Sourcing the 'Unsourcable': The Cost Sharing Regulations and the Sourcing of Affiliated Intangible-Related Transactions

78 Pages Posted: 2 Apr 2008 Last revised: 14 Apr 2015

See all articles by Ilan Benshalom

Ilan Benshalom

Hebrew University of Jerusalem - Faculty of Law

Date Written: April 18, 2007


The article examines the current U.S. cost sharing regulations (hereinafter, the CSRs) along with the still-pending and highly controversial proposed CSRs (published August 05). After presenting the key difficulties associated with the attempt to source income multinational enterprises (hereinafter, MNEs) derive from intangible assets, the article explains the CSRs' mechanisms, which allow related parties, who share the developing costs of intangibles, to share their fiscal ownership. It further elaborates upon the hollow hope that the CSRs would alleviate the great compliance and administrative burden of pricing affiliated transactions that involve intangibles. After explaining how the CSRs operate, the article explores how MNEs have turned them into a costly loophole to reduce their effective tax rate on income derived from high profile intangibles. This aspect of the CSRs is startlingly missing from the academic and professional literature and is therefore one of the articles' key contributions. The study further identifies why the proposed CSRs' cumbersome solutions offer little to salvage the deficiencies of the current CSRs. This case study of the CSRs raises a number of stimulating conceptual notions regarding the normative right and the practical ability of sovereigns to tax mobile, and difficult to locate, economic activities. To exemplify these notions, the article engages in an original analysis, which demonstrates how the attempt to simultaneously employ conflicting arm's length and formulary sourcing conventions in the CSRs resulted in a conceptual ambiguity. This ambiguity reflects in the CSRs' arrangements and their inadequate performance. I further argue that this vagueness adversely affected the transfer-pricing regime and has eroded the source income tax base. Building on the above analysis, the article offers an alternative original model for sourcing affiliated intangibles-related transactions. This unique formulary model is superior to the current transfer-pricing and CSRs arrangements on the following grounds: it better preserves the integrity of the income tax base, it promotes efficient use of intangible-assets by MNEs, and it reduces compliance and administrative burdens. The article concludes with presenting a broad discussion about the principled pillars of any future reform in the transfer-pricing regime. The discussion promotes the novel notion that a reform should simultaneously employ two sets of mechanisms to breakdown properly the MNEs' source tax base. The first set should rely on transfer pricing methods and should be employed for transactions with reasonable comparables. The second set should employ a difficult to manipulate formulary method for sourcing mobile and/or difficult to compare transactions (such as those involving intangibles). This is a necessary, and attainable, strategic shift in a global economic reality in which the arm's length standard paradigm is no longer applicable and an alternative comprehensive international formulary allocation is not yet foreseeable.

Keywords: cost sharing, transfer pricing, international taxation, related party transactions

JEL Classification: K34, H24

Suggested Citation

Benshalom, Ilan, Sourcing the 'Unsourcable': The Cost Sharing Regulations and the Sourcing of Affiliated Intangible-Related Transactions (April 18, 2007). Virginia Tax Review, Vol. 26, No. 3, 2007, Northwestern Public Law Research Paper No. 08-07, Available at SSRN:

Ilan Benshalom (Contact Author)

Hebrew University of Jerusalem - Faculty of Law ( email )

Mount Scopus
Mount Scopus, IL 91905

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