Gary Thomas, White & Case, Tokyo Sam Sim, Standard Chartered Bank, Singapore Clemens Thyme, S&P Capital IQ, Hon

1. Gary Thomas, White & Case, Tokyo Sam Sim, Standard Chartered Bank, Singapore Clemens Thyme, S&P Capital IQ, Hong Kong Michael Quigley, White & Case, Washington DC TRANSFER PRICING IN ASIA: THE GROWING ACCEPTANCE OF THE ARM’S LENGTH PRINCIPLE Asia Tax Forum 2012 Raffles Hotel, Singapore May 9-10, 2012

2. TOPICS • INTRODUCTION • MATURING OF THE ARM’S LENGTH PRINCIPLE IN JAPAN: A LESSON FOR THE REST OF ASIA? • COMPETENT AUTHORITY AND TRANSFER PRICING: HOW IS IT WORKING IN ASIA? • CURRENT TRANSFER PRICING ISSUES IN FINANCIAL SERVICES • TRANSFER PRICING – CREDIT RISK ASPECTS • CURRENT ISSUES BEING RAISED IN LITIGATION • CUSTOMS AND TRANSFER PRICING: WHAT YOU SHOULD BE AWARE OF • FUTURE OF TRANSFER PRICING IN ASIA • QUESTIONS

3. I. INTRODUCTION • Introduction of Panelists • Overall Panel Topic: “Growing Acceptance of the Arm’s Length Principle” in Asia • Merits – The Arm’s Length Principle is accepted! • Demerits – The Arm’s Length Principle (whatever it is) is required! • Using Japan as an Example of How Application of Arm’s Length Principle Has Evolved Over Time • Competent Authority: Is It Working in Asia? • Special Challenges in Financial Services • Applying the Arm’s Length Principle to Intra-Group Loans and Guarantees • Recent Litigation Issues • Transfer Pricing and Customs

4. II. MATURING OF THE ARM’S LENGTH PRINCIPLE IN JAPAN: A LESSON FOR THE REST OF ASIA • Outline • Historical Background • Recent History • Application of the Arm’s Length Principle Over the Years • Advance Pricing Arrangements • New Transfer Pricing Enforcement Approach in Japan: Focus on Taxpayer Voluntary Compliance • Japan as a Lesson for the Rest of Asia?

5. Historical Background of Transfer Pricing Enforcement in Japan • Adoption of Transfer Pricing Rules in 1986 • Reaction to US Internal Revenue Service assessments against US subsidiaries of major Japanese corporations from early 1980s • Transfer Pricing Rules Take Effect in 1987 • Initial NTA Enforcement Policies (1987-1989) • Collection of Information by Survey • “Soft Touch” Enforcement Approach • Adoption of “Centralized Management” by International Examination Section in NTA • Early Japanese Transfer Pricing Cases Focused on Foreign-Based Firms (1989-1996) • Expansion of Focus Toward Japanese Firms’ Outbound Transactions (from 1996) • Impact of APA Program in Recent Years in Reducing Number of Audits • Continuing Aggressive Audit Activity • Impact of Introduction of Transfer Pricing Documentation Requirements in 2010

6. Recent History in Transfer Pricing Compliance Rules • Release of NTA Transfer Pricing Guidelines (2001) • Addition of Transfer Pricing Provisions for Consolidated Corporations (2002) • Requirement of Disclosure of Transfer Pricing Methodologies in Schedule 17-3 (2003) • Introduction of Transactional Net Margin Method (“TNMM”) (2004) • Expansion of Coverage of “Foreign Related Parties” (2005) • Introduction of the Profit Methods (TNMM and PSM) in Presumptive Taxation (2006) • Introduction of Tax Payment Suspension Regime Specifically for Transfer Pricing Assessments in Competent Authority (2007) • Expansion of Exchange of Information Rules (2009) • Codification of Transfer Pricing Documentation Requirements (2010) • Introduction of “Most Appropriate Method Rule” (2011)

