Example.
Example.
(1) Year | (2) Sales | (3) Operating costs | (4) Cost contributions | (5) Operating income under cost sharing alternative (excluding PCT) |
1 | 0 | 0 | 50 | -50 |
2 | 0 | 0 | 50 | -50 |
3 | 200 | 100 | 50 | 50 |
4 | 400 | 200 | 50 | 150 |
5 | 600 | 300 | 60 | 240 |
6 | 650 | 325 | 65 | 260 |
7 | 700 | 350 | 70 | 280 |
8 | 750 | 375 | 75 | 300 |
9 | 750 | 375 | 75 | 300 |
10 | 675 | 338 | 68 | 269 |
11 | 608 | 304 | 61 | 243 |
12 | 547 | 273 | 55 | 219 |
13 | 410 | 205 | 41 | 164 |
14 | 308 | 154 | 31 | 123 |
15 | 231 | 115 | 23 | 93 |
FS anticipates that activity on this application will cease after Year 15. The application was derived from software developed by Company Q, an uncontrolled party. FS has a license under Company Q's copyright, but that license expires after Year 15 and will not be renewed.
(6) Year | (7) Sales | (8) Operating costs | (9) Licensing payments | (10) Operating income under licensing alternative | (11) Operating income under cost sharing alternative minus operating income under licensing alternative |
1 | 0 | 0 | 0 | 0 | -50 |
2 | 0 | 0 | 0 | 0 | -50 |
3 | 200 | 100 | 70 | 30 | 20 |
4 | 400 | 200 | 140 | 60 | 90 |
5 | 600 | 300 | 210 | 90 | 150 |
6 | 650 | 325 | 228 | 97 | 163 |
7 | 700 | 350 | 245 | 105 | 175 |
8 | 750 | 375 | 263 | 112 | 188 |
9 | 750 | 375 | 263 | 112 | 188 |
10 | 675 | 338 | 236 | 101 | 168 |
11 | 608 | 304 | 213 | 91 | 152 |
12 | 547 | 273 | 191 | 83 | 136 |
13 | 410 | 205 | 144 | 61 | 103 |
14 | 308 | 154 | 108 | 46 | 77 |
15 | 231 | 115 | 81 | 35 | 58 |
Observations that are within interquartile range | Comparable uncontrolled discount rate |
1 | 11% |
2 | 12 |
3 (Median) | 13 |
4 | 15 |
5 | 17 |
Observations that are within interquartile range | Comparable uncontrolled licensing rate |
1 | 30% |
2 | 32 |
3 (Median) | 35 |
4 | 37 |
5 | 40 |
INCOME METHOD APPLICATION NUMBER:: | Comparable uncontrolled licensing discount rate | Comparable uncontrolled CSA discount rate | Comparable uncontrolled licensing rate | Calculated lump sum PCT payment | Interquartile range of PCT payments |
1 | 17% | 19.6% | 30% | 217 | |
2 | 17 | 19.6 | 32 | 263 | |
3 | 15 | 17.3 | 30 | 264 | |
4 | 15 | 17.3 | 32 | 315 | |
5 | 13 | 15 | 30 | 321 | |
6 | 17 | 19.6 | 35 | 331 | |
7 | 12 | 13.8 | 30 | 354 | LQ = 354 |
8 | 17 | 19.6 | 37 | 376 | |
9 | 13 | 15 | 32 | 378 | |
10 | 11 | 12.7 | 30 | 391 | |
11 | 15 | 17.3 | 35 | 391 | |
12 | 12 | 13.8 | 32 | 415 | |
13 | 15 | 17.3 | 37 | 442 | Median = 442 |
14 | 17 | 19.6 | 40 | 444 | |
15 | 11 | 12.7 | 32 | 455 | |
16 | 13 | 15 | 35 | 464 | |
17 | 12 | 13.8 | 35 | 505 | |
18 | 15 | 17.3 | 40 | 517 | |
19 | 13 | 15 | 37 | 520 | UQ = 520 |
20 | 11 | 12.7 | 35 | 551 | |
21 | 12 | 13.8 | 37 | 566 | |
22 | 13 | 15 | 40 | 605 | |
23 | 11 | 12.7 | 37 | 615 | |
24 | 12 | 13.8 | 40 | 655 | |
25 | 11 | 12.7 | 40 | 710 |
Licensing alternative | Present value (12.5% DR) | Year 1 | Year 2 | Year 3 |
(1) Sales | $1000 | $1100 | $1210 | |
(2) License Fee | 400 | 440 | 484 | |
(3) Operating costs | 500 | 550 | 605 | |
(4) Operating Income | $261 | 100 | 110 | 121 |
(5) Tax (25%) | 25 | 28 | 30 | |
(6) Post-tax income | $196 | $75 | $82 | $91 |
Cost sharing alternative | Present value (15% DR) | Year 1 | Year 2 | Year 3 |
(7) Sales | $1000 | $1100 | $1210 | |
(8) Cost Contributions | 200 | 220 | 242 | |
(9) PCT Payments | D | A | B | C |
(10) Operating costs | 500 | 550 | 605 | |
(11) Operating income excluding PCT | $749 | 300 | 330 | 363 |
