Stephen C. Fox, retired
U.S. International Tax
Steve Fox has retired
   International Tax      Transfer Pricing      Cost Sharing

Cost Sharing

Cost sharing agreements (CSAs, also known as cost contribution agreements) provide taxpayers an international tax planning opportunity for taxpayers developing intangible assets.  Under CSAs, the cost of developing intangibles is allocated among the parties that will benefit in proportion to expected benefits.  CSAs are recognized under IRS regulations and OECD Guidelines.
Cost sharing applies to both marketing (brand, etc.) and product (patents, processes, etc.) intangibles.  Cost sharing has several basic requirements:
  • There must be an identifiable intangible asset or assets that are being developed.
  • Parties that are expected to benefit must enter into a written cost sharing agreement.
  • The agreement must provide that each party is reimbursed for its costs of development and pays for its share of costs (with netting)
  • The allocation of share of costs must be determined on reasonably anticipated benefits.  Tax authorities may appy hindsight only to a limited extent.
  • The allocation ratios must be subject to periodic adjustment for changes in facts, including experience related to benefits.
  • Certain documentation and filings with government authorities are required in the U.S. and some other jurisdictions.
  • The agreements may be required to conform to specific provisions in regulations in each jurisdiction.
  • Contribution of pre-existing intangibles is subject to buy-in provisions, which in some cases may be onerous.
Planning for cost sharing is a very detailed process, requiring a thorough understanding of the business and profit allocation goals.  While it should not be undertaken lightly, a CSA may provide both certainty and tax benefits.  Alternatives to cost sharing should always be considered.
The IRS now requires reporting significant details of cost sharing arrangement.  If the relevant taxpayers do not report, the IRS is not required to respect the agreements.  This reporting may increase the chance of IRS examination of returns, and scrutiny of the cost sharing arrangement.