7. Transfer Pricing Assessments Since FYE 1999 Historical Chart of Transfer Pricing Assessment in Japan since FYE 1999 *Each fiscal year shows FYE June XXX (Source: NTA Press Release)

8. Threshold Question: Is Comparability of “Transactions” to be Based on Single Transactions or Groupings of Transactions? • Historical NTA Position: Singular and strictly transactional, with aggregations within product group or business segment permitted in limited circumstances • “where setting of price is performed taking into consideration transactions belonging to same product group …or same business segment” • Use of “mini-baskets” in practice – but no overall company comparisons were accepted • Historical NTA Position: There is only one arm’s length price. Japanese transfer pricing law does not recognize ranges • But, in recent practice, NTA accepts overall company comparisons and considers the use of ranges

9. Comparable Uncontrolled Price Method • Early application of secret comparables based on “single transaction” interpretation • Failure of NTA to disclose identity of comparable product, comparable transaction or comparable company – “secret comparables” • Taxpayer was prevented from performing an effective comparability analysis. • Failure to make appropriate adjustments for differences in commercial level, transaction volume and other factors, such as business strategies • Subsequent difficulty to sustain secret comparables in competent authority negotiations • Use of CUP now seems to be the exception.

10. Resale Price Method • Singular or Plural? • NTA officials originally interpreted the Resale Price Method provisions as referring to “transactions” in the “singular,” resulting in application on a strictly transactional, “product-by-product” basis, with no aggregations of products and transactions recognized. • Criticisms of strict transactional approach • Taxpayers without “internal” comparables could not use the Resale Price Method unless they could identify (from information on competitors) specific gross margins of specific competing products which are similar to the Taxpayer’s products (and will be considered “similar” by the NTA on audit) and make necessary adjustments for differences in functions or other matters in regard to such specific transactions. • Requires use of “secret comparables” by tax authorities • Gradual adoption of company-wide comparison approach • Ultimately, difficult to sustain in competent authority negotiations • NTA now accepts company-wide comparison approach and has become more flexible in applying the Resale Price Method

11. Profit Split Methods • Early preference for profit split methods in US/Japan competent authority cases • Development of conceptual arguments for applying profit splits • Early criticism of “one-sided” approaches and concern for “income creation” • NTA Guidelines instruct examiners to compare Japanese profits vs. foreign profits • In past, NTA favored “contribution profit split” and use of two factors indicating relative value added: depreciation expense and personnel expense • Critics argue that Japanese Contribution Profit Split fails to take into account the value of intangible property embedded in products provided by foreign suppliers. • NTA has also used advertising and promotion expenses and other selling expenses of Japanese subsidiary of foreign based firm, resulting in high allocations of overall profits to Japan.

12. Profit Split Methods (cont’d) • NTA adopted “residual profit split” and “comparable profit split” by circular based on OECD Transfer Pricing Guidelines • NTA sometimes applied Residual Profit Split but ignored contracts and legal ownership to attribute high value to alleged “marketing intangibles” in Japan. • More recently, NTA has favored use of Residual Profit Split on outbound intangible transactions of Japanese companies • Document requirements included disclosure of foreign segment profit-and-loss data. • Recent defeat in court case involving profit splits

13. Transactional Net Margin Method • NTA historical antipathy toward TNMM • History of US assessments against Japanese firms based on Comparable Profits Method (CPM) and “income creation” issue • Active Japan involvement in drafting OECD 1995 Transfer Pricing Guidelines paragraphs limiting use of TNMM • Gradual acceptance from late 1990’s of “modified resale price method” to resolve MAP cases and reach bilateral APAs • TNMM finally adopted into Japanese tax law in 2006 • Policy objective seemed to be to apply to Japanese firms’ outbound transactions. • But adoption occurred at same time as agreement to revise US/Japan income tax treaty • TNMM was positioned as an “other method” with lesser priority than RPM or other basic methods

14. Transactional Net Margin Method (cont’d) • NTA was reluctant to apply TNMM in transfer pricing audits just after its introduction in 2004 • But from 2006 or so, NTA increasingly accepted TNMM in bilateral APAs and unilateral APAs and later on in audits as well • TNMM was included as a presumptive taxation method in 2006. • It is expected that TNMM will be applied more extensively going forward, although tax authorities’ views on comparables will likely be different from those of taxpayers.

