Amicus Curiae Brief — Altera Corporation & Subsidiaries, Petitioner v. Commissioner of Internal Revenue

No. 19-1009

IN THE

Supreme Court of the United States

________________

ALTERA CORPORATION & SUBSIDIARIES,

v.

Petitioner,

COMMISSIONER OF INTERNAL REVENUE,

________________

Respondent.

ON PETITION FOR A WRIT OF CERTIORARI TO

THE UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

________________

BRIEF OF FORMER FOREIGN TAX

OFFICIALS AS AMICI CURIAE IN SUPPORT

OF PETITIONER

________________

Mark S. Davies

Carolyn Frantz

Elizabeth R. Cruikshank

ORRICK, HERRINGTON &

SUTCLIFFE LLP

1152 15th Street, NW

Washington, DC 20005

E. Joshua Rosenkranz

Counsel of Record

Peter J. Connors

ORRICK, HERRINGTON &

SUTCLIFFE LLP

51 West 52nd Street

New York, NY 10019

(212) 506-5000

jrosenkranz@orrick.com

Counsel for Amici Curiae

i

TABLE OF CONTENTS

Page

TABLE OF AUTHORITIES ..................................... ii

INTEREST OF AMICI CURIAE .............................. 1

STATEMENT OF THE CASE .................................. 6

SUMMARY OF ARGUMENT................................. 10

ARGUMENT ........................................................... 11

I.

International Tax Treaties Are Based On

The Arm’s-Length Standard. ........................... 11

II. The Ninth Circuit’s Decision Allowing The

IRS To Abandon The Traditional Arm’sLength Standard Has Dangerous

Consequences For The Global Tax System. .... 16

CONCLUSION ........................................................ 19

ii

TABLE OF AUTHORITIES

Page(s)

Cases

EEOC v. Arabian Am. Oil Co.,

499 U.S. 244 (1991) ..............................................13

Eli Lilly & Co. v. Comm’r,

84 T.C. 996 (1985) ................................................16

F. Hoffmann-La Roche Ltd. v.

Empagran S.A.,

542 U.S. 155 (2004) ..............................................13

Local Fin. Corp. v. Comm’r,

407 F.2d 629 (7th Cir. 1969)................................16

Philipp Bros. Chems., Inc. (N.Y.) v.

Comm’r,

435 F.2d 53 (2d Cir. 1970) ...................................16

Procacci v. Comm’r,

94 T.C. 397 (1990) ................................................16

Statutes

26 U.S.C. § 482 .................................... 8, 10, 15, 16, 17

Tax Reform Act of 1986, Pub. L. No. 99514, 100 Stat. 2085 ........................................10, 17

Rulemakings and Regulations

26 C.F.R. § 1.482-1(a) ..................................................9

iii

26 C.F.R. § 1.482-1(b) ..................................................9

26 C.F.R. § 1.482-1(c) ..................................................9

26 C.F.R. § 1.482-1(d)(1) ...........................................16

26 C.F.R. § 1.482-5(c)(2) ............................................16

26 C.F.R. § 1.482-7 ..................................................7, 8

26 C.F.R. § 1.482-7A ...................................................7

26 C.F.R. § 1.482-7A(d)(2)...........................................7

Study of Intercompany Pricing Rules 53

Fed. Reg. 43,522-01 (Oct. 27, 1988) .... 5, 13, 14, 17

67 Fed. Reg. 48,997 (July 29, 2002)............................8

68 Fed. Reg. 51,171 (Aug. 26, 2003) ...........................9

Other Authorities

1996 Technical Explanation, 1 Tax

Treaties (CCH) ¶ 216 .....................................15, 17

2001 U.S.-United Kingdom Income Tax

Treaty, art. 9 (July 24, 2001),

https://tinyurl.com/yxthmttr ...............................15

2006 Technical Explanation, 1 Tax

Treaties (CCH) ¶ 215 ...........................................18

Diane Bartz, U.S. Government Seeks to

Intervene in Apple’s EU Tax Appeal:

Source, Reuters (July 4, 2017),

https://tinyurl.com/y6kxhrf4 ...............................13

iv

Brazil-U.S. Business Council, A

Roadmap to a U.S.-Brazil Tax

Treaty (March 2019),

https://tinyurl.com/y4goy2hp ...............................15

William Mauldin, U.S. Launches Probe

of French Digital Tax, Wall St. J.

