Instructions for Examiners on Transfer Pricing Selection- Reasonably Anticipated Benefits in Cost Sharing Arrangements


Notice: Historical Content

This is an archival or historical document and may not reflect current law, policies or procedures.

January 12, 2018

Control No: LB&I-04-0118-004
Impacted IRM


From: Douglas W. O’Donnell  
Commissioner, Large Business and International Division
Subject: Instructions for Examiners on Transfer Pricing Issue Selection- Reasonably Anticipated Benefits in Cost Sharing Arrangements 

This Directive provides instructions to Large Business & International (LB&I) examiners in the selection of transfer pricing issues for examination.


Transfer pricing issues make up a substantial portion of the LB&I inventory.  As a result, significant LB&I resources are devoted to transfer pricing issues.  LB&I recognizes that it needs to manage transfer pricing issues under examination and related resources in the most efficient and effective manner possible.  This Directive provides instructions with respect to managing certain transfer pricing issues in inventory.

This Directive only applies to examinations of LB&I taxpayers (i.e., assets equal to or greater than $10,000,000) who are required to file (including extensions) forms 5471 or 5472 with their original annual US tax return.


Stop developing adjustments to cost sharing arrangements (CSAs) based on changing the taxpayer’s multiple reasonably anticipated benefits (RAB) shares to a single RAB share when subsequent platform contribution transactions (PCTs) are added to an existing CSA until a Service-wide position is finalized

In a common fact pattern in many existing CSAs, the US participant acquires an independent company with valuable intangible property (IP), and then makes the acquired IP available to a foreign CSA participant through a subsequent PCT contribution to the CSA.  In some situations, new PCTs may generate incremental profits to the participants in proportions that are substantially different from the RAB shares of the pre-existing CSA.  In this scenario, there are three different potential ratios of RAB shares that could be used in the CSA: the existing RAB shares under the existing CSA, the shares of incremental profits related to the IP made available to the CSA by the subsequent PCT, and updated RAB shares that would result after the newly acquired IP is contributed to the existing CSA and combined with the IP already covered by that CSA.

Some examination teams have taken the position that the RAB share regulations under Treas. Reg. §1.482-7 require use of a single RAB share for such subsequent PCTs.  An example in the regulations for use of the acquisition price method (APM) to determine the PCT states that the pre-existing RAB share is “not reasonably anticipated to change” as a result of this acquisition (Treas. Reg. §1.482-7(g)(5)(v)).  However, if a taxpayer could choose to set up multiple CSAs to accommodate the different IP and corresponding different RAB shares, incorporating different RAB shares in the same CSA is conceptually comparable.  Until further guidance from Counsel about whether the example restricts the intent to a single RAB share in all situations, other positions taken by taxpayers based on documented valid facts and circumstances cannot be automatically ruled out.  The Service is currently reviewing this issue to determine a consistent Service-wide position.  Included in this review is how to incorporate subsequent PCTs into the RAB share of an existing CSA and determine what RAB shares should be allowed under all PCT valuation methods.

In the interim, for purposes efficient tax administration, examination teams should not develop adjustments based solely on changing a taxpayer’s multiple RAB shares to a single RAB share for subsequent PCTs.  However, examiners should still examine whether the multiple RAB shares used by taxpayers are appropriate given all the specific facts and circumstances.  Once a consistent Service-wide position has been developed, examination teams will be able to proceed with more effective and efficient analysis regarding the appropriate incorporation of subsequent PCTs into existing CSAs.


For further information regarding this Directive and any of the specific issues addressed herein, please contact the Director of Treaties and Transfer Pricing Operations.

This Directive is not an official pronouncement of law and cannot be used, cited or relied upon as such. In addition, nothing in this Directive should be construed as affecting the operation of any other provision of the Code, regulations or guidance thereunder.

cc:  Division Counsel, LB&I