Cost-Sharing Arrangement and the Related Transfer of Intangible Assets

The Amazon Case (United States: Amazon.com, Inc. & Subsidiaries v. Commissioner of Internal Revenue (No 31197-12) [2017] 148 T.C. No 8) deals with a commonly used structuring of U.S. multinational enterprises (MNE) to set up a non-US company structure to explore the European or global markets outside the US by way of a transfer of intangibles using a cost-sharing arrangement (CSA).

The U.S. cost-sharing regime is originally a safe harbour regime that protects research joint ventures from regular transfer pricing scrutiny. A CSA is an agreement between controlled parties to share the costs of developing intangibles in proportion to the respective anticipated benefits of each party. Consequently, each participant is considered an owner of the intangible property and is able to exploit it without paying a royalty in return. The parties to a CSA typically must make a “buy-in” payment to the participant providing already existing assets and resources that contribute to the development of the cost-shared intangibles. Even though the idea behind the CSA regime was to create simplicity through a safe harbour, the determination of prices for “buy-in” payments based on a CSA has generated con...