(12) Operating income | H | E | F | G |
(13) Tax | ||||
(14) Post-tax income excluding PCT | $562 | $225 | $248 | $272 |
(15) Post-tax income | L | I | J | K |
Cost Sharing Alternative
Time Period (Y = Year, TV = Terminal Value) | Y1 | Y2 | Y3 | Y4 | Y5 | Y6 | Y7 | Y8 | TV |
Discount Period | 0 | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 7 |
Items of Income/Expense at Beginning of Year: | |||||||||
1 Sales | 100 | 100 | 200 | 400 | 600 | 650 | 700 | 750 | (3% annual growth in each year from previous year). |
2 Routine Cost and Operating Cost Contributions (60% of sales amount in row 1 of relevant year) | 60 | 60 | 120 | 240 | 360 | 390 | 420 | 450 | (60% of annual sales in row 1 for each year). |
3 Cost Contributions (10% of sales amount in row 1 for relevant year after Year 5) | 25 | 25 | 50 | 50 | 60 | 65 | 70 | 75 | (10% of annual sales in row 1 for each year). |
4 Profit = amount in row 1 reduced by amounts in rows 2 and 3 | 15 | 15 | 30 | 110 | 180 | 195 | 210 | 225 | (row 1 minus rows 2 and 3 for each year). |
5 PV (using 14% discount rate) | 15 | 13.2 | 23.1 | 74.2 | 107 | 101 | 95.7 | 89.9 | 842. |
6 TOTAL PV of Cost Sharing Alternative = Sum of all PV amounts in Row 5 for all Time Periods = $1,361 million. |
Licensing Alternative
Time Period (Y = Year, TV = Terminal Value) | Y1 | Y2 | Y3 | Y4 | Y5 | Y6 | Y7 | Y8 | TV |
Discount Period | 0 | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 7 |
Items of Income/Expense at Beginning of Year: | |||||||||
7 Sales | 100 | 100 | 200 | 400 | 600 | 650 | 700 | 750 | (3% annual growth in each year from previous year). |
8 Routine Cost and Operating Cost Contributions (60% of sales amount in row 7 of relevant year). | 60 | 60 | 120 | 240 | 360 | 390 | 420 | 450 | (60% of annual sales in row 7 for each year). |
9 Operating Profit = amount in Row 7 reduced by amount in Row 8 | 40 | 40 | 80 | 160 | 240 | 260 | 280 | 300 | (Row 7 minus row 8 for each year). |
10 PV of row 9 (using 13% discount rate) | 40 | 35.4 | 62.7 | 111 | 147 | 141 | 135 | 128 | 1313. |
11 TOTAL PV FOR ALL AMOUNTS IN ROW 10 = $2,112.7 million | |||||||||
12 Licensing Payments (30% of sales amount in row 7) | 30 | 30 | 60 | 120 | 180 | 195 | 210 | 225 | (30% of amount in row 7 for each year). |
13 PV of amount in row 12 (using 13% discount rate) | 30 | 26.5 | 47 | 83.2 | 110 | 106 | 101 | 95.6 | 985. |
14 TOTAL PV FOR ALL AMOUNTS IN ROW 13 = $1,584.5 million. | |||||||||
15 TOTAL PV of Licensing Alternative = Row 11 minus Row 14 = $528 million. |
Calculation of PCT Payment
16 | TOTAL PV OF COST SHARING ALTERNATIVE (FROM ROW 6 ABOVE) = | $1,361 million. |
17 | TOTAL PV OF LICENSING ALTERNATIVE (FROM ROW 15 ABOVE) = | $528 million. |
18 | LUMP SUM PCT PAYMENT = ROW 16 - ROW 17 = | $833 million. |
Example. USP, a U.S. corporation, and its newly incorporated, wholly-owned foreign subsidiary (FS) enter into a CSA at the start of Year 1 to develop Group Z products. Under the CSA, USP and FS will have the exclusive rights to exploit the Group Z products in the U.S. and the rest of the world, respectively. At the start of Year 2, USP acquires Company X for cash consideration worth $110 million. At this time USP's RAB share is 60%, and FS's RAB share is 40% and is not reasonably anticipated to change as a result of this acquisition. Company X joins in the filing of a U.S. consolidated income tax return with USP. Under paragraph (j)(2)(i) of this