(July 10, 2019),

https://tinyurl.com/y5l6jfqt ..................................13

OECD, Inclusive Framework on Base

Erosion and Profit Shifting,

https://tinyurl.com/y4berw7q (last

visited July 26, 2019) ...........................................12

OECD, Transfer Pricing in Brazil:

Towards Convergence with the

OECD Standard (2019),

https://tinyurl.com/ubpcxlb;.................................15

Pending Income Tax Agreements,

Hearing Before the S. Comm. on

Foreign Relations (Feb. 25, 2004)

(testimony of Barbara Angus, Int’l

Tax Counsel, U.S. Dep’t of Treas.),

https://tinyurl.com/yxea26yo ................... 11, 12, 13

U.S. Treasury Dep’t, Preamble to 2016

U.S. Model Income Tax Convention

(Feb. 17, 2016),

https://tinyurl.com/y6b4ss93 ...............................11

1

INTEREST OF AMICI CURIAE 1

Amici curiae are 18 former tax officials of foreign

jurisdictions who devoted significant parts of their

government service to interpreting or administering

domestic and international tax rules. 2 They are:

•

Stefaan De Baets: Former First Attaché of Finance at Belgian Federal Public Service Finance; Vice-Chair of Committee on Fiscal

Affairs Working Party 6 (Transfer Pricing),

OECD; Vice-Chair of EU Transfer Pricing Forum;

•

Eric Bonneaud: Former Director of Unit responsible for treaties, transfer pricing, and mutual agreement procedures, Directorate of Tax

Legislation, French Ministry of Finance; Former French Competent Authority;

1 The parties have consented to the filing of this amicus

brief. No counsel for a party authored the brief in whole or in

part. No party, counsel for a party, or any person other than

counsel for amici curiae made a monetary contribution intended

to fund the preparation or submission of the brief.

2 Amici join this brief in their individual capacities as former government officials. Given the widespread implications of

the decision below, many major U.S. and multinational corporations have a significant interest in the outcome of this case. That

group includes the employers or firms of some amici and numerous clients of other amici or their firms. Amici do not, however,

represent Altera, and neither they nor their employers or firms

have been compensated for participation in this case. Amici join

this brief solely because of their knowledge of the issues raised

and their belief in the exceptional importance of this case.

2

•

Carolina del Campo Azpiazu: Former Deputy

Director-General for Non-Resident Taxation,

Spanish Ministry of Economy and Finance;

•

Blaise-Philippe Chaumont: Former Chief of

Staff of French Budget Minister Valérie

Pécresse; Former Deputy Chief of Staff to

French Economy and Finance Minister

François Baroin; Former Tax Policy Advisor to

French Economy and Finance Minister Christine Lagarde; Former Director of Division responsible for treaties, transfer pricing, and

mutual agreement procedures, Directorate of

Tax Legislation, French Ministry of Finance;

Former French Competent Authority; Former

Head of Unit – International Tax Audit;

•

Ricardo Escobar: Former Commissioner of the

Internal Revenue Service of Chile;

•

Bruno Gibert: Former Director, International

Division, Tax Policy Department, and Competent Authority for Mutual Agreement Procedures, Ministry of Finance, France; Former CoChair of the OECD Forum on Harmful Tax

Competition;

•

Nishana Gosai: Former Head of Transfer Pricing, South African Revenue Service; Member of

the UN Committee of Experts on International

Cooperation in Tax Matters, Subcommittee on

Transfer Pricing; Member of the African Tax

Administrators’ Forum Technical Tax Committee;

3

•

Friedhelm Jacob: Former Associate International Tax Counsel, Federal Ministry of Finance, Bonn, Germany; Counselor (Fiscal),

German Embassy, Washington, DC;

•

Cezary Krysiak: Former Director, Tax Policy

Department, Ministry of Finance of the Republic of Poland;

•

Armando Lara Yaffar: Former Director-General for International Treaties, Tax Legislation

Unit, Ministry of Finance and Public Credit,

Mexico; Former Chairperson of the UN Committee of Experts on International Cooperation

in Tax Matters; Former Vice-Chair of OECD

Committee on Fiscal Affairs;

•

Kyung Geun Lee: Former Director, International Tax Division, Tax & Customs Office,

Ministry of Finance; Member of the UN Committee of Experts on International Cooperation

in Tax Matters;

