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Definitions and special rules—(1) Definitions—(i) In general. For purposes of this section—...
Treas. Reg. § 1.482-7(j)(j)Definitions and special rules—(1) Definitions—(i) In general. For purposes of this section—
(ii)Examples. The following examples illustrate certain definitions in paragraph (j)(1)(i) of this section:
Example 1. Controlled participant.Foreign Parent (FP) is a foreign corporation engaged in the extraction of a natural resource. FP has a U.S. subsidiary (USS) to which FP sells supplies of this resource for sale in the United States. FP enters into a CSA with USS to develop a new machine to extract the natural resource. The machine uses a new extraction process that will be patented in the United States and in other countries. The CSA provides that USS will receive the rights to exploit the machine in the extraction of the natural resource in the United States, and FP will receive the rights in the rest of the world. This resource does not, however, exist in the United States. Despite the fact that USS has received the right to exploit this process in the United States, USS is not a controlled participant because it will not derive a benefit from exploiting the intangible developed under the CSA.
Example 2. Controlled participants.(i) U.S. Parent (USP), one foreign subsidiary (FS), and a second foreign subsidiary constituting the group's research arm (R + D) enter into a CSA to develop manufacturing intangibles for a new product line A. USP and FS are assigned the exclusive rights to exploit the intangibles respectively in the United States and the rest of the world, where each presently manufactures and sells various existing product lines. R + D is not assigned any rights to exploit the intangibles. R + D's activity consists solely in carrying out research for the group. It is reliably projected that the RAB shares of USP and FS will be 66 2/3% and 33 1/3%, respectively, and the parties' agreement provides that USP and FS will reimburse 66 2/3% and 33 1/3%, respectively, of the IDCs incurred by R + D with respect to the new intangible. (ii) R + D does not qualify as a controlled participant within the meaning of paragraph (j)(1)(i) of this section, because it will not derive any benefits from exploiting cost shared intangibles. Therefore, R + D is treated as a service provider for purposes of this section and must receive arm's length consideration for the assistance it is deemed to provide to USP and FS, under the rules of paragraph (a)(3) of this section and §§ 1.482-4(f)(3)(iii) and (4), and 1.482-9, as appropriate. Such consideration must be treated as IDCs incurred by USP and FS in proportion to their RAB shares (that is, 66 2/3% and 33 1/3%, respectively). R + D will not be considered to bear any share of the IDCs under the arrangement.
Example 3. Cost shared intangible, reasonably anticipated cost shared intangible.U.S. Parent (USP) has developed and currently exploits an antihistamine, XY, which is manufactured in tablet form. USP enters into a CSA with its wholly-owned foreign subsidiary (FS) to develop XYZ, a new improved version of XY that will be manufactured as a nasal spray. Work under the CSA is fully devoted to developing XYZ, and XYZ is developed. During the development period, XYZ is a reasonably anticipated cost shared intangible under the CSA. Once developed, XYZ is a cost shared intangible under the CSA.
Example 4. Cost shared intangible.The facts are the same as in Example 3, except that in the course of developing XYZ, the controlled participants by accident discover ABC, a cure for disease D. ABC is a cost shared intangible under the CSA.
Example 5. Reasonably anticipated benefits.Controlled parties A and B enter into a cost sharing arrangement to develop product and process intangibles for an already existing Product P. Without such intangibles, A and B would each reasonably anticipate revenue, in present value terms, of $100M from sales of Product P until it became obsolete. With the intangibles, A and B each reasonably anticipate selling the same number of units each year, but reasonably anticipate that the price will be higher. Because the particular product intangible is more highly regarded in A's market, A reasonably anticipates an increase of $20M in present value revenue from the product intangible, while B reasonably anticipates only an increase of $10M. Further, A and B each reasonably anticipate spending an extra $5M present value in production costs to include the feature embodying the product intangible. Finally, A and B each reasonably anticipate saving $2M present value in production costs by using the process intangible. A and B reasonably anticipate no other economic effects from exploiting the cost shared intangibles. A's reasonably anticipated benefits from exploiting the cost shared intangibles equal its reasonably anticipated increase in revenue ($20M) plus its reasonably anticipated cost savings ($2M) minus its reasonably anticipated increased costs ($5M), which equals $17M. Similarly, B's reasonably anticipated benefits from exploiting the cost shared intangibles equal its reasonably anticipated increase in revenue ($10M) plus its reasonably anticipated cost savings ($2M) minus its reasonably anticipated increased costs ($5M), which equals $7M. Thus A's reasonably anticipated benefits are $17M and B's reasonably anticipated benefits are $7M.