section, Company X and USP are treated as one taxpayer for purposes of this section. Accordingly, the rights in any of Company X's resources and capabilities that are reasonably anticipated to contribute to the development activities of the CSA will be considered platform contributions furnished by USP. Company X's resources and capabilities consist of its workforce, certain technology intangibles, $15 million of tangible property and other assets and $5 million in liabilities. The technology intangibles, as well as Company X's workforce, are reasonably anticipated to contribute to the development of the Group Z products under the CSA and, therefore, the rights in the technology intangibles and the workforce are platform contributions for which FS must make a PCT Payment to USP. None of Company X's existing intangible assets or any of its workforce are anticipated to contribute to activities outside the CSA. For purposes of this example, it is assumed that no additional adjustment on account of tax liabilities is needed. Applying the acquisition price method, the value of USP's platform contributions is the adjusted acquisition price of $100 million ($110 million acquisition price plus $5 million liabilities less $15 million tangible property and other assets). FS must make a PCT Payment to USP for these platform contributions with a reasonably anticipated present value of $40 million, which is the product of $100 million (the value of the platform contributions) and 40% (FS's RAB share).
Time Period (Y = Year) (TV = Terminal Value) | Y1 | Y2 | Y3 | Y4 | Y5 | Y6 | Y7 | Y8 | Y9 | Y10 | Y11 | TV |
Discount Period | 0 | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 | 10 | 10 |
[1] Sales | 0 | 200 | 300 | 450 | 675 | 878 | 1141 | 1369 | 1643 | 1807 | 1626 | |
[2] Growth Rate | 50% | 50% | 50% | 30% | 30% | 20% | 20% | 10% | -10% | |||
[3] Exploitation Costs and Operating Cost Contributions (52% of Sales [1]) | 40 | 130 | 200 | 250 | 351 | 456 | 593 | 712 | 854 | 940 | 846 | |
[4] Return on [3] (6% of [3]) | 2.4 | 8 | 12 | 15 | 21 | 27 | 36 | 43 | 51 | 56 | 51 | |
[5] Cost Contributions (10% of Sales [1] after Year 5) | 60 | 100 | 100 | 60 | 68 | 88 | 114 | 137 | 164 | 181 | 163 | |
[6] Residual Profit = [1] minus {[3] + [4] + [5]} | -102 | -38 | -12 | 125 | 235 | 306 | 398 | 477 | 573 | 630 | 567 | 2395 |
[7] Residual Profit [6] Discounted at 17.5% discount rate | -102 | -32 | -9 | 77 | 124 | 137 | 151 | 154 | 158 | 148 | 113 | 477 |
[8] Sum of all amounts in [7] for all time periods = $1,395 million | ||||||||||||
[9] Relative value in FS's division of USP's nanotechnology to FS's marketing intangibles = 150% | ||||||||||||
[10] Profit Split (USP) | 60% = 1.5 * [11] | |||||||||||
[11] Profit Split (FS) | 40% | |||||||||||
[12] FS's PCT Payments | [8] * [10] = $1,395 million * 60% = $837 million |
Calculation of USP's PCT Payment to FS
Time Period (Y = Year) (TV = Terminal Value) | Y1 | Y2 | Y3 | Y4 | Y5 | Y6 | Y7 | Y8 | Y9 | Y10 | TV |
Discount Period | 0 | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 | 9 |
[1] Sales | 1000 | 1500 | 2250 | 3375 | 4725 | 6615 | 9261 | 12965 | 16855 | 21912 | |
[2] Growth Rate | 50% | 50% | 50% | 40% | 40% | 40% | 40% | 30% | 30% | ||
[3] Exploitation Costs and Operating Cost Contributions (40% of Sales [1]) | 400 | 600 | 900 | 1350 | 1890 | 2646 | 3704 | 5186 | 6742 | 8765 | |
[4] Return on [3] = 6% of [3] | 24 | 36 | 54 | 81 | 113 | 159 | 222 | 311 | 405 | 526 | |