•

Daniel Lüthi: Former Vice Director of the Federal Tax Administration, Ministry of Finance,

Switzerland; Delegate of the Swiss Ministry of

Finance for International Tax Matters; Chairman of Working Party No. I of the Committee

on Fiscal Affairs, OECD;

•

Yoshiyasu Okada: Former Deputy Commissioner (International) and Japanese Competent Authority, Director of the Office of

4

International Operations, and Director of International Tax Examinations, National Tax

Agency, Japan;

•

Robin Oliver: Former Deputy Commissioner of

Policy at Inland Revenue of New Zealand; Former Deputy Chair of OECD Committee on Fiscal Affairs;

•

Maura Parsons: Former Deputy Director, Head

of Transfer Pricing, HM Revenue & Customs,

UK Competent Authority;

•

Karina Perez Delgadillo: Former Central Administrator for Legal International Tax Issues

and Internal Criteria for Large Taxpayers and

Mexican Competent Authority, Tax Administration Service; Underdirector General for

Treaty Negotiations, Underministry of Revenue, Ministry of Finance and Public Credit,

Mexico;

•

Carlos Pérez Gómez Serrano: Former Director

of Transfer Pricing Examinations in the Mexican Tax Administration Service; Member of the

UN Committee of Experts on International Cooperation in Tax Matters Subcommittee on

Transfer Pricing; and

•

Edwin Visser: Former Director, Direct Taxes

and Former Deputy Director-General, Tax and

Customs Policy and Legislation, Netherlands

Ministry of Finance; Chairman of the Coordination Group on Transfer Pricing, Netherlands

Tax and Customs Administration.

5

At issue here are the rules governing “transfer

pricing.” “[V]irtually every major industrial nation

takes the arm’s length standard as its frame of reference in transfer pricing cases.” Study of Intercompany

Pricing Rules, 53 Fed. Reg. 43,522-01, 43,539 & n.156

(Oct. 27, 1988) (“White Paper”). The heart of the

arm’s-length standard is consideration of what unrelated parties operating at arm’s length actually do. In

this case, however, the IRS decided to categorically

disregard this evidence in favor of its own “internal”

view of the transactions at issue.

As experts in foreign tax codes, amici have extensive experience using comparisons in real-world

transactions when applying the arm’s-length standard to related companies. Importantly, this standard

allocates how much income should be attributed to

each of two countries and thus how much tax revenue

each country may collect. This helps avoid double taxation, where each country taxes the same income because each is applying a different set of transfer

pricing rules, and minimizes cross-border conflicts

that arise when different countries wish to tax the

same significant income sources.

Based on their collective experience and expertise, amici believe the IRS’s decision to disregard evidence of potential comparable transactions when

determining the scope of cost-sharing payments is

unique and troubling. The Ninth Circuit’s decision below countenances a departure from the worldwide understanding of what the arm’s-length standard

means. Amici are not aware of any other taxing au-

6

thority which categorically disregards relevant evidence presented in the form of comparable transactions among unrelated parties.

This isolationist ruling risks a tremendous increase in disputes between the United States and

other countries over how much income should be attributed to each of two countries. The uncertainty

caused by the Ninth Circuit’s ruling warrants prompt

resolution by the Court. The Court should grant review to preserve international comity.

STATEMENT OF THE CASE

In May 1997, Altera entered into a cost-sharing

agreement with one of its foreign subsidiaries, Altera

International, Inc., a foreign corporation (“Altera International”). Under a cost-sharing agreement, parties agree to share the costs of developing intangible

property and thereby share its benefits (if any) following development. Cost-sharing agreements like the

one Altera entered into with Altera International are

common.

At issue in this case is whether it was appropriate

for the IRS to require that the stock-based compensation paid to employees engaged in intangible development be included in the development costs Altera and

Altera International share. The Ninth Circuit held

that the IRS was entitled when adopting its requirement to categorically disregard evidence about

whether unrelated parties share such costs when engaging in similar transactions.

