White: Cost Sharing Agreements And The Arm's Length Standard

Sienna Carly White (Jones Day, Cleveland), Cost Sharing Agreements & The Arm's Length Standard: A Matter of Statutory Interpretation?, 19 Fla. Tax Rev. 191 (2016):

The arm’s length standard has been the touchstone of international transfer pricing and Internal Revenue Code Section 482 for the better part of a century, but its relevance is under scrutiny. A growing consensus among the international community suggests the arm’s length standard is no longer adequate to accurately and fairly tax the multinational enterprises that make up the modern global economy. In this paper, I examine the implications of the Xilinx saga and conclude that both the Ninth Circuit and the IRS were incorrect: the arm’s length standard should function as a legal principle, with explicit exceptions, rather than as a legal rule.

The post-Xilinx landscape will be further altered by the Ninth Circuit outcome of Altera, which may open the door for additional regulatory challenges to Treasury regulations promulgated outside the Administrative Procedure Act. Rather than maintaining the status quo, the United States should adopt a transfer pricing system that reflects economic reality, but also embodies the spirit of Section 482—creating parity between taxpayers. Only then can we begin to restore public confidence in the fairness and efficacy of our country’s tax system—and make transfer pricing jurisprudence clearer instead of “curiouser.”