[5] Cost Contributions | 250 | 313 | 391 | 488 | 610 | 763 | 839 | 923 | 1015 | 1117 | |
[6] Residual Profit = [1] minus {[3] + [4] + [5]} | 326 | 552 | 905 | 1456 | 2111 | 3047 | 4495 | 6545 | 8693 | 11504 | 64287 |
[7] Residual Profit [6] Discounted at 12% discount rate | 326 | 492 | 722 | 1036 | 1342 | 1729 | 2277 | 2961 | 3511 | 4148 | 23183 |
[8] Sum of all amounts in [7] for all time periods = $41,727X | |||||||||||
Profit Split for Calculation of USP's PCT Payment to FS: [Total of US contributions = 74.5%] | |||||||||||
[9] USP's Platform Contribution = 59.5% | |||||||||||
[10] FS's Platform Contribution = 25.5% | |||||||||||
[11] USP's Operating Intangibles = 15% | |||||||||||
[12] USP's PCT Payment to FS = [8] * [10] = $41,727X multiplied by 25.5% = $10,640X |
Calculation of FS's Net PCT Payment to USF
Time Period (Y = Year) (TV = Terminal Value) | Y1 | Y2 | Y3 | Y4 | Y5 | Y6 | Y7 | Y8 | Y9 | Y10 | TV |
Discount Period | 0 | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 | 9 |
[13] Sales | 500 | 750 | 1125 | 1688 | 2363 | 3308 | 4631 | 6483 | 8428 | 10956 | |
[14] Growth Rate | 50% | 50% | 50% | 40% | 40% | 40% | 40% | 30% | 30% | ||
[15] Exploitation Costs and Operating Cost Contributions (40% of Sales [13]) | 200 | 300 | 450 | 675 | 945 | 1323 | 1852 | 2593 | 3371 | 4382 | |
[16] Return on [15] = 6% of [15] | 12 | 18 | 27 | 41 | 57 | 79 | 111 | 156 | 202 | 263 | |
[17] Cost Contributions | 125 | 156 | 195 | 244 | 305 | 381 | 420 | 462 | 508 | 559 | |
[18] Residual Profit = [13] minus {[15] + [16] + [17]} | 163 | 276 | 453 | 728 | 1056 | 1524 | 2248 | 3272 | 4347 | 5752 | 32144 |
[19] Residual Profit [18] Discounted at 12% discount rate | 163 | 246 | 361 | 518 | 671 | 865 | 1139 | 1480 | 1755 | 2074 | 11591 |
[20] Sum of all amounts in [19] for all time periods = $20,864X | |||||||||||
Profit Split for Calculation of FS's PCT Payment to USP: [Total of FS's contributions = 37%] | |||||||||||
[21] USP's Platform Contribution = 63% | |||||||||||
[22] FS's Platform Contribution = 27% | |||||||||||
[23] FS's Operating Intangibles = 10% | |||||||||||
[24] FS's PCT Payment to USP = [20] * [21] = $20,864X multiplied by 63% = $13,144X | |||||||||||
[25] FS's Net PCT Payment to USP = [24] minus [12] = $13,144X minus $10,640X = $2,504X |
Sales
[In millions of dollars]
Year | USS | FP |
1 | 5 | 10 |
2 | 20 | 20 |
3 | 30 | 30 |
4 | 40 | 40 |
5 | 40 | 40 |
6 | 40 | 40 |
7 | 40 | 40 |
8 | 20 | 20 |
9 | 10 | 10 |
10 | 5 | 5 |
Sales
[In millions of dollars]
Year | USS | FP |
1 | 0 | 17 |
2 | 17 | 35 |
3 | 25 | 35 |
4 | 38 | 41 |
5 | 39 | 41 |
Sales
[In millions of dollars]
Year | USS | FP |
1 | 0 | 17 |
2 | 17 | 35 |
3 | 25 | 44 |
4 | 34 | 54 |
5 | 36 | 55 |
Sales
[In millions of dollars]
Year | USS | FP |
6 | 36 | 55 |
7 | 36 | 55 |
8 | 18 | 28 |
9 | 9 | 14 |
10 | 4.5 | 7 |
a | b | c | d | e | f | g | h |
Year | Sales | Non CC costs | CCs | PCT payments | Investment (d + e) | Divisional profit or loss (b-c) | AERR (PVTP/PVI) (g/f) |
1 | 0 | 0 | 15 | 40 | 55 | 0 | |
2 | 0 | 0 | 17 | 10 | 27 | 0 | |
3 | 0 | 0 | 18 | 10 | 28 | 0 | |
4 | 705 | 662 | 20 | 10 | 30 | 46 | |
5 | 886 | 718 | 22 | 10 | 32 | 168 | |
6 | 1,113 | 680 | 24 | 10 | 34 | 433 | |
7 | 1,179 | 747 | 27 | 10 | 37 | 432 | |
PV through Year 5 | 970 | 846 | 69 | 69 | 138 | 124 | 0.90 |
PV through Year 6 | 1,523 | 1,184 | 81 | 74 | 155 | 340 | 2.20 |
PV through Year 7 | 2,033 | 1,507 | 93 | 78 | 171 | 526 | 3.09 |