7

The requirement at issue in this case was originally adopted in 2003. In that year, the U.S. Treasury

Department (“Treasury”) adopted Reg. § 1.4827A(d)(2), 3 which provided that, with respect to the

scope of payments under a cost-sharing agreement,

parties must allocate stock-based compensation between themselves:

[In a cost-sharing agreement], a controlled

participant’s operating expenses include all

costs attributable to compensation, including

stock-based compensation. As used in this

section, the term stock-based compensation

means any compensation provided by a controlled participant to an employee or independent contractor in the form of equity

instruments, options to acquire stock (stock

options), or rights with respect to (or determined by reference to) equity instruments or

stock options, including but not limited to

property to which section 83 applies and stock

options to which section 421 applies, regardless of whether ultimately settled in the form

of cash, stock, or other property.

26 C.F.R. § 1.482-7A(d)(2). 4 In other words, Treasury’s regulation required that, when parties enter

3 Although the 2003 amendments are still in effect, the Tax

Code has since been reorganized so that what was once § 1.4827 in 2003 is now § 1.482-7A. This brief, like the decision below,

uses the current citation to the regulation.

4 This requirement impacts the tax U.S. companies engaging in cost-sharing agreements must pay. For instance, if a U.S.

company enters into a cost-sharing agreement with a foreign

8

into a cost-sharing agreement, stock-based compensation must in all circumstances be included in the pool

of costs they share.

Everyone agrees—and has agreed for most of a

century—that 26 U.S.C. § 482, the statute on which

Treasury relied for its authority to enact the 2003 regulation, establishes an “arm’s-length” standard for allocation of income and deductions between related

entities. See IRS C.A. Br. 31. 5 Under the arm’s-length

standard, the income attributed to related parties is

determined based on what the parties’ income would

have been if they were unrelated entities dealing at

arm’s length. During the administrative process,

Treasury repeatedly stated that its proposed rulemaking was consistent with the arm’s-length standard. See, e.g., 67 Fed. Reg. 48,997, 49,000 (July 29,

2002) (“The proposed regulations … clarify that

§ 1.482-7 provides the specific method to be used to

evaluate whether a qualified cost sharing arrangement produces results consistent with an arm’s

subsidiary, under this regulation, the U.S. company’s income

would be calculated as if the subsidiary paid it a proportional

share of stock-based compensation under the cost-sharing agreement, whether or not that was the agreement between the parties. The taxing authority in the country where the subsidiary is

located also must determine whether to allow a deduction to that

subsidiary for this purported payment. Inconsistency in approach can result in double taxation.

5 Section 482 authorizes the U.S. Treasury to “distribute,

apportion, or allocate gross income, deductions, credits, or allowances” between two related organizations if necessary “to prevent evasion of taxes or clearly to reflect the income of any of

such organizations.” 26 U.S.C. § 482.

9

length result….”). It is also well understood that evidence about comparable transactions engaged in by

unrelated parties should be considered where available in determining what is an arm’s length result. See,

e.g., 26 C.F.R. § 1.482-1(a)-(c).

In the notice-and-comment period regarding the

2003 regulation, commentators pointed out that the

IRS’s proposed approach was contrary to what parties

would do at arm’s length and presented evidence that

unrelated parties do not share stock-based compensation when engaged in similar co-development arrangements. Pet. App. 98a-101a; see id. at 229a-231a.

Treasury adopted the regulation anyway, notwithstanding this significant evidence—and a lack of evidence showing unrelated parties sharing the costs of

this compensation—all the while claiming that its approach comported with the arm’s-length standard.

See 68 Fed. Reg. 51,171, 51,172-73 (Aug. 26, 2003)

(“Treasury and the IRS do not agree with the comments that assert that taking stock-based compensation into account in the [cost-sharing] context would

be inconsistent with the arm’s length standard in the

absence of evidence that parties at arm’s length take

stock-based compensation into account in similar circumstances.”).

Before the Ninth Circuit, the IRS asserted that it

could ignore such evidence of potentially comparable

transactions, stating that “comparability analysis

plays no role in determining the costs that must be

shared under a [cost-sharing agreement] in order to

10

achieve an arm’s length result.” IRS C.A. Br. 30. 6 To

support its position on appeal, the IRS argued that

the second sentence of section 482—which provides

that “[i]n the case of any transfer (or license) of intangible property,” “the income with respect to such

transfer or license shall be commensurate with the income attributable to the intangible”—allows it to take

a purely “internal” view of cost-sharing arrangements, disregarding evidence about the behavior of

unrelated parties. IRS C.A. Br. 31; see also Pet. App.

