In light of... Veritas Software Corp. v. Comm'r, 2009 U.S. Tax Ct. LEXIS 34 (T.C. Dec. 10, 2009), U.S. multinationals should give careful consideration to the manner in which their IP is created, held and paid for.
In January 1999, the company established Veritas Software Holding, Ltd. (VSHL), an Irish corporation, as a wholly owned subsidiary of the U.S. parent. In August 1999 Veritas Software International, Ltd. (VSIL) was incorporated as a resident of Ireland and a wholly owned subsidiary of VSHL. Effective November 3, 1999, Veritas assigned to VSHL and its subsidiaries (collectively, Veritas Ireland) all of the U.S. company's existing sales agreements with European-based sales subsidiaries. Also effective on that date, Veritas, Veritas Ireland and others of the company's subsidiaries entered into an Agreement for Sharing Research and Development Costs (RDA), and Veritas US and Veritas Ireland entered into a Technology License Agreement (TLA).Under the TLA, Veritas Ireland would pay royalties to its U.S. parent... [T]he TLA included initial royalty rates, as well as an amount to be prepaid for the covered IP (i.e., a lump-sum buy-in payment). Under the TLA, the parties were able to "adjust the royalty rate prospectively or retrospectively as necessary so that the rate will remain an arm's-length rate." In fulfillment of the agreement, Veritas received $6.3 million from Veritas Ireland in 1999. In 2000 Veritas Ireland paid Veritas $166 million representing the balance of the lump-sum buy-in payment. The buy-in payment was subsequently reduced to $118 million in 2002, as was permissible under the agreement.Veritas's determination of arm's-length charges was made under the comparable uncontrolled transaction (CUT) method. Treas. Reg. § 1.482-4(c)(2)(ii). Under this method, the arm's-length nature of the amount charged is determined by reference to the amount charged in transactions involving the same or substantially similar intangibles under the same or substantially similar circumstances, terms and conditions between unrelated parties.
The determination of the value of an intangible is a subjective exercise involving numerous variables and qualitative measures aimed at producing a quantitative result. A tax valuation is like a contractor's bid or a skating judge's score - an expert's best guess carried to four decimal places. In this case, the issue came down to an interpretation of Treasury Regulations and their application to the facts and circumstances of the transaction.
It was the business success of Veritas Ireland that solidified the case for the taxpayer... Choosing a favorable answer and working backwards to arrive at it is a failing strategy. Neither taxpayers nor the government can manipulate the facts and circumstances or the law to suit a desired result.
LEXIS users can access the complete commentary here. Additional fees may be incurred. (Approx. 5 pages)
Elizabeth Sweigart and Rob Jennings discuss the Veritas v. Comm'r holding in a Tax Law Community podcast