IRS To Probe Deeper Into Cost-Sharing Arrangements

10/06/2019

The US Internal Revenue Service has directed its transfer pricing examiners to resume reviewing taxpayers' transfer pricing positions with respect to cost-sharing agreements in certain circumstances.

In January 2018, the IRS issued Directive LB&I-04-0118-004 (the Reasonably Anticipated Benefits (RAB) Share Directive). This directed examiners to stop developing adjustments to CSAs based solely on changing a taxpayer's multiple RAB shares to a single RAB share when subsequent platform contribution transactions are added to an existing CSA. It said that this would continue until a service-wide position on the issue was finalized. It was intended to ensure the efficient use of transfer pricing examination resources within the IRS.

On June 5, 2019, the Internal Revenue Service published a directive withdrawing the RAB Share Directive, as a service-wide position has been finalized. This is set out in advice memorandum 2018-003, released by the Office of the Associate Chief Counsel (International) on July 26, 2018. That memorandum concluded that it may be appropriate to determine and apply different RAB shares with respect to separate cost pools under a single CSA.

The memorandum further concluded it may be appropriate to determine and apply a RAB share solely for the purpose of calculating platform contribution transaction payments with respect to a particular subsequent platform contribution transaction that was different from the RAB share used by the taxpayer to calculate cost share transaction payments under the CSA immediately before the subsequent platform contribution transaction was entered into.

In its June 5, 2019, directive, the IRS has told its staff that, "with the issuance of this guidance, examination of these CSA issues can now continue with the application of the most reliable method depending on the facts and circumstances of each case to determine the appropriateness of using single or multiple RAB shares with respect to a single CSA."

"These issues are necessarily fact intensive and may be complex. As always, transfer pricing issue teams should exercise care and rigor in developing the facts to support their analyses and conclusions. Where appropriate, a team should consider consulting the practice network and/or Counsel for support in developing the most reliable analysis of this issue," it said.

The new directive, withdrawing the RAB Share Directive, is effective May 21, 2019.

Source: Pride Partners International