29a (characterizing IRS’s approach as “[d]oing away

with analysis of comparable transactions, and instead

requiring an internal method of allocation”). This

“commensurate with income” language has been in

section 482 since 1986. See Tax Reform Act of 1986,

Pub. L. No. 99-514, 100 Stat. 2085, 2563. The IRS appellate brief acknowledged that its new approach to

comparables based on that language “changed the legal landscape.” IRS C.A. Br. 30.

SUMMARY OF ARGUMENT

The international taxation system relies on countries working together to develop consistent and stable understandings of important tax concepts. The

IRS’s significant departure from the common worldwide understanding of the arm’s-length standard, validated by the Ninth Circuit below, threatens this

cooperation. The underlying taxation question is how

6 Amici understand that Altera and other amici are addressing the appropriateness of the IRS’s change of position under

U.S. administrative law. This brief does not address that topic,

instead focusing on the significance of the IRS’s appellate position to international taxation.

11

much income should be attributed to each of two countries. This issue is of great practical importance to the

functioning of the worldwide tax system. The uncertainty around this question needs to be resolved now.

Amici urge this Court to grant Altera’s petition for

certiorari.

ARGUMENT

I.

International Tax Treaties Are Based On

The Arm’s-Length Standard.

International taxation is a complex system. While

each country has its own tax code and rules, because

taxation often has international consequences, countries enter into tax treaties in an effort to apply the

tax law consistently across borders, with the goal of

ensuring that transactions are taxed once and only

once. See U.S. Treasury Dep’t, Preamble to 2016 U.S.

Model Income Tax Convention, at 1 (Feb. 17, 2016),

https://tinyurl.com/y6b4ss93 (citing “the Treasury

Department’s longstanding policy that tax treaties

should eliminate double taxation”); Pending Income

Tax Agreements, Hearing Before the S. Comm. on Foreign Relations (Feb. 25, 2004) (testimony of Barbara

Angus, Int’l Tax Counsel, U.S. Dep’t of Treas.),

https://tinyurl.com/yxea26yo (noting that avoiding

double taxation is a goal of tax treaties) (“Angus Statement”).

Tax treaties work best when they employ well-understood and well-established concepts that each

country can attempt to apply in the same manner to

minimize disputes. As explained by counsel for Treasury itself, testifying before a Senate committee:

12

Tax treaties provide benefits to both taxpayers and governments by setting out clear

ground rules that will govern tax matters relating to trade and investment between the

two countries. A tax treaty is intended to

mesh the tax systems of the two countries in

such a way that there is little potential for dispute regarding the amount of tax that should

be paid to each country…. A treaty with clear

rules addressing the most likely areas of disagreement minimizes the time the two governments (and taxpayers) spend in resolving

individual disputes.

Angus Statement. Countries expend significant resources negotiating tax treaties, and implementing

their provisions, to achieve these important benefits.

In addition, a great deal of effort is spent internationally attempting to harmonize understandings of

tax law among nations. Substantial undertakings like

the Organisation for Economic Cooperation and Development’s (“OECD”) Base Erosion and Profit Sharing project are directly aimed at creating common

understandings across countries of how to create and

apply tax laws with cross-border consequences. 7

These treaties and common understandings promote consistency and stability and diminish conflict

between nations, which may each have a claim to tax

7 OECD, Inclusive Framework on Base Erosion and Profit

Shifting, https://tinyurl.com/y4berw7q (last visited July 26,

2019).

13

the same income. Cross-border tax disputes are timeand resource-intensive not only for taxpayers but also

for governments, and uncertainty in the tax law can

impede free flow of business activity across borders.

See Angus Statement. In some cases, unresolved disagreements between countries about taxation can lead

to high-level political conflict. 8 Maintaining common

understandings of significant tax principles is therefore important to international comity and trade. 9

Cost-sharing arrangements, whereby two entities

share the costs and risks of developing new intangibles, are common among related and unrelated parties worldwide. See Pet. App. 99a-100a. In

determining the scope of required payments under

these arrangements, both the United States and its

treaty partners have looked to the arm’s-length

standard. This standard forms the basis not only for

U.S. tax law but also for scores of tax treaties. White

8 See, e.g., William Mauldin, U.S. Launches Probe of French

Digital Tax, Wall St. J. (July 10, 2019), https://tinyurl.com/y5l6jfqt; Diane Bartz, U.S. Government Seeks to Intervene in Apple’s EU Tax Appeal: Source, Reuters (July 4, 2017),

https://tinyurl.com/y6kxhrf4.

