Benshalom on The Cost Sharing Regs and the Sourcing of Affiliated Intangible-Related Transactions

Ilan Benshalom (J.S.D. 2007, Yale) has published Sourcing the "Unsourceable":  The Cost Sharing Regulations and the Sourcing of Affiliated Intangible-Related Transactions, 26 Va. Tax Rev. 631 (2007). Here is the Conclusion:

More than a year has passed since the proposed CSRs have been promulgated. To date, the current CSRs are still in force and their loophole is still wide open with all of its fiscal losses and inequitable implications. Although the proposed CSRs would have narrowed the loophole, the Service and the Treasury have avoided their enactment. One can only speculate whether the reason for this delay is the political hesitance to openly advocate for tougher taxation on the proceeds of R&D activity or the fear that a legislative change may be required for the proposed CSRs to be legally sustainable.

The suggestions advocated by the Article are clearly important. As the CSRs and the proposed CSRs suggest, the adoption of the Article's conceptual foundations and operative proposal may necessitate persuasion (and legislation) given the longstanding support of the arm's-length standard. The Article does not pretend to offer any panacea to the problems associated with the sourcing of affiliated transactions. It does, however, aspire, particularly through the CSRs example, to point toward some important policy directions that policymakers may wish to consider upon reforming their sourcing paradigms. On the operational level, the Article suggests that when the arm's-length standard does not provide satisfying sourcing consequences, it should be replaced with a formulary sourcing methodology based on immobile indicators. On a broader policymaking level, the Article highlights that the shift to a formulary sourcing methodology has broader normative implications. The change must accompany a determination of the sourcing regime's objectives (and their prioritization), what links should connect a specific economic activity to a particular fiscal jurisdiction, and how the MNE tax base should be distributed between various sovereigns.

Despite the fact that the concept of source lies at the core of international taxation, it is devoid of any concrete, well-theorized normative content. The ongoing tax competition pressures arising from the evolution of trade, finance, and business structures as well as technological innovations have put the source regime under siege. The equitable and distributive implications of this siege have often been neglected due to the blurred rhetoric that accepts the arm's-length standard and the need to invigorate the competitiveness of U.S. businesses through reductions in the effective corporate tax rate as a given. This Article confronts that rhetoric head on by offering a critical assessment of the affiliated transactions sourcing paradigm.