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Stock Based Compensation
in Transfer Pricing
November 2017
Cost Plus Invoice
Wages 71
Stock based compensation
granted to employees10
Meals & Entertainment 5
Travel 7
Other Expenses 7
Subtotal 100
Plus 3% 3
Total 103
Sample Invoice
2
Example
Expenses (100)
Cost plus 3% 103
Income 3
Stock option expense
(disallowed for tax)
(5)
Taxable Income 3
INC
LTD
Customers
Pre- sales
Sales
Cost plus
Taxpayer Preference
4
Example
Expenses (100)
Stock option expense
(5)
Cost plus 3% ~108
Taxable Income ~8
IRS Preference
5
INC
LTD
Customers
Pre- sales
Sales
Cost plus
Altera Cost-Sharing Arrangement
Shareholders
INCCayman
JV
6
Code § 482
Sentence 1: In any case of two or more [related]
organizations the Secretary may allocate gross
income, deductions, credits, or allowances among
such organizations if he determines that such
allocation is necessary in order to prevent evasion
of taxes or clearly to reflect the income of any of
such organizations.
Sentence 2: In the case of any transfer (or license)
of intangible property the income with respect to
such transfer or license shall be commensurate
with the income attributable to the intangible.
Arm’s Length
7
Section 482 places a controlled
taxpayer on a tax parity with an
uncontrolled taxpayer by determining
the true taxable income of the
controlled taxpayer.
Reg. § 1.482-1(a)
Purpose of Transfer Pricing
8
In determining the true taxableincome of a controlled taxpayer, thestandard to be applied in everycase is that of a taxpayer dealingat arm's length with an uncontrolledtaxpayer.
Reg. § 1.482-1(b)(1)
Arm’s Length Standard
9
Cost Sharing Arrangements
o “Section 1.482-7 provides the specific methods
to be used to determine arm's length results
of controlled transactions in connection with a
cost sharing arrangement as defined in §
1.482-7.”
o Intangible development costs (IDCs) in a cost
sharing arrangement include SBC.
10
The Government
11
Altera
12
Altera- What did he say?
13
Does it only apply to CSAs?
o Reg. § 1.482-9 Controlled
Services Transaction.
o The arm's length amount
charged in a controlled services
transaction includes total services
cost which means “all costs of
rendering those services for
which total services costs are
being determined. Total services
costs include all costs in cash or in
kind (including stock-based
compensation).”
14
INC
LTD
Customers
Pre- sales
Sales
Cost plus
What’s next?
o Ruling
o Legislation
15
What can be done now?
o Amended returns?
o Clawbacks
o Foreign government intervention(Mutual Agreement Procedure)
o Advance Credit
o Take a position
16
THANK YOU
17
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