9 Cf. F. Hoffmann-La Roche Ltd. v. Empagran S.A., 542 U.S.

155, 164-65 (2004) (noting that ensuring that “the potentially

conflicting laws of different nations work together in harmony”

is “particularly needed in today’s highly interdependent commercial world”); EEOC v. Arabian Am. Oil Co., 499 U.S. 244, 248

(1991) (highlighting the importance of “protect[ing] against unintended clashes between our laws and those of other nations

which could result in international discord”).

14

Paper, 53 Fed. Reg. at 43,539 & n.156 (explaining that

the “arm’s length standard is embodied in all U.S. tax

treaties” and “is incorporated into most tax treaties to

which the United States is not a party”). The IRS

White Paper further explained that the arm’s-length

standard is in every “major model treaty, including

the U.S. Model Convention” and the model conventions of the OECD and United Nations. Id. at 43,539

& n.158. Indeed, “virtually every major industrial nation takes the arm’s length standard as its frame of

reference in transfer pricing cases.” Id. The application of the arm’s-length standard is thus reflected in

the “Associated Enterprises” article of tax treaties to

which the United States is a party.

For example, the income tax treaty with the

United Kingdom provides for application of the arm’slength standard in Article 9, as follows:

Where a Contracting State includes in the

profits of an enterprise of that State, and

taxes accordingly, profits on which an enterprise of the other Contracting State has been

charged to tax in that other State, and the

other Contracting State agrees that the profits so included are profits that would have accrued to the enterprise of the first-mentioned

State if the conditions made between the two

enterprises had been those that would have

been made between independent enterprises,

then that other State shall make an appropriate adjustment to the amount of the tax

charged therein on those profits.

15

2001 U.S.-United Kingdom Income Tax Treaty, art. 9

(July 24, 2001), https://tinyurl.com/yxthmttr (emphasis added). Article 9 of the U.S. Model Tax Treaty “incorporates … the arm’s-length principle reflected in

the U.S. domestic transfer pricing provisions, particularly Code section 482.” Pet. App. 86a (quoting 1996

Technical Explanation, 1 Tax Treaties (CCH) ¶ 216,

at 10,691-26).

Further showing the importance of the arm’slength standard to transfer pricing treaties, the

United States has thus far refrained from entering

into a tax treaty with Brazil, which instead conducts

transfer pricing on the basis of certain statutory profit

percentages. Brazil-U.S. Business Council, A

Roadmap to a U.S.-Brazil Tax Treaty, at 7-8 (March

2019), https://tinyurl.com/y4goy2hp (noting that the

countries’ disparate treatments of transfer pricing is

a “key negotiation point[]”). In fact, Brazil’s transfer

pricing policies have also prevented it from joining the

OECD. Recently, however, Brazil initiated an effort to

join this elite group of countries. This triggered an assessment of the Brazilian transfer pricing rules conducted by the OECD and Brazil’s tax authorities

aimed at enabling its rules to achieve convergence

with the arm’s-length standard. See OECD, Transfer

Pricing in Brazil: Towards Convergence with the

OECD Standard (2019), https://tinyurl.com/ubpcxlb;

see id. at 25 (“Ensuring the primacy of the arm’s

length principle as set out in the OECD Transfer Pricing Guidelines is required of OECD member countries

as one of the OECD Committee on Fiscal Affairs’ Core

Principles.”)

16

II. The Ninth Circuit’s Decision Allowing The

IRS To Abandon The Traditional Arm’sLength

Standard

Has

Dangerous

Consequences For The Global Tax System.

The IRS’s position that it can categorically ignore

relevant facts is not consistent with the arm’s-length

standard as it is understood worldwide. That global

standard is instead a fact-intensive inquiry. Multiple

U.S. courts have also recognized this fact. See, e.g., Eli

Lilly & Co. v. Comm’r, 84 T.C. 996, 1134 (1985), aff’d

in relevant part, 856 F.2d 855, 860 (7th Cir. 1988); see

also Philipp Bros. Chems., Inc. (N.Y.) v. Comm’r, 435

F.2d 53, 57 (2d Cir. 1970) (§ 482 determination is “essentially one of fact”); Local Fin. Corp. v. Comm’r, 407

F.2d 629, 632 (7th Cir. 1969) (same); Procacci v.

