, constant over time.
5
Because α measures the expected reasonably anticipated
benefit share of the CFP over the period of cost sharing activ-
ity calculated at date t=1, the strict inequality is required to en-
sure that the cost sharing arrangement satisfies the require-
ments of Regs. §1.482-7(b) (2011). Because the valuation of the
PCT occurs at the inception of the cost sharing, α is not carry-
ing a time index.
6
This formula confirms the following statement attributed
to Daniel J. Frisch by Paul Shukovsky: ‘‘In testimony, Frisch
also made a point of saying that proper intangible develop-
ment costs affect the buy-in; the larger the IDC, the smaller the
buy-in value.’’ Shukovsky, ‘‘As Amazon Trial Closes, Tax
Court Judge Alludes to One Conclusion About Cost Pool,’’ 23
Transfer Pricing Report 1087, 1/8/15.
2
8-6-15 Copyright ஽ 2015 TAX MANAGEMENT INC., a subsidiary of The Bureau of National Affairs, Inc. TMTR ISSN 1063-2069

This concludes the proof of the FTP condition. It
should be noted and understood that the way the PCT
payment is defined and calculated in the Treasury regu-
lations is a ‘‘plug’’ that forces two discounted streams of
cash flows to have the same present value. Whether the
discounted stream of cost sharing alternative cash flows
before the PCT payment is greater or smaller than the
discounted stream of licensing alternative cash flows
entirely depends on the selected α. For some (low) val-
ues of α it could be the case that the discounted stream
of cost sharing alternative cash flows is greater than
that of licensing alternative cash flows and vice versa
for some (high) other values of α. This result is a direct
consequence of the tightly specified structure of the in-
come method in Regs. §1.482-7(g)(4).
Before graphically illustrating the FTP condition, the
FTP RAB share for the CFP shall be defined as:
αFTP
is named the FTP RAB share because when the
CFP is allocated IDC based on αFTP
, the resulting PCT
payment is by definition always exactly zero. Any RAB
share for the CFP lower than αFTP
results in a strictly
positive PCT (that is the FTP condition) and any RAB
share greater than αFTP
results in a strictly negative
PCT (because the FTP condition is an ‘‘if and only if
condition’’).
With a few substitutions, the PCT formula can be re-
written as:
This formula for the PCT makes clear when and why
a PCT may be negative, as summarized in Figure 1. A
direct graph of the size of the PCT is provided later in
Figure 4.
In the previous graph, α* denotes the RAB share for
the CFP consisting in the ratio of the present value of
the expected gross intangible income of the CFP to the
present value of the expected consolidated gross intan-
gible income. This graphic illustration of the FTP condi-
tion underscores the critical importance of the FTP RAB
share—RAB shares lower than the FTP RAB share re-
sult in a positive PCT, while RAB shares greater than
the FTP RAB share result in a negative PCT.
Thus, for a project with positive expected consoli-
dated value under the discounted cash flow method
(DCF), one has the following (assuming without loss of
generality that the consolidated IDCs are in excess of
the expected gross intangible income of the CFP):
3
TAX MANAGEMENT TRANSFER PRICING REPORT ISSN 1063-2069 BNA TAX 8-6-15

Similarly, for a project with negative expected con-
solidated value under DCF, one has the following:
For example, consider a project with positive ex-
pected consolidated value under DCF. Suppose that the
RAB share selected is net sales, where:
Since the RAB share of the foreign participant α is
strictly greater than the ratio of the present value of the
expected gross intangible income of the foreign partici-
pant to the present value of the expected consolidated
intangible development costs, the resulting PCT pay-
ment is negative—despite the project having strictly
positive expected value under DCF.
This establishes that projects with strictly positive
expected value under DCF will result in a negative PCT
payment under Regs. §1.482-7(g)(4) when the FTP con-
dition is violated. In the previous example, the negative
PCT payment rebalances in present value the over-
allocation of IDC. The over-allocation of IDC is the re-
sult of using a RAB share for the CFP based on sales
rather than expected gross (or net—see FTP Lemma be-
low) intangible income. The RAB share based on sales
overestimates the relative beneﬁt of the CFP from the
cost sharing arrangement. The rebalancing is required
by law to achieve indifference between the licensing
and the cost sharing alternatives.
As another example, consider a project with negative
consolidated expected value under DCF. Suppose that
the RAB share selected for the CFP is expected gross in-
tangible income, where:
Because the RAB share of the CFP α is strictly
greater than the ratio of the present value of the ex-
pected gross intangible income of the CFP to the pres-
ent value of the expected consolidated intangible devel-
opment costs, the resulting PCT payment is negative.
This establishes that projects with strictly negative
expected value under DCF will result in a negative PCT
payment under Regs. §1.482-7(g)(4) if the RAB share
selected for the CFP is the ratio of the expected gross
(or net—see FTP Lemma below) intangible income of
the CFP in the expected gross (or net) consolidated in-
tangible income.
Corollary 1: If the RAB share of the CFP is calculated
using the present value of expected gross intangible in-
come of the CFP in the expected gross consolidated in-
tangible income, the PCT payment is strictly positive if
and only if the intangible development activity has
strictly positive expected consolidated net present value
under DCF.
Proof:
4

Let
Using the FTP condition, one knows that
Furthermore:
Therefore,
Corollary 2: If the present value of the expected gross
intangible income of the CFP is strictly greater than the
present value of the expected consolidated intangible
development costs, the platform contribution transac-
tion payment is always strictly positive.
Proof:
Using the FTP condition, one knows that Furthermore,
Since α < 1, it follows that j 0 < α < 1
5