(2)Special rules—(i) Consolidated group. For purposes of this section, all members of the same consolidated group shall be treated as one taxpayer. For these purposes, the term consolidated group means all members of a group of controlled entities created or organized within a single country and subjected to an income tax by such country on the basis of their combined income.
(ii)Trade or business. A participant that is a foreign corporation or nonresident alien individual will not be treated as engaged in a trade or business within the United States solely by reason of its participation in a CSA. See generally § 1.864-2(a).
(iii)Partnership. A CSA, or an arrangement to which the Commissioner applies the rules of this section, will not be treated as a partnership to which the rules of subchapter K of the Internal Revenue Code apply. See § 301.7701-1(c) of this chapter.
(3)Character—(i) CST Payments. CST Payments generally will be considered the payor's costs of developing intangibles at the location where such development is conducted. For these purposes, IDCs borne directly by a controlled participant that are deductible are deemed to be reduced to the extent of any CST Payments owed to it by other controlled participants pursuant to the CSA. Each cost sharing payment received by a payee will be treated as coming pro rata from payments made by all payors and will be applied pro rata against the deductions for the taxable year that the payee is allowed in connection with the IDCs. Payments received in excess of such deductions will be treated as in consideration for use of the land and tangible property furnished for purposes of the CSA by the payee. For purposes of the research credit determined under section 41, CST Payments among controlled participants will be treated as provided for intra-group transactions in § 1.41-6(i). Any payment made or received by a taxpayer pursuant to an arrangement that the Commissioner determines not to be a CSA will be subject to the provisions of §§ 1.482-1 through 1.482-6 and 1.482-9. Any payment that in substance constitutes a cost sharing payment will be treated as such for purposes of this section, regardless of its characterization under foreign law.
(ii)PCT Payments. A PCT Payor's payment required under paragraph (b)(1)(ii) of this section is deemed to be reduced to the extent of any payments owed to it under such paragraph from other controlled participants. Each PCT Payment received by a PCT Payee will be treated as coming pro rata out of payments made by all PCT Payors. PCT Payments will be characterized consistently with the designation of the type of transaction pursuant to paragraphs (c)(3) and (k)(2)(ii)(H) of this section. Depending on such designation, such payments will be treated as either consideration for a transfer of an interest in intangible property or for services.
(iii)Examples. The following examples illustrate this paragraph (j)(3):
Example 1.U.S. Parent (USP) and its wholly owned Foreign Subsidiary (FS) form a CSA to develop a miniature widget, the Small R. Based on RAB shares, USP agrees to bear 40% and FS to bear 60% of the costs incurred during the term of the agreement. The principal IDCs are operating costs incurred by FS in Country Z of 100X annually, and costs incurred by USP in the United States also of 100X annually. Of the total costs of 200X, USP's share is 80X and FS's share is 120X so that FS must make a payment to USP of 20X. The payment will be treated as a reimbursement of 20X of USP's costs in the United States. Accordingly, USP's Form 1120 will reflect an 80X deduction on account of activities performed in the United States for purposes of allocation and apportionment of the deduction to source. The Form 5471 “Information Return of U.S. Persons With Respect to Certain Foreign Corporations” for FS will reflect a 100X deduction on account of activities performed in Country Z and a 20X deduction on account of activities performed in the United States.