15. Seeking Certainty: Advance Pricing Arrangements Become More Prevalent • Advance Pricing Arrangements (APA) confirm that, once a tax authority evaluates the transfer pricing methodology and its validity, and accepts them as reasonable, as long as the firm conducts transactions according to the contents under certain preconditions, there would be no taxation on transfer prices. • Principal merits and demerits • Merit: Secure predictability in transfer pricing • Merit: Mitigate the transfer pricing risks (presumptive taxation, secret comparables and penalty) • Merit: More flexibility in applying methods as compared to an audit • Demerit: Required to submit much information to tax authorities for APA review, which can be like an audit • Demerit: Administrative burdens and expenses • On balance: Should now be seriously considered!

16. Trends in Bilateral APAs in Japan Increasing number of APA applications (Source: NTA Press Release)

17. Trends in Bilateral APAs in Japan Increased number of APAs with Asian countries (Source: NTA Press Release)

18. Trends in Bilateral APAs in Japan Significant increase in application of TNMM in recent years (Source: NTA Press Release)

19. New Transfer Pricing Enforcement Approach: Voluntary Compliance as a Matter of Corporate Governance • Public announcement at a Tax Seminar in Tokyo on April 24, 2012 • Mr. Toshiyuki Fushimi, Director, Large Enterprise Examination and Criminal Investigation Department National Tax Agency of Japan • International Trends in Tax Enforcement • Efforts to Enhance Corporate Governance Concerning Taxes • Efforts to Maintain and Enhance Tax Compliance in Transfer Pricing • Key Actions Expected of Enterprises to Prevent Occurrence of Transfer Pricing Problems • “Check Sheet to Confirm the Status of Efforts Concerning Transfer Pricing”

20. International Trends in Tax Enforcement:Meeting of the Forum on Tax Administration in January 2012 • The January 2012 meeting in Buenos Aires of the Forum on Tax Administration brought together the heads of the tax administrations from 43 countries under the auspices of the OECD and concluded with a unified and strengthened commitment to combat offshore tax abuse. • The tax administrators focused on the need to work smarter in times of shrinking budgets, and how to strengthen their relationship with large corporations through efficient and effective strategies that benefit both the taxpayer and taxing authority. • “Although there have been some high-profile successes in the fight against offshore tax abuse, resulting in significant additional tax revenues and real improvements in transparency and exchange of information, it is far too soon to declare victory.” • The tax administrations agreed that collaboration must now include coordinated actions by countries to finally put an end to offshore non-compliance.

21. International Trends in Tax Enforcement:Meeting of the Forum on Tax Administration in January 2012 • A key agreed objective was to promote the relationship between tax administrations and Large Business Taxpayers “An adversarial relationship between tax administrations and multinational corporate taxpayers serves neither of our purposes well and is contrary to our common goals, which are earlier and greater certainty, consistency, and efficiency.” “We will pay particular attention to the process of conducting and resolving transfer pricing cases. Overall, we intend to move away from a hide and seek approach to one based on greater transparency on the part of both taxpayers and tax administrations. As more companies put good tax compliance at the heart of their corporate governance, this will be easier to achieve.”