Lemma (Fiaccadori-Tobin-Penelle): RAB shares calcu-
lated as the ratio of the present value of the expected
gross intangible income of the CFP to the expected con-
solidated gross intangible income are equal to those
calculated as the ratio of the present value of the ex-
pected net intangible income of the CFP to the expected
consolidated net intangible income.
Proof:
Let h denote a fixed point of the following mapping:
That is,
Solving for h
Simplifying,
h is therefore given by
Furthermore, h is unique by the intermediate value
theorem as Map is a continuous and strictly decreasing
in the compact domain 0 ≤ α ≤ 1 with Map(0) > 0 and
Map(1) < 1.
One may now prove the striking result that any RAB
share (for the CFP) such that 0 < α < 1, including ran-
domly selected ones, produces an arm’s length result.
Again, this property is a direct consequence of the way
the income method under Regs. §1.482-7(g)(4) is speci-
fied and implemented; it is not a universal property of
the application of other specifications of the income
method. This result is, however, critically important as
the Irrelevance of the RAB Share Paradox below (IRS
Paradox in short) shows that controversy on the rea-
sonableness of specific RAB shares appears to be some-
what meaningless—at least insofar as the arm’s length
nature of the result is not at stake. Taxpayers are re-
quired by the Treasury regulations under Internal Rev-
enue Code Section 482 to achieve an arm’s length result
in their controlled dealings. That overarching require-
ment of Regs. §1.482-7(b)(1) tends to trump any other
requirements under Section 482. In the next section of
6

this article, the reader will be engaged in a more granu-
lar legal discussion of the results outlined herein, in-
cluding a discussion of how Regs. §1.482-7(e)(1)(ii) af-
fects the selection of RAB shares.
Irrelevance of RAB Share Paradox (IRS Paradox): Let
the present value of the expected gross intangible in-
come of the controlled foreign participant in a CSA be
strictly positive. The platform contribution transaction
payment calculated under Regs. §1.482-7(g)(4)(2011) is
arm’s length for all RAB shares for the CFP 0 < α < 1.
Proof:
Consider the proof of the FTP condition up until
Recall that this formula is satisfied for all 0 < α < 1.
Let WCSA
and WLicense
denote the non-routine value of
the cost sharing alternative and of the licensing alterna-
tive to the CFP, respectively. It should be clear that one
can always normalize WLicense
= 0 because the CFP
does not contribute any valuable intangible assets to the
CSA, and to the extent the CFP exploits non-cost-
shared intangibles in the cost sharing alternative, it also
does in the licensing alternative. This is a direct conse-
quence of Regs. §1.482-7(g)(4)(i)(C) and Regs. §1.482-
7(g)(4)(vi)(F)(1).
An arm’s length result is defined as a result such that
for 0 < α < 1 one has WCSA
(α) = WLicense
= 0. This is a
direct application of the realistic alternative concept of
Regs. §1.482-7(g)(2)(iii)(A) and Regs. §1.482-
7(g)(4)(i)(A).7
Substituting the formula for the PCT above into WCSA
(α), one obtains, for all 0 < α < 1:
Notice how the function WCSA
(α) reduces to WLicense
regardless of the particular value of α (the CFP RAB
share) selected.
Legal Discussion
The most interesting case to discuss is that of a proj-
ect with positive (consolidated) value under DCF, and
not enough expected gross intangible income in the for-
eign divisional interest to justify incurring the expected
consolidated intangible development costs. These two
conditions are written below:
Applying the FTP condition, one concludes that
since:
A strictly negative PCT payment will occur when the
CFP RAB shares are such that
7
Regs. §1.482-7(g)(4)(i)(A) reads: ‘‘The income method
evaluates whether the amount charged in a PCT is arm’s
length by reference to a controlled participant’s best realistic
alternative to entering into a CSA. Under this method, the
arm’s length charge for a PCT Payment will be an amount such
that a controlled participant’s present value, as of the date of
the PCT, of its cost sharing alternative of entering into a CSA
equals the present value of its best realistic alternative. In gen-
eral, the best realistic alternative of the PCT Payor to entering
into the CSA would be to license intangibles to be developed
by an uncontrolled licensor that undertakes the commitment
to bear the entire risk of intangible development that would
otherwise have been shared under the CSA. Similarly, the best
realistic alternative of the PCT Payee to entering into the CSA
would be to undertake the commitment to bear the entire risk
of intangible development that would otherwise have been
shared under the CSA and license the resulting intangibles to
an uncontrolled licensee. Paragraphs (g)(4)(i)(B) through (vi)
of this section describe specific applications of the income
method, but do not exclude other possible applications of this
method.’’
7