Example 2.The facts are the same as in Example 1, except that the 100X of costs borne by USP consist of 5X of costs incurred by USP in the United States and 95X of arm's length rental charge, as described in paragraph (d)(1)(iii) of this section, for the use of a facility in the United States. The depreciation deduction attributable to the U.S. facility is 7X. The 20X net payment by FS to USP will first be applied in reduction pro rata of the 5X deduction for costs and the 7X depreciation deduction attributable to the U.S. facility. The 8X remainder will be treated as rent for the U.S. facility.
Example 3.(i) Four members (A, B, C, and D) of a controlled group form a CSA to develop the next generation technology for their business. Based on RAB shares, the participants agree to bear shares of the costs incurred during the term of the agreement in the following percentages: A 40%; B 15%; C 25%; and D 20%. The arm's length values of the platform contributions they respectively own are in the following amounts for the taxable year: A 80X; B 40X; C 30X; and D 30X. The provisional (before offsets) and final PCT Payments among A, B, C, and D are shown in the table as follows:
| A | B | C | D | |
|---|---|---|---|---|
| Payments | <40> | <21> | <37.5> | <30> |
| Receipts | 48 | 34 | 22.5 | 24 |
| Final | 8 | 13 | <15> | <6> |
Example 3.(All amounts stated in X's) (ii) The first row/first column shows A's provisional PCT Payment equal to the product of 100X (sum of 40X, 30X, and 30X) and A's RAB share of 40%. The second row/first column shows A's provisional PCT receipts equal to the sum of the products of 80X and B's, C's, and D's RAB shares (15%, 25%, and 20%, respectively). The other entries in the first two rows of the table are similarly computed. The last row shows the final PCT receipts/payments after offsets. Thus, for the taxable year, A and B are treated as receiving the 8X and 13X, respectively, pro rata out of payments by C and D of 15X and 6X, respectively.
| Term | Definition | Main cross references |
|---|---|---|
| Acquisition price | § 1.482-7(g)(5)(i). | |
| Adjusted acquisition price | § 1.482-7(g)(5)(iii). | |
| Adjusted average market capitalization | § 1.482-7(g)(6)(iv). | |
| Adjusted benefit shares | § 1.482-7(i)(2)(ii)(A). | |
| Adjusted RPSM | § 1.482-7(i)(6)(v)(B). | |
| Adjustment Year | § 1.482-7(i)(6)(i). | |
| ADR | § 1.482-7(i)(6)(iv). | |
| AERR | § 1.482-7(i)(6)(iii). | |
| Applicable Method | § 1.482-7(g)(2)(ix)(A). | |
| Average market capitalization | § 1.482-7(g)(6)(iii). | |
| Benefits | Benefits mean the sum of additional revenue generated, plus cost savings, minus any cost increases from exploiting cost shared intangibles. | § 1.482-7(e)(1)(i). |
| Capability variation | § 1.482-7(f)(3). | |
| Change in participation under a CSA | § 1.482-7(f). | |
| Consolidated group | § 1.482-7(j)(2)(i). | |
| Contingent payments | § 1.482-7(h)(2)(i)(B). | |
| Controlled participant | Controlled participant means a controlled taxpayer, as defined under § 1.482-1(i)(5), that is a party to the contractual agreement that underlies the CSA, and that reasonably anticipates that it will derive benefits, as defined in paragraph (e)(1)(i) of this section, from exploiting one or more cost shared intangibles. | § 1.482-7(a)(1). |
| Controlled transfer of interests | § 1.482-7(f)(2). | |
| Cost contribution | § 1.482-7(d)(4). | |
| Cost shared intangible | Cost shared intangible means any intangible, within the meaning of § 1.482-4(b), that is developed by the IDA, including any portion of such intangible that reflects a platform contribution. Therefore, an intangible developed by the IDA is a cost shared intangible even though the intangible was not always or was never a reasonably anticipated cost shared intangible. | § 1.482-7(b). |
| Cost sharing alternative | § 1.482-7(g)(4)(i)(B). | |
| Cost sharing arrangement or CSA | § 1.482-7(a), (b). | |
