The Ninth Circuit Court ruled that a taxpayer who is engaged in a cost-sharing agreement with a related person must share all costs related to the agreement, including stock option costs, even where unrelated parties would not do so. This decision fundamentally weakens the "arm's length standard" of section 482 of the Internal Revenue Code - which serves as a core principle of international transfer pricing agreements.
On Aug. 21, 2009, the NAM joined 15 other organizations in an amicus brief urging a larger complement of the Ninth Circuit to reconsider the 2-1 decision by three of its judges. We argued that for more than 75 years, Congress, the courts and the IRS consistently have mandated the application of the arm's length standard for transactions governed by Section 482 of the Code. This is designed to prevent the manipulation of profits between related entities. It is very important that one internationally accepted objective measure be used to evaluate related-party transactions to prevent double taxation.
The judges vacated their original ruling, and on March 22, 2010, ruled as we had suggested. They affirmed the trial court's ruling, holding that the relevant statute should be construed to give parity between taxpayers in uncontrolled transactions and those in controlled transactions. In addition, the "arm's length" standard was part of the US-Ireland tax treaty obligations that applied to the transaction in question, and our treaty negotiators thought that this standard should apply in such cases.