From a legal standpoint, it is interesting to explore
whether anything in the Treasury Regulations could, or
would, prevent the CFP RAB share α to satisfy the last
inequality above and result in a negative PCT payment.
At this stage of the discussion, it becomes particu-
larly important to distinguish the definition of various
concepts in the Treasury Regulations from the mea-
surement thereof, and the guidance provided in the
Treasury Regulations about the measurement thereof.
Regs. §1.482-7(j)(1)(i) provides the following important
definitions:
s Benefit: ‘‘Benefits mean the sum of additional rev-
enue generated, plus cost savings, minus any cost in-
creases from exploiting cost shared intangibles.’’ Main
Cross References §1.482-7(e)(1)(i);
s Reasonably Anticipated Benefits: ‘‘A controlled
participant’s reasonably anticipated benefits mean the
benefits that reasonably may be anticipated to be de-
rived from exploiting cost shared intangibles. For pur-
poses of this definition, benefits mean the sum of addi-
tional revenue generated, plus cost savings, minus any
cost increases from exploiting cost shared intangibles.’’
Main Cross References §1.482-7(e)(1).
In addition, Regs. §1.482-7(e)(1)(i) provides that ‘‘A
controlled participant’s share of reasonably anticipated
benefits is equal to its reasonably anticipated benefits
divided by the sum of the reasonably anticipated ben-
efits, as defined in paragraph (j)(1)(i) of this section, of
all the controlled participants.’’ These provisions com-
bine to precisely define the ‘‘true’’ RAB share for the
CFP as being the ratio of present value of the expected
net intangible income of the CFP to the present value of
the expected consolidated net intangible income (attrib-
utable to the cost shared intangibles). The FTP Lemma
demonstrated that the aforementioned ratio is equal to
α*, the ratio of the present value of the expected gross
intangible income of the CFP to the present value of the
expected consolidated gross intangible income (attrib-
utable to the cost shared intangibles).
That ‘‘true’’ RAB share α*, however, is neither
known nor directly observable ex ante nor ex post.
Regs. §1.482-7(e)(1)(ii) thus provides taxpayers with
guidance on how to estimate the ‘‘true’’ RAB share α* :
‘‘A controlled participant’s RAB share must be deter-
mined by using the most reliable estimate. In determin-
ing which of two or more available estimates is most re-
liable, the quality of the data and assumptions used in
the analysis must be taken into account, consistent with
§1.482-1(c)(2)(ii) (Data and assumptions). Thus, the re-
liability of an estimate will depend largely on the com-
pleteness and accuracy of the data, the soundness of the
assumptions, and the relative effects of particular defi-
ciencies in data or assumptions on different estimates.’’
Let 0 < i* < 1 denote the most reliable estimate of
α* based on the data available. Applying the IRS Para-
dox, it is known that any CFP RAB share, including i*
and any other strictly greater than zero and strictly
lower than one, results in an arm’s length allocation of
income between participants. This property of the CFP
RAB shares addresses the overarching principle of Sec-
tion 482—as memorialized in the affirmation of the
arm’s length standard under Regs. §1.482-1(b)(1) as be-
ing the universal burden placed on taxpayers. However,
only one RAB share meets the requirement of Regs.
§1.482-7(e)(1)(ii).
Regs. §1.482-7(a)(1) directs readers to ‘‘See para-
graph (b)(1)(i) of this section regarding the require-
ment that controlled participants, as defined in section
(j)(1)(i) of this section, share intangible development
costs (IDCs) in proportion to their shares of reasonably
anticipated benefits (RAB shares) by entering into cost
sharing transactions (CSTs).’’ Furthermore, Regs.
§1.482-7(e)(1)(ii) provides that ‘‘[a] controlled partici-
pant’s RAB share must be determined by using the most
reliable estimate.’’
First note that Regs. §1.482-7(a)(1) states merely that
This provision, however, does not provide any guid-
ance as to how α must be estimated. That piece of guid-
ance is provided in Regs. §1.482-7(e)(1)(ii) by the re-
quirement that i* must be the most reliable estimate of
the α* . In other words:
For taxpayers who (i) have reliable projections de-
veloped for both controlled participants down to the op-
erating income line; (ii) can reliably estimate for both
controlled participants the routine returns; and (iii) can
reliably bifurcate the estimated gross intangible income
of the U.S. participant to isolate the contribution of the
cost shared intangibles (RUS
) from the contribution of
non-cost-shared intangibles to that gross residual, it
could be the case that
It should be clear that this strategy requires a large
number of data, parameters, and assumptions com-
pared to an indirect base of measurement such as a
RAB share based on net revenue, for example. The
mere fact that a taxpayer has developed full financial
projections for both participants down to the operating
income line does not mean that a direct measurement
of α* is more reliable than an indirect measurement
8