22. International Trends in Tax Enforcement:OECD Guidelinesfor Multinational Enterprises - 2011 Part I : Recommendations for responsible business conduct in a global context Section XI - Taxation • “Taxcompliance includes such measures as providing to the relevantauthorities timely information that is relevant or required by law forpurposes of the correct determination of taxes to be assessed inconnection with their operations and conforming transfer pricingpractices to the arm’s length principle.” (Para 1) • “Enterprises should treat tax governance and tax compliance as importantelements of their oversight and broader risk management systems. Inparticular, corporate boards should adopt tax risk management strategiesto ensure that the financial, regulatory and reputational risks associatedwith taxation are fully identified and evaluated.” (Para 2)

23. International Trends in Tax Enforcement:OECD Guidelinesfor Multinational Enterprises - 2011 Part I, Section XI - Taxation • In the case of enterprises having a corporate legal form, corporate boards are in a position to oversee tax risk in a number of ways. For example, corporate boards should proactively develop appropriate tax policy principles, as well as establish internal tax control systems so that the actions of management are consistent with the views of the board with regard to tax risk. (Para. 102) • Taxauthorities may need information from outside their jurisdiction in orderto be able to ….. determine the tax liabilityof the member of the MNE group in their jurisdiction. Again, theinformation to be provided is limited to that which is relevant to orrequired by law for the proposed evaluation of those economicrelationships for the purpose of determining the correct tax liability ofthe member of the MNE group. MNEs should co-operate in providingthat information. (Para. 103)

24. International Trends in Tax Enforcement:OECD Guidelinesfor Multinational Enterprises - 2011 Part I, Section XI - Taxation • Application of the arm’s length principle avoids inappropriate shifting of profits or losses and minimises risks of double taxation. Its proper application requires multinational enterprises to cooperate with tax authorities and to furnish all information that is relevant or required by law regarding the selection of the transfer pricing method adopted for the international transactions undertaken by them and their related party. (Para. 104) • The OECD Transfer Pricing Guidelinesaim to help taxadministrations (of both OECD member countries and non-membercountries) and multinational enterprises by (partially omitted)minimisingconflict among tax administrations and between tax administrations andmultinational enterprises and avoiding costly litigation. Multinationalenterprises are encouraged to follow the guidance in the OECD TransferPricing Guidelines, as amended and supplemented, in order to ensurethat their transfer prices reflect the arm’s length principle. (Para. 106)

25. Efforts to Enhance Corporate Governance Concerning Taxes • The economic activities of large business taxpayers occupy a large portion of the economy in Japan and the amount of their reported income is high. • For example, large business taxpayers comprise 0.02% of the number of corporations, but 26% of the reported income of all corporations. • Large business taxpayers lead industries and regions. Tax compliance by large business taxpayers greatly affects tax compliance by their enterprise groups as well as small to medium taxpayers and individual taxpayers. • When the tax compliance by large business taxpayers, which require significant administrative resources in tax examinations, is enhanced, the tax administration will be able to allocate more administrative resources to the corporations with a high level of need to be examined and to plan for improvement in their level of reported income. “From the perspective of the maintenance and improvement of the level of tax reporting throughout Japan, it is important to maintain and improve tax compliance by large business taxpayers.”

26. Results of Enhancing Corporate Governance Concerning Taxes • Benefits for Enterprises • Minimizing tax risks • Minimizing the burden of audit defenses in tax examinations. • Benefits for the Tax Administration • Greater focus on tax examinations of corporations with a high need for examinations “It is beneficial for both enterprises and the tax administration when tax compliance is improved through the enhancement of corporate governance.”

27. Efforts by the National Tax Authorities* 1. Conducting of Orientation Sessions “In meetings attended by top management of large business taxpayers, we will encourage the enhancement of corporate governance concerning taxes (such as by introducing examples of effective efforts).” “The national tax authorities will maintain and improve tax compliance through the enhancement of corporate governance by large business taxpayers, by confirming the status of corporate governance concerning taxes by large business taxpayers during tax examinations and carrying out exchanges of views with top management.” * “National tax authorities” refers to regional taxation bureaus, which have jurisdiction over large business taxpayers.

