Tax implications for Swiss taxpayers of Altera vs. Commissioner decision of the US Tax Court of 7 June 2019

A cost-sharing arrangement (CSA) is an intra-group agreement under US American law which is defined and strictly regulated in the US Treasury Regulations. This agreement is the result of both parties' commitment to share the costs, risks and benefits of the development of one or more intangible assets. The costs are shared proportionately, based on each party's expected profit from the use of the developed assets according to a contractually agreed profit distribution.

Questions and answers in connection with cost sharing arrangement

Here you will find information on various transfer pricing topics in connection with cross-border transactions. This information is intended to provide clarification on selected issues. It is general in nature and cannot be used as the sole basis for the tax assessment of a specific fact pattern.

• Which instrument recognised by the OECD Transfer Pricing Guidelines is similar to the CSA?

  Such a legal construct exists neither in Swiss law nor in the OECD Transfer Pricing Guidelines. The OECD Transfer Pricing Guidelines recognise the cost contribution arrangement (CCA), a legal instrument that is partially similar to the CSA. A CCA is defined as a contractual undertaking which enables companies to share the contributions and risks associated with the joint development, production or procurement of intangible assets, tangible fixed assets or services, whereby, it is assumed that these result in a benefit  for each of the participants. In principle, the costs of the CCA are shared and the profits are distributed according to the contributions made.
  

• What is the main subject of the Altera vs. Commissioner decision of the US Tax Court of 7 June 2019?

  In the Altera vs. Commissioner decision, the US Tax Court ruled that the costs of stock options and stock-based compensations (SBCs) of employees who perform CSA-related activity must be included in the cost basis of the CSA.
  

• What consequences does the Altera vs. Commissioner decision have for companies that are taxable in Switzerland and are parties to a CSA?

  In order to comply with the Altera decision, companies that are party to a CSA and subject to tax in Switzerland must increase the shared cost basis by the amount of the SBCs. As a result, the value of the developed asset is reduced.

  The costs for SBCs under a CSA can be comparable to employee shareholdings or incentive programmes and, in the case of enterprises that are taxable in Switzerland and are party to such an agreement, are generally considered to be business-related expenses. However, each individual case must be assessed individually.
  

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