thereof. The Treasury regulations are very clear on that
point.
Should reliable estimates of RFX
and RUS
not exist,
one obvious alternative would be to use the present
value of projected operating income as a proxy of each
RX
, provided reliable projections down to the operating
income line exist for both participants.8
However, guidance in Regs. §1.482-7(e)(2)(ii)(C) in-
dicates that operating profit is likely to be the most reli-
able method only in certain limited circumstances:
‘‘This basis of measurement will more reliably deter-
mine RAB shares to the extent that such profit is largely
attributable to the use of cost shared intangibles, or if
the share of profits attributable to the use of cost shared
intangibles is expected to be similar for each controlled
participant. This circumstance is most likely to arise
when cost shared intangibles are closely associated
with the activity that generates the profit and the activ-
ity could not be carried on or would generate little profit
without use of those intangibles.’’
In other circumstances, a different measurement
metric would arguably have to be used, such as units
sold (allowed under Regs. §1.482-7(e)(2)(ii)(A)), or
sales (allowed under Regs. §1.482-7(e)(2)(ii)(B)), or an-
other base (allowed under Regs. §1.482-7(e)(2)(ii)(D)).
While the direct basis for measuring RAB shares is a net
concept, the regulations do not indicate any preference
for the direct basis for measuring RAB shares; instead,
the regulations simply indicate that the most reliable
basis for measurement must be used.
Note that two of the three specified indirect bases for
measuring RAB shares – sales and units sold — are
gross concepts. The other base method for determining
RAB share under Regs. §1.482-7(e)(2)(ii)(D) indicates
that the general criteria of acceptability for such other
base would be the extent to which ‘‘there is expected to
be a reasonably identifiable relationship between the
basis of measurement used and additional revenue gen-
erated or net costs saved by the use of the cost shared
intangibles.’’ When none of the specified bases work,
the regulations sanction the use of a gross concept as
the basis of measurement. Thus, three of the four indi-
rect bases of measurement of RAB share are gross con-
cepts rather than net concepts. It follows that the regu-
lations contemplate that a gross basis for measuring
benefits may be the most reliable measurement metric
in many circumstances.
The conclusion of this legal analysis is that out of all
the RAB shares examples contained in the cost sharing
regulations only one example—Regs. §1.482-
7(e)(2)(ii)(E) (Example 5) — uses a ratio that may en-
sure that a PCT payment will not be negative for a proj-
ect with positive expected value under DCF (see Corol-
lary 1). The word ‘‘may’’ is used because the ratio used
is expected operating income, not expected gross intan-
gible income—the words ‘‘shall’’ or ‘‘will’’ would have
been chosen had the ratio used been expected gross in-
tangible income. However, since in that example most
of the expected operating income comes from the cost
shared intangibles, it is likely (albeit not guaranteed)
that the two ratios will be very close to each other.
For projects that have expected consolidated gross
intangible values fairly close to the expected consoli-
dated discounted IDC, it is very likely that even small
deviations of i* from the ‘‘true’’ α* will result in a nega-
tive PCT payment.
Mathematically:
And using the FTP condition, one has:
So, for example, if the first ratio above is 50 percent
and the second ratio is 52 percent, then a selection of a
RAB share strictly greater than 52 percent (for instance,
53 percent) results in a negative PCT payment. This cor-
responds to a 1.5 percent deviation (not basis points)
from the target ratio that ensures a non-negative PCT.
Since RAB shares have to be estimated, the level of
measurement accuracy required in such cases to ensure
a non-negative PCT is substantially greater than can
possibly be realistically achieved or required of taxpay-
ers. For example, suppose the CFP RAB share based on
sales is 55 percent. It follows that using a CFP RAB
share of 55 percent (instead of 50 percent) makes a dif-
ference between a strictly negative and a positive PCT
payment.
It would be erroneous to assume that this case is far-
fetched. Remember that the discount rate used to dis-
count the expected IDC is lower than the discount rate
used to discount expected gross intangible income. An
investment that requires high levels of IDC upfront (be-
8
This would be an unreliable strategy if the U.S. participant
exploits non-cost-shared intangibles in connection with the ex-
ploitation of cost shared intangibles, which is often the case.
See Regs. §1.482-7(e)(2)(ii)(C).
9

fore any expectation of revenue) for a long period be-
fore any revenue is expected will therefore tend to re-
sult easily in a violation of the FTP condition. This, in
turn, will result in a strictly negative PCT payment, de-
spite the choice of an otherwise reliable measurement
of the CFP RAB share.
The use of differential discount rates is not necessary
to cause the PCT to be negative—the numerical ex-
ample in the next section clearly illustrates that. The
real factor that causes a PCT to be negative under Regs.
§1.482-7(g)(4) is the RAB share selected relative to the
expected gross intangible income in the foreign divi-
sional interest. The use of differential discount rates ex-
acerbates the issue and makes the likelihood of a nega-
tive PCT greater for any given RAB share.
It was mentioned earlier that the FTP RAB share is
of great importance. One of the reasons is illustrated in
Figure 4.
Figure 4 illustrates the decrease in PCT as the CFP
RAB share increases. Notice that when the CFP RAB
share equals the FTP RAB share, the PCT is exactly
zero. Figure 4 is thus the same as Figure 1 with the ad-
dition of a y-axis tracking the value of the PCT as the
RAB share selected varies. Assume that a taxpayer
takes the position that, based on data availability, and
assumptions and parameters required, the most reliable
RAB share is based on net revenue. Further assume that
i* > αFTP
. The ‘‘true’’ RAB share α* is always to the left
of the FTP RAB share for projects with positive value
under DCF, as shown in Figure 4 (also see Figure 2). In
this case, i* cannot possibly satisfy Regs. §1.482-
7(e)(1)(ii) and be the most reliable. The reason for that
impossibility should be clear from Figure 4; although
nobody knows where α* really is, it is certain that α* ≤
αFTP
. It follows that it is more reliable to use the FTP
RAB share in this case than it is to use the RAB shares
based on net revenue—it gets you closer to the ‘‘true’’
(but unknown and unobservable) PCT.
This is the reason why the application of Regs.
§1.482-7(e)(1)(ii) allows a rewrite of the general for-
mula for the PCT:
As:
10