28. Efforts by the National Tax Authorities • Approaches towards Individual Enterprises • During the opportunity of a tax examination by Special Examiners in the Large Enterprise Examination Department in each regional tax bureau, the national tax authorities will confirm the status of the corporate governance concerning taxes by large business taxpayers through a request to them to describe the current status of their corporate governance including the involvement and direction by top management and the maintenance of an organization and functions in the finance and audit departments, in a “Confirmation Sheet on Corporate Governance Concerning Taxes”. • Upon the closing of a tax examination, the top management of a large business taxpayer and the top officials of a regional tax bureau will exchange views for the enhancement of corporate governance concerning taxes (such as by introducing examples of effective efforts).

29. Efforts by the National Tax Authorities 3. Use in Determining the Need for an Examination “Going forward, when determining the need for an examination, the national tax authorities will utilize the status of corporate governance concerning taxes as an important decision-making material and will allocate tax examination resources more heavily toward corporations with a high need for an examination.” • Efforts in Transfer Pricing “Also on transfer pricing, in order to maintain and improve tax compliance, the national tax authorities will carry out a detailed plan as part of its efforts for the enhancement of corporate governance concerning taxes.”

30. Efforts to Maintain and Enhance Tax Compliance in Transfer Pricing • Merits for both the enterprises and the tax authorities through maintaining and enhancing tax compliance in transfer pricing Benefits for enterprises • Minimizing tax risks • Minimizing the burden of audit defenses in tax examinations Benefits for the tax authorities • Greater focus on tax examinations of corporations with a high need for an examination • Preventing the problem of international double taxation (Mutual Agreement Procedures with foreign tax authorities) “In order to prevent the occurrence of problems concerning transfer pricing, the national tax authorities will promote the voluntary and appropriate actions of enterprises through cooperation between the national tax authorities and the enterprises.”

31. Particular Compliance Concerns in Transfer Pricing • In a self-assessment system, the taxpayer is required to themselves calculate the arm’s length prices for their transfer pricing and to file tax returns based on such calculations. • Because transfer pricing issues involve huge risks and costs, it requires even more voluntary and appropriate actions by the enterprises. • The importance of improving tax compliance, including transfer pricing, has been highlighted as an international trend. • In foreign countries, the enforcement of transfer pricing rules has been strengthened, and it is expected that transfer pricing assessments (double taxation) and the competent authority negotiations resulting from the same will increase. Accordingly, there is an increased need to consider measures, etc. for advance prevention of double taxation.

32. Particular Compliance Concerns in Transfer Pricing • Currently, the national tax authorities are moving ahead with efforts toward the enhancement of corporate governance concerning taxes, and it is possible to characterize the measures for transfer pricing as one part of such efforts. • In addition, in the 2010 tax reforms, the scope of required transfer pricing documentation was clarified, and the environment for the preparation of transfer pricing documentation was improved. • This means that the “documents that are recognized to be necessary for the purpose of computing arm’s length prices” were clarified in the ministerial order that sets for the “presumptive taxation” rules, which could be invoked if the tax administrations are not able to obtain the taxpayer’s cooperation through providing such necessary documents.

33. Key Actions Expected of Enterprises to Prevent Occurrence of Transfer Pricing Problems • Knowledge of Transfer Pricing Legislation • Involvement of Top Management • Recognition of Status and Problem Areas in Foreign Related Party Transactions • Implementation of Global Transfer Pricing Policies • Transaction Price Setting Taking into Account Transfer Pricing Methodologies • Transfer Pricing Compliance of Related Parties Overseas (Governance by Parent Company) • Communications with the Tax Administration Based on the above, a “Check Sheet to Confirm the Status of Efforts Concerning Transfer Pricing” should be prepared.

