Cost Sharing and the Acrobatics of Arm’s Length Taxation

Abstract:     
The United States’ cost sharing regime enables multinational enterprises to export United States intangible property to low or no tax jurisdictions, essentially tax-free. This is in stark contrast to long standing United States policy, and the explicit tax agenda of the Obama administration. Two recent cases have circumvented attempts by the IRS to mitigate cost sharing based tax avoidance. This article explains the regime, how the insistence of the IRS on arm’s length based transfer pricing rules contributed to the current non taxation of foreign income of United States multinational enterprises, and explores alternative reforms.

Number of Pages in PDF File: 20

Keywords: Transfer Pricing, Arm's Length, Formulary Apportionment, Cost Sharing, Buy-in, Valuation of Intangibles

JEL Classification: F23, H20, K34

Accepted Paper Series