With:
The article will now turn to a more developed ex-
ample that will illustrate the ideas developed conceptu-
ally in this article.
Example
The example discussed in this section demonstrates
numerically the existence of the inverse relationship be-
tween RAB shares and PCT payment calculated under
Regs. §1.482-7(g)(4). Recall from our previous discus-
sion that a larger allocation of IDC to the CFP by choice
of a greater RAB share will translate into a lower, pos-
sibly negative PCT payment (see the FTP condition)
that always satisfies the arm’s length standard (see the
IRS Paradox). These properties were discussed in the
Results section of this article.
Table I summarizes the results of the numerical ex-
ample developed and discussed in this section. Not only
does Table I illustrate the impact of the selection of RAB
shares on the sign of the PCT payment, it also illustrates
the sensitivity of the magnitude of the PCT payment to
the RAB shares selected.
Table 1
RAB Shares Selected
Based On
RAB
Shares
Lump-Sum PCT
Payment (NPV)
Cumulative Sales
(undiscounted)
50% -$2.2 million
FTP RAB share 49% $0.0
Pre-IDC Operating
Profits (discounted)
42% +$15.5 million
The various RAB shares considered in Table 1 have a
mathematical expression that were presented in the Re-
sults section of this article. In particular, the FTP RAB
share was defined as the RAB share that resulted in a
zero PCT payment. It was the pivotal RAB share that
swung the PCT from being positive to becoming nega-
tive in the FTP condition. It was also shown to be a
more reliable RAB share under Regs. §1.482-7(e)(1)(ii)
than any RAB share that results in a negative PCT.
To eliminate any doubt as to what causes the possi-
bility of a negative PCT under Regs. §1.482-7(g)(4), this
example will be developed using the same discount
rates to discount the cash flows in the cost sharing al-
ternative and in the licensing alternative. It should be
obvious that a negative PCT cannot possibly be caused
by differential discount rates in an example in which
said discount rates are forced (unrealistically) to be
identical.9
Every other assumption made will serve the
same purpose, that is, rule out causality between each
specific potential cause of a negative PCT other than
that memorialized in the FTP condition—a RAB share
in excess of a specific ratio of discounted values. In this
example, only timing differences will cause the negative
PCT for the RAB shares that are being analyzed.10
Assumptions
1. Differential discount rates do not cause negative
PCT: all streams are discounted at the same rate (15
percent per annum);
2. Tax rates and tax arbitrage do not cause negative
PCT: all relevant tax rates are assumed to be zero;
3. Long valuation horizons do not cause negative
PCT: the CSA is expected to last for five years (2015-19)
with no terminal value;
4. Only timing differences across divisional interests
cause negative PCT:
a. The expected operating margin before IDC is 55
percent per annum in each divisional interest;
b. Routine returns are 5 percent of sales in each di-
visional interest;
c. Cumulative sales are the same in each divisional
interest;
d. Cumulative cost of goods sold are the same in
each divisional interest;
e. Cumulative operating income are the same in
each divisional interest; and
f. The only difference between the divisional inter-
ests is the timing of exploitation of the cost shared
intangibles (see Tables 3 and 4 below).
5. Other assumptions:
a. The income method is applied to the expected op-
erating income streams (not cash flows) of the li-
censing and cost sharing alternatives, respectively;
b. The PCT payment shall be paid in a lump sum;
and
c. The project has positive expected consolidated
value.
9
The use of differential discount rates can exacerbate the
magnitude of a negative PCT, but it does not cause it per se.
Note that in a legitimate CSA involving legitimate IDC, it is al-
ways the case that the cost sharing alternative and the licens-
ing alternative discount rates are different in an application of
Regs. §1.482-7(g)(4). This is another consequence of the pre-
scriptions of Regs. §1.482-7(g)(4)(i)(C) and -7(g)(4)(vi)(F)(1).
10
To be more specific, differences in the timing of recogni-
tion of expected costs and revenues for the two divisional in-
terests will dictate what the CFP FTP RAB share is, which in
turn will determine whether any candidate RAB share results
in a positive or negative PCT payment.
11

The following will now explain step by step the rea-
sons why this numerical example results in a negative
PCT.
Step 1: Check that the project has positive
expected consolidated value
An important purpose of this example is to demon-
strate that a cost sharing agreement? that has positive
expected consolidated value under the DCF method can
have at arm’s length negative PCT payments associated
with it under Regs. §1.482-7(g)(4). The first step in es-
tablishing this conclusion numerically is thus to con-
struct an example of a cost sharing arrangement with
positive expected consolidated value.
Table 2 presents the consolidated financial projec-
tions of the cost sharing alternative. Note that consis-
tent with the Treasury regulations, these financial pro-
jections are assumed to be probability weighted aver-
ages of possible outcomes. Notice that the first
expected operating income and operating margin pre-
sented in Table 2 are pre-IDC. After presenting the ex-
pected value of each of the financial projection items for
each year 2015-19, the present value of these items, dis-
counted at 15 percent (see assumptions) is calculated
and presented in the far-right column of Table 2.
All values in Table 2 are assumed to be in millions of
current dollars.
Table 2
CONSOLIDATED (WW)
(In millions)
2015 2016 2017 2018 2019 2015-2019
(PV)
Revenue $50.0 $250.0 $100.0 $100.0 $300.0 a $504.59
CoGS $7.5 $37.5 $15.0 $15.0 $45.0 b $75.69
Operating Expenses $15.0 $75.0 $30.0 $30.0 $90.0 c $151.38
Op. Income (pre-IDC) $27.5 $137.5 $55.0 $55.0 $165.0 d $277.53
Op. Margin (pre-IDC) 55% 55% 55% 55% 55% e 55%
Routine Profits $2.5 $12.5 $5.0 $5.0 $15.0 f $25.23
Gross Intangible Income $25 $125 $50.0 $50.0 $150.0 g $252.30
IDC $150.0 $75.0 $30.0 $10.0 $5.0 h $215.07
Net Intangible Income -$125 $50 $20 $40 $145 i $37.22
Note: a, b, c, and h are assumed. d=a-b-c; e=d/a; f=5%×a; g=d-f; i=g-h
The expected net present value (consolidated) of the
intangible development activity of the cost sharing al-
ternative is positive $37.22 million. In the notation used
throughout the article, one has:
By assumption, one has rL
= rIDC
= 15 percent (see
assumptions). Having a project subject to a cost sharing
arrangement with positive expected net present value
(consolidated), the next step is to show how the ex-
pected costs and revenues are expected to be recog-
nized by both participants in the cost sharing alterna-
tive; timing is going to be of the essence, because it will
be the only difference between the expected results of
the cost sharing for the two divisional interests. In fact,
cumulatively (undiscounted) over the period of cost
sharing activity, the two divisional interests are undis-
tinguishable.
Step 2: Show the financial projections of the
divisional interest of each participant
The financial projections for the divisional interest of
each participant obviously reconcile with the consoli-
dated financial projections in Table 2. The reader will
recognize in Table 3 and Table 4 that the only differ-
ence in the financial projections of the divisional inter-
est of each participant is the timing of recognition of ex-
pected costs and revenues; everything else is assumed
to be exactly the same (see assumptions). As a reminder
to the reader, this is done to isolate the cause of nega-
tive PCT, not to isolate factors that exacerbate negative
PCT.
12