34. Efforts to Maintain and Improve Compliance in Transfer Pricing “As part of their efforts directed toward the enhancement of corporate governance concerning taxes, the national tax authorities will encourage enterprises to themselves plan for the maintenance and improvement of tax compliance in transfer pricing, while confirming the status of the efforts of the enterprises concerning transfer pricing.” • Facilitation through Orientation Sessions “Along with an explanation of the domestic and foreign trends in transfer pricing, the national tax authorities will explain the importance for enterprises to themselves maintain and improve their tax compliance in transfer pricing.”

35. Efforts to Maintain and Improve Compliance in Transfer Pricing • Facilitation through Individual Contacts with Enterprises • The national tax authorities will confirm the status of efforts on transfer pricing through a request to fill in a “Check Sheet to Confirm the Status of Efforts Concerning Transfer Pricing.” • As the time of exchanges of views between the top management of the enterprises and the tax bureaus with regard to corporate governance concerning taxes, the national tax authorities will also exchange views concerning transfer pricing. • Views will be exchanged between the enterprises and the tax officials in charge of transfer pricing, based on the contents of the “Check Sheet to Confirm the Status of Efforts Concerning Transfer Pricing.”

36. Japan as a Lesson for the Rest of Asia? • What can we learn from Japan’s history of attempting to apply the Arm’s Length Principle using the various transfer pricing methods? • What have the Japanese tax authorities told other governments in Asia over time and now today about Japan’s experience? • What are the implications of Japan’s new transfer pricing enforcement approaches seeking greater taxpayer compliance based on corporate governance objectives?

37. III. COMPETENT AUTHORITY AND TRANSFER PRICING: HOW IS IT WORKING IN ASIA? Panel Discussion • Gary Thomas, White & Case, Tokyo • Sam Sim, Standard Chartered Bank, Hong Kong • Clemens Thyme, S&P Capital IQ, Hong Kong • Michael Quigley, White & Case, Washington DC

38. IV. CURRENT TRANSFER PRICING ISSUES IN FINANCIAL SERVICES IN ASIA – THE BIG PICTURE Financial Sector FDI 2011 IPO Volume 2011

39. IV. CURRENT TRANSFER PRICING ISSUES IN FINANCIAL SERVICES IN ASIA – CONTRASTING FLAVOURS Some Macro Factors Impacting Level of Cross-border Activity • Crisis, really? • European withdrawal vs Regionals Stepping up • Bank Finance to Capital Markets • Simpler Products vs Increasing Sophistication • Increased Regulations vs Internationalization • Ring-fencing liquidity vs Outlet for excess savings Asia cross-border FS has vast room for growth But so does sophistication of authorities & TP rules !

40. IV. CURRENT TRANSFER PRICING ISSUES IN FINANCIAL SERVICES IN ASIA – DIFFERENT STROKES A. Familiar Global Themes… • Challenge to management fees/Head-office charges • Related party lending, capital, liquidity and guarantee fees • Increased documentation & reporting/compliance burden • Regulatory change and restructuring B. More so in Asia… • Intervention/influence of prudential regulators • Sophistication of tax authorities, advisors and taxpayers - Target vs Principles based; Cultural aspects • Bespoke & evolving business/product/pricing models • Legislative framework is young and in flux (Treaties/APA/MAP, TP jurisprudence) • Beyond OECD?: BRIIC, UN model • Implications of state ownership

41. IV. CURRENT TRANSFER PRICING ISSUES IN FINANCIAL SERVICES IN ASIA - MORE SPICE TO THE POT A. APA/MAPs -Are they worth the trouble? -First in class? Do you have the resources? B. Reconciling Differences -Different TP methods and mark-ups; Global consistency vs Local appropriate -Tax/TP vs Accounting (Financial vs Management view) C. GAAR, Thin-Cap, Indirect Taxes & TP -Interaction of such evolving tax principles with transfer pricing D. Branch banking to Subsidiaries -Subsidarisation, Securities companies, SPEs E. TP Infrastructure -Tax vs Finance: Roles & Responsibilities -Outsourcing

42. TRANSFER PRICING – CREDIT RISK ASPECTS • Transfer pricing standards require financial transactions such as loans and guarantees between related entities to utilize arm’s length pricing. • Key question: At what rate could a subsidiary fund itself if it were an independent entity?