Comm’r, 94 T.C. 397, 412 (1990) (“[T]he determination under section 482 is essentially and intensely factual.”). Today, the § 482 regulations contain 90

references to “facts and circumstances” or “factors” in

addressing the application of the arm’s-length standard. See, e.g., 26 C.F.R. § 1.482-1(d)(1) (comparability

of transactions “must be evaluated considering all

factors that could affect prices or profits in arm’s

length dealings” (emphasis added)); 26 C.F.R. § 1.4825(c)(2) (the “degree of comparability between the

tested party and the uncontrolled taxpayer depends

upon all the relevant facts and circumstances” (emphasis added)).

While application of the arm’s-length standard

can be difficult, and examination of comparable transactions may require additional economic analysis (or

such transactions may be lacking entirely in a partic-

17

ular case), amici are not aware of any other taxing authority which purports to apply that standard while

categorically disregarding relevant evidence presented in the form of comparable transactions among

unrelated parties. Accord White Paper, 53 Fed. Reg.

43,522-01 (“Transfer prices must be determined on

the basis of true comparables if they in fact exist”).

The IRS’s new “purely internal” approach to defining

the scope of cost-sharing payments, relying on its own

incompletely informed belief about how parties would

behave instead of analyzing the available evidence of

what unrelated parties actually do, is inconsistent

with the arm’s-length standard.

The 1986 inclusion of the “commensurate with income” language in 26 U.S.C. § 482 did not change the

common understanding of the role of the arm’s-length

standard in determining the scope of cost-sharing

payments. In all the years this language has been in

the U.S. statute, neither the IRS nor foreign taxing

authorities have ever before deemed it to categorically

dispense with comparability analysis. In fact, as

Judge O’Malley wrote in her dissent from the panel

opinion, the U.S. “commensurate with income” standard has been applied only to circumstances where

comparable transactions do not provide guidance.

Pet. App. 59a (quoting White Paper, 53 Fed. Reg. at

43,537-38). Under Article 9 of the U.S. Model Tax

Treaty, “[i]t is understood that the ‘commensurate

with income’ standard for determining appropriate

transfer prices for intangibles, added to Code section

482 by the Tax Reform Act of 1986, was designed to

operate consistently with the arm’s length standard.”

Pet. App. 92a (quoting 1996 Technical Explanation, 1

Tax Treaties (CCH) ¶ 216, at 10,691-26 and citing

18

2006 Technical Explanation, 1 Tax Treaties (CCH) ¶

215, at 10,641).

The IRS’s position in this appeal, endorsed by the

Ninth Circuit below, is not consistent with the arm’slength standard as it is understood worldwide. Indeed, it is fair to say that such an approach is simply

not the application of the arm’s-length standard at all.

Pet. App. 72a (characterizing the IRS’s decision to

abandon comparability as an impermissible “exception that swallows a rule”).

The Ninth Circuit concluded that the tax treaties

to which the United States is a party are not relevant

because “there is no evidence that our treaty obligations bind us to the analysis of comparable transactions.” Pet. App. 31a. But U.S. treaty obligations do

bind the IRS to application of the arm’s-length standard, which requires consideration of comparable

transactions where they are available.

As a result, the approach the IRS supports in this

appeal is a dangerous one. The goal of the United

States and its treaty partners has been to agree on

standards for transfer pricing to help ensure that income is taxed once and only once, minimizing disagreement and confusion. See supra at 11-13.

Coordination is particularly important for transfer

pricing, as the underlying taxation question is how

much income should be attributed to each of two countries. Consideration of third-party evidence is an important part of the arm’s-length standard, grounding

countries in facts that can be referenced and discussed where disagreements arise. If instead “arm’s

length” can be anything one country declares it to be,

19

then there is no way to fairly resolve disputes or mitigate double taxation.

CONCLUSION

This Court should grant the petition for certiorari

in light of the exceptional importance of the question

posed in this case.

Respectfully submitted,

Mark S. Davies

Carolyn Frantz

Elizabeth R. Cruikshank

ORRICK, HERRINGTON &

SUTCLIFFE LLP

1152 15th Street, NW

Washington, DC 20005

March 13, 2020

E. Joshua Rosenkranz

Peter J. Connors

ORRICK, HERRINGTON &

SUTCLIFFE LLP

51 West 52nd Street

New York, NY 10019

(212) 506-5000