Table 3
U.S. Participant
(In millions)
2015 2016 2017 2018 2019 2015-2019
(PV)
Revenue $50.0 $250.0 $50.0 $50.0 $0.0 a $293.98
CoGS $7.5 $37.5 $7.5 $7.5 $0.0 b $44.10
Op. Margin (pre-IDC) 55% 55% 55% 55% NA e 55%
Routine Profits $2.5 $12.5 $2.5 $2.5 $0.0 f $14.70
Gross Intangible Income $25 $125 $25.0 $25.0 $0.0 g $146.99
Note: a, b, and c are assumed. d=a−b−c; e=d/a; f=5%×a; g=d−f
Table 4
CF Participant
(In millions)
2015 2016 2017 2018 2019 2015-2019
(PV)
Revenue $0.0 $0.0 $50.0 $50.0 $300.0 a $210.62
CoGS $0.0 $0.0 $7.5 $7.5 $45.0 b $31.59
Op. Margin (pre-IDC) NA NA 55% 55% 55% e 55%
Routine Profits $0.0 $0.0 $2.5 $2.5 $15.0 f $10.53
Gross Intangible Income $0.0 $0.0 $25.0 $25.0 $150.0 g $105.31
Note: a, b, and c are assumed. d=a−b−c; e=d/a; f=5%×a; g=d−f
Using the notation used throughout this article, one
can write the expected gross intangible income of the
CFP as:
Recall from Step 1 that the expected net present
value of the IDC (consolidated) was given by:
One is now in position to analyze in the next step
various RAB shares that could reasonably allocate a
portion of the consolidated IDC of $270 million to each
participant.
Step 3: RAB share allocation of consolidated
IDC to each participant
The Treasury regulations provide that a RAB must be
selected, and consolidated IDC must be shared between
participants to a cost sharing in proportion to their re-
spective reasonably anticipated benefit share.
Cumulative Revenue-Based RAB Shares
Consider an allocation of consolidated IDC based on
the cumulative revenue reasonably anticipated by each
cost sharing participant in its respective divisional in-
terests. Revenue is one of the most frequently used RAB
share alternatives used by practitioners, because it is
fairly reliably estimated and it is simple to administer.
Based on the assumptions, this is equivalent to a 50-50
split of IDCs as each cost sharing participant expects
cumulative revenues of $400 million during the course
of the cost sharing arrangement. Table 5 summarizes
the data used to calculate the RAB shares using cumu-
lative revenue.
Table 5
Cumulative Revenue (in
millions)
2015 2016 2017 2018 2019 2015-2019
U.S. Participant $50.0 $250.0 $50.0 $50.0 $0.0 $400
CF Participant $0.0 $0.0 $50.0 $50.0 $300.0 $400
α is denoted as the RAB share of the CFP. Keeping that notation, it follows that
13

Therefore, the CFP will be allocated half of the cu-
mulative IDC. Table 6 shows the yearly expected IDC
and the allocation of half to each participant.
Table 6
IDC Allocation
(In millions)
2015 2016 2017 2018 2019 2015-2019
(PV)
Consolidated $150.0 $75.0 $30.0 $10.0 $5.0 $215.07
Allocated U.S. Participant $75.0 $37.5 $15.0 $5.0 $2.5 $107.6
Allocated CF Participant $75.0 $37.5 $15.0 $5.0 $2.5 $107.6
Since the CFP gets allocated $107.6 million of IDC
but only expects million of gross intangible income, one
can calculate the PCT as:
The negative PCT is required to make the CFP indif-
ferent between licensing and cost sharing pursuant to
Regs. 1.482-7(g)(4)(i)(A). The intuition is simple
enough: in this example, RAB shares based on cumula-
tive revenue allocate more IDC to the CFP than it rea-
sonably expects in gross intangible income (both in
present values), despite the positive expected value of
the (consolidated) project.
FTP RAB Share
The FTP RAB share is (by deﬁnition) the RAB share
that results in a zero PCT.
Remember that the FTP RAB share was deﬁned as
(see Results section):
To verify that an allocation of 49 percent of consoli-
dated IDC to the CFP results in a zero PCT, consider
Table 6.
Table 7
IDC Allocation
(In millions) 2015 2016 2017 2018 2019
2015-2019
(PV)
Consolidated $150.0 $75.0 $30.0 $10.0 $5.0 $215.07
14

