IRS targets 'cost-sharing' arrangements.

• Author: Marshall, Jeffrey
• Position: TRANSFER PRICING

The Internal Revenue Service (IRS) and Congress are both very interested in so-called "Cost-sharing" arrangements undertaken by U.S. software and other technology firms in the form of transfer pricing programs involving foreign subsidiaries.

In fact, the issue has vaulted near the top of the IRS priority list, according to attorneys at Miller & Chevalier in Washington, D.C., who note that IRS officials have gone on record as saying that at least $20 billion worth of "adjustments" to taxable income have been made by West Coast-based companies in connection with cost-sharing agreements.

Miller & Chevalier attorney Sam Maruca said in an interview that typically, U.S.-developed intangibles and software script, as they evolve in successive generations of products, have been made part of cost-sharing arrangements with foreign subsidiaries in lower-tax jurisdictions. The U.S. parent will put in platform technology, and the foreign unit will put in money to advance further development and share ongoing development costs, usually based on forecasted cash flows.

"We're talking about the highprofit intangibles of some of these companies. There's a tremendous amount at stake," Maruca says.

The IRS and security software maker Symantec Corp. were scheduled to square off in U.S. Tax Court in June over an alleged $832...