Tax Treaty Case Law around the Globe 2016

S. 199Chapter 16 United States: The Altera Case

Yariv Brauner

16.1. Introduction

This landmark case is the apex case in a recent saga of US disputes involving cost sharing. It continued the Tax Court’s support of the traditional interpretation of the arm’s length standard as a literal standard, requiring the comparison of non-market with market transactions, even in the safe harbour confines of the cost sharing regulations, and in consistent support of taxpayers’ positions. The case has benefitted from media exposure because of the novelty of using administrative law standards in the tax context and a very impactful use at that: the invalidation of a regulation. Yet, the case also has important tax treaty implications, again continuing the very traditional approach of the Tax Court that minimizes the impact of tax treaties in the United States, resorting to domestic law practices whenever possible.

Altera addresses the question of whether Treas. Reg. § 1.482-7(d)(2), issued in 2003, requiring participants in cost sharing agreements to share stockbased compensation figures in order to achieve an arm’s length result is arbitrary and capricious. The Ninth Circuit, the court to which this case w...