Table 7 − Continued
IDC Allocation
(In millions) 2015 2016 2017 2018 2019
2015-2019
(PV)
and reasonably expects million of gross intangible in-
come, one can calculate the PCT as:
The allocation of IDC to the CFP exactly wipes out in
present value the entire gross intangible income ex-
pected by the CFP, resulting in indifference between li-
censing and cost sharing at a zero PCT.
Discounted Pre-IDC Operating
Profit RAB Share
Finally, consider a RAB share based on the expected
discounted pre-IDC operating profits of the partici-
pants. Note that this is different from the use of cumu-
lative pre-IDC operating profits, which would give the
same negative PCT result as cumulative sales, because
the RAB share based on cumulative pre-IDC operating
profits would be 50 percent as well.
From Tables 3 and 4, one calculates the RAB share
of the CFP as:
Table 7 summarizes the resulting allocation of IDC
to both participants.
Table 8
IDC Allocation
(In millions)
2015 2016 2017 2018 2019 2015-2019
(PV)
Consolidated $150.0 $75.0 $30.0 $10.0 $5.0 $215.07
Because the CFP gets allocated $89.77 million of IDC
and reasonably expects million of gross intangible in-
come, one can calculate the PCT as:
The allocation of IDC to the CFP leaves $15.54 mil-
lion of net intangible income in the cost sharing alter-
native that the CFP does not have in the licensing alter-
native. A PCT of $15.54 million is thus necessary to
achieve the regulatory mandate under Regs. 1.482-
7(g)(4)(i)(A) of indifference between the two options.
Applying the FTP Condition
As a practical matter, the easiest way to understand
the impact of the RAB shares on the sign of the PCT is
to apply the FTP condition directly. Having verified that
the expected gross intangible income of the CFP is
strictly positive (as per Table 4, it is $105.31 million),
one knows that
15

The FTP condition says that the PCT will be strictly
positive if and only if the selected RAB share for the
CFP is strictly less than 49 percent. The PCT will be
zero when the selected RAB share of the CFP is exactly
49 percent, and it will be strictly negative when the RAB
share of the CFP is strictly greater than 49 percent.
Armed with this important result, it is clear that RAB
shares based on cumulative sales that result in an allo-
cation of 50 percent of the consolidated IDC to the CFP
will result in a strictly negative PCT.
Applying the IRS Paradox
The IRS paradox states that any RAB share strictly
greater than zero and strictly less than one results in an
arm’s length outcome. To illustrate the application of
that result, a random number generator is used to pick
a random number strictly between zero and one. The
result of that random experiment was 0.62, which then
was selected as the RAB share for the CFP:
α = 0.62
Table 9 summarizes the resulting allocation of IDC
to both participants.
Table 9
Cumulative IDC
(In millions)
2015 2016 2017 2018 2019 2015-2019
(PV)
Consolidated $150.0 $75.0 $30.0 $10.0 $5.0 $215.07
and reasonably expects millions of dollars of gross in-
tangible income, one can calculate the PCT as:
To prove that allocating $133.35 million of IDC to the
CFP and having the U.S. participant pay the CFP a
lump-sum amount of $28.04 million is an arm’s-length
result, one must show that the realistic alternative con-
dition of the realistic alternative concept of Regs.
§1.482-7(g)(2)(iii)(A) and Regs. §1.482-7(g)(4)(i)(A) is
satisﬁed, namely, that the CFP is indifferent between li-
censing the intangibles and cost sharing them.
Normalize, as was done earlier, the value of the li-
censing alternative to the CFP to be zero—WLicense
= 0.
One thus needs to show that WCSA
(α = 0.62) = 0.
The application of the IRS Paradox (see Results sec-
tion) to this particular example illustrates the trade-off
that is implicit in the income method speciﬁed under
Regs. §1.482-7(g)(4) between allocating a certain
amount of present value of consolidated IDC to the CFP
and the sign and magnitude of the PCT. Because the
PCT is constructed to ensure indifference between li-
censing and cost sharing, any increase in IDC allocated
to the CFP will result in a one-for-one (in present value)
decrease of PCT to ensure WCSA
= WLicense
at the par-
ticular RAB share α selected. Since IDC allocations and
RAB shares increase and decrease together proportion-
ally, it follows that PCTs and both RAB shares and IDC
allocations will move in opposite directions: an increase
in RAB share results in a proportional decrease in PCT,
and a decrease in RAB share results in a proportional
increase in PCT. These movements in opposite direc-
tions are such that the net impact on the expected value
of the cost sharing to the CFP is left unchanged at the
expected value of the licensing alternative to the CFP.
16