| Cost sharing transactions or CSTs | § 1.482-7(a)(1), (b)(1)(i). | |
| Cross operating contributions | A cross operating contribution is any resource or capability or right, other than a platform contribution, that a controlled participant has developed, maintained, or acquired prior to the CSA Start Date, or subsequent to the CSA start date by means other than operating cost contributions or cost contributions, that is reasonably anticipated to contribute to the CSA Activity within another controlled participant's division. | § 1.482-7(a)(3)(iii), (g)(2)(iv). |
| CSA Activity | CSA Activity is the activity of developing and exploiting cost shared intangibles. | § 1.482-7(c)(2)(i). |
| CSA Start Date | The CSA Start Date is the earlier of the date of the CSA contract or the first occurrence of any IDC to which the CSA applies, in accordance with § 1.482-7(k)(1)(iii). | § 1.482-7(i)(6)(iii)(B) and (k)(1)(ii) and (iii). |
| CST Payments | § 1.482-7(b)(1). | |
| Date of PCT | § 1.482-7(b)(3). | |
| Determination Date | § 1.482-7(i)(6)(i). | |
| Differential income stream | § 1.482-7(g)(4)(vi)(F)(2). | |
| Division | Division means the territory or other division that serves as the basis of the division of interests under the CSA in the cost shared intangibles pursuant to § 1.482-7(b)(4). | See definitions of divisional profit or loss, operating contribution, and operating cost contribution. |
| Divisional interest | § 1.482-7(b)(1)(iii), (b)(4). | |
| Divisional profit or loss | Divisional profit or loss means the operating profit or loss as separately earned by each controlled participant in its division from the CSA Activity, determined before any expense (including amortization) on account of cost contributions, operating cost contributions, routine platform and operating contributions, nonroutine contributions (including platform and operating contributions), and tax. | § 1.482-7(g)(4)(iii). |
| Fixed payments | § 1.482-7(h)(2)(i)(A). | |
| Implied discount rate | § 1.482-7(g)(2)(v)(B)(2). | |
| IDC share | § 1.482-7(d)(4). | |
| Input parameters | § 1.482-7(g)(2)(ix)(B). | |
| Intangible development activity or IDA | § 1.482-7(d)(1). | |
| Intangible development costs or IDCs | § 1.482-7(a)(1), (d)(1). | |
| Licensing alternative | § 1.482-7(g)(4)(i)(C). | |
| Licensing payments | Licensing payments means payments pursuant to the licensing obligations under the licensing alternative. | § 1.482-7(g)(4)(iii). |
| Make-or-sell rights | § 1.482-7(c)(4), (g)(2)(iv). | |
| Market-based input parameter | § 1.482-7(g)(2)(ix)(B). | |
| Market returns for routine contributions | Market returns for routine contributions means returns determined by reference to the returns achieved by uncontrolled taxpayers engaged in activities similar to the relevant business activity in the controlled participant's division, consistent with the methods described in §§ 1.482-3, 1.482-4, 1.482-5, or § 1.482-9(c) | § 1.482-7(g)(4), (g)(7). |
| Method payment form | § 1.482-7(h)(3). | |
| Nonroutine contributions | Nonroutine contributions means a controlled participant's contributions to the relevant business activities that are not routine contributions. Nonroutine contributions ordinarily include both nonroutine platform contributions and nonroutine operating contributions used by controlled participants in the commercial exploitation of their interests in the cost shared intangibles (for example, marketing intangibles used by a controlled participant in its division to sell products that are based on the cost shared intangible). | § 1.482-7(g). |
| Nonroutine residual divisional profit or loss | § 1.482-7(g)(7)(iii). | |
| Operating contributions | An operating contribution is any resource or capability or right, other than a platform contribution, that a controlled participant has developed, maintained, or acquired prior to the CSA Start Date, or subsequent to the CSA Start Date by means other than operating cost contributions or cost contributions, that is reasonably anticipated to contribute to the CSA Activity within the controlled participant's division. | § 1.482-7(g)(2)(ii), (g)(4)(vi)(E), (g)(7)(iii)(A) and (C). |
