Cost sharing arrangements (CSAs) permit all foreign profits derived from exploiting developed intellectual property (IP) to be earned by foreign subsidiaries. CSAs are tax planning tools because foreign tax rates often are materially lower than the U.S. corporate tax rate of 35%, one of the highest in the world.
As provided for in Treasury regulations, a CSA consists of an agreement between participants—generally a U.S. member of a multinational group and one or more foreign subsidiaries. The participants divide the world into regions, and typically the U.S. company accounts for the R&D costs for the U.S. market and a foreign affiliate would bear the R&D costs for the rest of the world.
If the IP used by a foreign affiliate has been even partially developed by the U.S. participant prior to entering the CSA, the foreign affiliate will be required to pay something for its utilization. The payment generally is in the form of a royalty consistent with what would have transpired at arm’s length, taking into account the depreciating value of IP. Transfer pricing specialists tasked with calculating this royalty rate rely upon the robust search tools found in ktMINE to help locate relevant licenses.