Applying Regs. §1.482-7(e)(1)(ii)
Nowhere in this example was it indicated what the
‘‘true’’ CFP RAB share is. It is generally unobservable
and unknown and must be estimated based on the most
reliable measure of the ‘‘true’’ RAB share. The standard
of reliability to be used is that of Regs. §1.482-
7(e)(1)(ii). As discussed in the Legal Discussion section
of this article, the RAB share based on cumulative sales
of 50 percent is strictly less reliable than the FTP RAB
share of 49 percent. This is because for projects with
positive expected value under DCF, the ‘‘true’’ RAB
share α* is always to the left of the FTP RAB share,
which itself is always to the left of any and all RAB
shares that result in a negative PCT. It follows that the
FTP RAB share is more reliable in estimating the ‘‘true’’
RAB share than is the RAB share based on cumulative
sales.
Conclusion
The concept of a U.S. multinational making platform
contributions to a CFP in the form of valuable intan-
gible rights and required to compensate the CFP to in-
duce it to agree to enter into the cost sharing arrange-
ment may appear to many as egregious. How can that
possibly happen? This article provided a clear and defi-
nite answer as to why that can happen under the in-
come method specified in Regs. §1.482-7(g)(4). If the
selection of RAB share allocates more IDC to the CFP
than there is reasonably expected gross intangible in-
come in the foreign divisional interest, a negative PCT
is required under the law to ensure indifference of the
CFP between licensing and cost sharing.
Note once again that many of the properties of the
income method specified under Regs. §1.482-7(g)(4) de-
rive directly from Regs. §1.482-7(g)(4)(i)(C) and Regs.
§1.482-7(g)(4)(vi)(F)(1). These two provisions require
the financial projections used to value the cost sharing
alternative and the licensing alternative to be exactly
identical other than (i) the payment of a royalty in the
licensing alternative, (ii) the payment of IDC in the cost
sharing alternative, and (iii) the payment of a PCT in
the cost sharing alternative. In addition, all risks other
than those deriving directly from the differences noted
above are the same in both alternatives. Whether or not
these requirements are economically realistic in every
single scenario, or whether or not arm’s length parties
would make these two strong assumptions is irrelevant;
a taxpayer asserting treatment under Regs. §1.482-
7(g)(4) is bound by them. In that sense, although Regs.
§1.482-7(g)(4) does not provide taxpayers with a safe
harbor, when combined with new language that seems
to require results consistent with the results of income
method approaches in Regs. §1.482-7(g)(1),11
and the
IRS’s historical preference for the income method,12
it
creates something that provides taxpayers with a sig-
nificant level of predictability in outcome. Should a tax-
payer not be willing to accept Regs. §1.482-7(g)(4)(i)(C)
and -7(g)(4)(vi)(F)(1) in a particular fact pattern, and
thus decline the level of predictability offered by Regs.
§1.482-7(g)(4), other flavors of the income method can
be used as unspecified methods.
This article presents a view of the possible legal ba-
sis the government might have to shut down a negative
PCT resulting from the selection of a RAB share that ex-
ceeds the FTP RAB share. That basis is Regs. §1.482-
7(e)(1)(ii). The government could argue that the FTP
RAB share always is more reliable than the RAB share
selected by the taxpayer since it always is closer to the
‘‘true’’ (yet unknown and unobservable) RAB share de-
fined in Regs. §1.482-7(j)(1)(i) and Regs. §1.482-
7(e)(1)(i) for projects with positive value under DCF.
Taxpayers, however, likely will counter that they have
met the overarching burden of achieving an arm’s-
length result because all RAB shares strictly between
zero and one produce arm’s-length results (see IRS
Paradox). This article demonstrated that property of
RAB shares.
Additionally, the IRS might have a difficult time con-
vincing the courts that an unknown and unobservable
RAB share was more reliable than the RAB share the
controlled parties selected ex ante with the then-
available information, because the courts have rejected
the IRS’s theoretical approach to the arm’s length stan-
dard in favor of a practical approach that looks for con-
crete facts, rather than rely on theoretical econometric
analysis.13
Accordingly, it is possible that negative PCT
payments might be upheld by courts under certain fact
patterns discussed in this article.
The arguments for and against transactions valued
under Regs. §1.482-7(g)(4) with reasonable assump-
tions, data and parameters, carried out with negative
PCT payments, have now been set forth. The argument
in favor is that such transactions achieve an arm’s-
length result; the argument against is that they can be
considered to violate Regs. §1.482-7(e)(1)(ii) and
should be valued at a zero PCT payment.
Going forward, it will be up to taxpayers, the IRS and
the courts to resolve the inevitable resulting controver-
sies.
The opinions expressed in this article are those of
the authors and should not be construed in any way as
representing the opinions of Deloitte Tax LLP or any of
11
The 2011 final cost sharing regulations added the follow-
ing sentence to the regulations: ‘‘Each method must yield re-
sults consistent with measuring the value of a platform contri-
bution by reference to the future income anticipated to be gen-
erated by the resulting cost shared intangibles.’’ Regs. §1.482-
7(g)(1) (emphasis added). Thus, while any method can be
selected (consistent with the best method rule), that method
must yield results consistent with the results the income
method would generate.
12
See, for example, IRS Coordinated Issue Paper on Cost
Sharing Buy-ins favoring the application of the income method
as an unspecified method (16 Transfer Pricing Report 386,
10/4/07), withdrawn in 2012 (20 Transfer Pricing Report 812,
1/26/12); Veritas Software Corp. v. Comr., 133 T.C. No. 14
(2010), rejecting the IRS’s application of income method to a
cost sharing buy-in (18 Transfer Pricing Report 890, 12/17/09);
A.O.D. 2010-05, the IRS’s statement that it will not follow the
decision Veritas, rejecting the court’s results, reasoning and
factual conclusions, and asserting the IRS will continue to use
the income method for cost sharing buy-in disputes (19 Trans-
fer Pricing Report 808, 11/18/10); Amazon.com Inc. v. Comr.,
T.C., Docket No. 031197-12, the cost sharing buy-in dispute in
which the taxpayer is contesting the IRS’s application of the
DCF method to the buy-in payment (23 Transfer Pricing Re-
port 1087, 1/8/15).
13
See Xilinx Inc. v. Comr., 598 F.3d 1191 (9th Cir. 2010),
which rejected the IRS’s theoretical econometric interpretation
of the arm’s-length standard in Regs. §1.482-1(b)(1), indicating
that an arm’s-length analysis must be based on concrete facts
(18 Transfer Pricing Report 1171, 3/25/10).
17

its afﬁliated legal entities. This article does not consti-
tute tax, legal, or other advice from Deloitte Tax LLP,
which assumes no responsibility with respect to assess-
ing or advising the reader as to tax, legal, or other con-
sequences arising from the reader’s particular situa-
tion.
18

The Seemingly Strange Case of the Negative PCT Payment

Recommended

Recommended

More Related Content

What's hot

What's hot (20)

Similar to The Seemingly Strange Case of the Negative PCT Payment

Similar to The Seemingly Strange Case of the Negative PCT Payment (20)

The Seemingly Strange Case of the Negative PCT Payment