| Operating cost contributions | Operating cost contributions means all costs in the ordinary course of business on or after the CSA Start Date that, based on analysis of the facts and circumstances, are directly identified with, or are reasonably allocable to, developing resources, capabilities, or rights (other than reasonably anticipated cost shared intangibles) that are reasonably anticipated to contribute to the CSA Activity within the controlled participant's division. | § 1.482-7(g)(2)(ii), (g)(4)(iii), (g)(7)(iii)(B). |
| PCT Payee | § 1.482-7(b)(1)(ii). | |
| PCT Payment | § 1.482-7(b)(1)(ii). | |
| PCT Payor | § 1.482-7(b)(1)(ii), (i)(6)(i). | |
| PCT Payor WACC | § 1.482-7(i)(6)(iv)(D). | |
| Periodic adjustments | § 1.482-7(i)(6)(i). | |
| Periodic Trigger | § 1.482-7(i)(6)(i). | |
| Platform contribution transaction or PCT | § 1.482-7(a)(2), (b)(1)(ii). | |
| Platform contributions | § 1.482-7(c)(1). | |
| Post-tax income | § 1.482-7(g)(2)(v)(B)(4), (g)(4)(i)(G). | |
| Pre-tax income | § 1.482-7(g)(2)(v)(B)(4), (g)(4)(i)(G). | |
| Projected benefit shares | § 1.482-7(i)(2)(ii)(A). | |
| PRRR | § 1.482-7(i)(6)(ii). | |
| PVI | § 1.482-7(i)(6)(iii)(C). | |
| PVTP | § 1.482-7(i)(6)(iii)(B). | |
| Reasonably anticipated benefits | A controlled participant's reasonably anticipated benefits mean the benefits that reasonably may be anticipated to be derived from exploiting cost shared intangibles. For purposes of this definition, benefits mean the sum of additional revenue generated, plus cost savings, minus any cost increases from exploiting cost shared intangibles. | § 1.482-7(e)(1). |
| Reasonably anticipated benefits or RAB shares | § 1.482-7(a)(1), (e)(1). | |
| Reasonably anticipated cost shared intangible | § 1.482-7(d)(1)(ii). | |
| Relevant business activity | § 1.482-7(g)(7)(i). | |
| Routine contributions | Routine contributions means a controlled participant's contributions to the relevant business activities that are of the same or similar kind to those made by uncontrolled taxpayers involved in similar business activities for which it is possible to identify market returns. Routine contributions ordinarily include contributions of tangible property, services and intangibles that are generally owned by uncontrolled taxpayers engaged in similar activities. A functional analysis is required to identify these contributions according to the functions performed, risks assumed, and resources employed by each of the controlled participants. | § 1.482-7(g)(4), (g)(7). |
| Routine platform and operating contributions, and net routine platform and operating contributions | § 1.482-7(g)(4)(vii), 1.482-7(g)(7)(iii)(C)(4). | |
| Specified payment form | § 1.482-7(h)(3). | |
| Stock-based compensation | § 1.482-7(d)(3). | |
| Stock options | § 1.482-7(d)(3)(i). | |
| Subsequent PCT | § 1.482-7(g)(2)(viii). | |
| Target | § 1.482-7(g)(5)(i). | |
| Tax rate | Reasonably anticipated effective tax rate with respect to the pre-tax income to which the tax rate is being applied. For example, under the income method, this rate would be the reasonably anticipated effective tax rate of the PCT Payor or PCT Payee under the cost sharing alternative or the licensing alternative, as appropriate. | § 1.482-7(g)(2)(v)(B)(4)(ii), (g)(4)(i)(G). |
| Trigger PCT | § 1.482-7(i)(6)(i). | |
| Variable input parameter | § 1.482-7(g)(2)(ix)(C). | |
| WACC | WACC means weighted average cost of capital. | § 1.482-7(i)(6)(iv)(D). |
Source: 26 CFR § 1.482-7 via Electronic Code of Federal Regulations (eCFR)
See this section in context within the complete § 1.482-7 regulation.
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