a | b | c | d | e | f | g |
Year | Sales | Non-CC costs | Divisional profit or loss (b-c) | CCs | Routing return | Residual proift (d-e-f) |
1 | 0 | 0 | 0 | 15 | 0 | -15 |
2 | 0 | 0 | 0 | 17 | 0 | -17 |
3 | 0 | 0 | 0 | 18 | 0 | -18 |
4 | 705 | 662 | 43 | 20 | 53 | -30 |
5 | 886 | 718 | 168 | 22 | 57 | 89 |
6 | 1,113 | 680 | 433 | 24 | 54 | 355 |
7 | 1,179 | 747 | 432 | 27 | 60 | 345 |
8 | 1,238 | 822 | 416 | 29 | 66 | 321 |
9 | 1,300 | 894 | 406 | 32 | 72 | 302 |
10 | 1,365 | 974 | 391 | 35 | 78 | 278 |
Cumulative PV through Year 10 as of CSA Start Date | 3,312 | 2,385 | 927 | 124 | 191 | 612 |
a | b | c | d | e |
Year | Divisional profit | Royalty rate | Nominal royalty due under adjusted RPSM (b*c) | Nominal payments made |
Year 1 | 0 | 66.0 | $0 | $40 |
Year 2 | 0 | 66.0 | 0 | 10 |
Year 3 | 0 | 66.0 | 0 | 10 |
Year 4 | 43 | 66.0 | 28 | 10 |
Year 5 | 168 | 66.0 | 111 | 10 |
Year 6 | 433 | 66.0 | 286 | 10 |
Cumulative PV as of Year 1 | 224 | 74 |
a | b | c | d | e | f |
Year | Divisional profit | Royalty rate | Royalty due (b*c) | PCT Payments otherwise paid | Periodic adjustment d-e) |
7 | 432 | 66.0% | $285 | $10 | $275 |
8 | 416 | 66.0 | 275 | 10 | 265 |
9 | 406 | 66.0 | 268 | 10 | 258 |
Year | Divisional profit | Royalty rate | Royalty due | PCT payment called for under original agreement but not made | Periodic adjustment |
10 | 391 | 66.0% | $258 | $10 (not paid) | $258 |
Participant | Divisional profits (cumulative PV through year 7 as of the CSA start date) | Residual profits (cumulative PV through year 7 as of the CSA start date) |
FS1 | $667 | $314 |
FS2 | 271 | 159 |
FS3 | 592 | 295 |
Because only USP had nonroutine contributions, under paragraph (g)(7)(iii)(C) of this section, the entire nonroutine residual divisional profit constitutes the PCT Payment owed to USP. Therefore, the present values (as of the CSA Start Date) of the PCT Payments owed are as follows:
PCT Payment owed from FS1 to USP: $314 million
PCT Payment owed from FS2 to USP: $159 million
PCT Payment owed from FS3 to USP: $295 million
Pursuant to paragraph (i)(6)(v)(A) of this section, the steps in paragraphs (i)(6)(v)(A)(2) through (7) of this section are performed separately for the PCT Payments that are owed to USP by each of FS1, FS2, and FS3.
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) . |
(All amounts stated in X's)
A | B | C | D | |
Payments | [LESS THAN]40[GREATER THAN] | [LESS THAN]21[GREATER THAN] | [LESS THAN]37.5[GREATER THAN] | [LESS THAN]30[GREATER THAN] |
Receipts | 48 | 34 | 22.5 | 24 |
Final | 8 | 13 | [LESS THAN]15[GREATER THAN] | [LESS THAN]6[GREATER THAN] |
Example. Companies A and B, both of which are members of the same controlled group, commence an IDA on March 1, Year 1. Company A pays the first IDCs in relation to the IDA, as cash salaries to A's research staff, for the staff's work during the first week of March, Year 1. A and B, however, do not sign and date any written contractual agreement until August 1, Year 1, whereupon they execute a "Cost Sharing Agreement" that purports to be "effective as of" March 1 of Year 1. The arrangement fails the requirement that the participants record their arrangement in a written contractual agreement that is contemporaneous with the formation of a CSA. The arrangement has failed to meet the requirements set forth in paragraph (b)(2) of this section and, pursuant to paragraph (b) of this section, cannot be a CSA.
26 C.F.R. §1.482-7