43. Establish a Risk Based Framework for Intercompany Loans and Guarantees • Use a risk based approach thatdifferentiates credit quality • Find appropriate comparable marketrates for interest spreads or guarantee fees • Use globally consistent methodology • Document sound economic theoryaround assessments Example: Coca-Cola

45. Classification - Credit Assessment Methodologies Ratings Internal or Third Party

46. Build fundamentals driven comparables • Establish consistent approach for internal ratings on subs: • Model based approach (most objectified, limitations) • Internal Ratings Based approach (most detailed, expensive) • Internal vs. external assessment Generate custom comparable yield curves

47. Alternatives in Establishing Effective Reference Prices • Establishing a market based comparable requires: • Transparent methodology • Appropriate segmentation (geography, industry, credit rating, duration, etc.) • Cover all risk factors (sovereign risk, T&C) • Strong grounding on empirical data Credit Spread Models

48. VI. CURRENT ISSUES BEING RAISED IN LITIGATION AND WHAT THIS MEANS FOR ASIA • Status of Selected Recent Cases • US: Medtronic Inc. v. Comm’r • US: Guidant LLC v. Comm’r, T.C. No. 5989-11 • US: Veritas Software Corp. v. Comm’r • US: Xilinx, Inc. v. Comm’r • US: Intersport Fashions West Inc. v. United States • Australia: SNF (Australia) Pty. Ltd. v. Comm’r • Canada: GlaxoSmithKline Inc. v. The Queen • Canada: The Queen v. General Electric Capital Canada Inc. • Canada: Alberta Printed Circuits Ltd. v. The Queen • India: Vodafone • Spain: Roche Vitamins Europe Ltd. • Russia: Gazprom Extraction Astrakhan LLC • Toyota Argentina SA c/AFIP-DGI • What These Cases Mean for Asia

49. Medtronic Inc. v. Comm’r, T.C. No. 6944-11 SUMMARY: • Leads and devices adjustment: $1.2 billion • The IRS challenged payments from Medtronic Puerto Rico (“PR”) to Medtronic U.S. for the use of patents and other IP and to purchase medical device components. PR used the components to assemble finished products, which it sold to Medtronic USA Inc., another U.S. affiliate that distributed the products in the U.S. and abroad. • Medtronic used a CUT as its primary method, with a profit split as a corroborating method. • IRS argument in the alternative: significant value transferred under 367(d) • Medtronic also challenges a royalty true-up in the amount of $4 • Swiss Supply Agreement Issue: $39 million • Under the agreement, Medtronic’s Swiss subsidiary assists PR by manufacturing and supplying the U.S. with devices to meet excess U.S. demand. • The Swiss subsidiary pays the leads and devices royalty and the trademark royalty that PR would have paid if it had manufactured the product itself.

50. Medtronic Inc. v. Comm’r, T.C. No. 6944-11 • Spinal Screw Operations: $90 million • Medtronic claims that the IRS improperly treated its PR as a contract manufacturer rather than a risk-bearing, autonomous manufacturer • Interest Income from Prior Buy-In Case: $14 million • In 2010, Medtronic and the IRS signed a closing agreement to resolve a 2008 Tax Court case (Medtronic Inc. v. Comm’r, T.C. No. 17488-08) relating to the buy-in paid by Medtronic’s Swiss subsidiary for the right to use preexisting intangibles. • Medtronic disputes the inclusion of the interest amounts in its 2005-2006 returns because it has a competent authority request pending pursuant to the U.S.-Switzerland treaty.