1002vol.8,No.23) Membership provided in the text. The German tax authorities explic itly deny that a patent exploitation company may join ticipant must meet three requirements Is ontrolled par- The U.S. regulations provide that a an R&D pool of manufacturing companies, since the in terests of a patent exploitation company are supposed a reasonably anticipate that it will derive benefits to be different from those of a manufacturing com- from the use of the covered intangibles; pany. The same applies for combinations of produc tion companies and holdings. 8 In fact, this combina a substantially comply with the accounting require- tion may cause considerable problems at a practical ments;2°and level as currently a single holdin pate in an R&D pool instead of a number of its mant i substantially comply with detailed documentation facturing subsidiaries. From an administrative point of and reporting requirements wiew smaller pools can be managed more easily .All While the documentation and reporting requirements things equal, an increase in the membership will in will be dealt with later in chapter VI the focus in the fol- crease the tax induced costs of the participating parties lowing will be on the first requirement. As indicated above, this provision, will lead to a ovided for a narrow rather: homogeneous composition of cost sharing ar- interpretation of use. Under the originally proposed rangements participants, thus avoiding situations active conduct rule a controlled taxpayer was required where a profit markup for the services rendered to the to"use or reasonably expect to use the covered intan-I pool would seriously have to. be considered under amples suggested that the term" was restricted to the actual physical use of an intangible and would not include its econc g to taxpay Allocation: of Costs, Anticipated Benefits cerns, the IRS amended the final regulations and elin The cost allocation is generally based on an alloca- nated the active conduct rule. The amended version tion of the benefit each participant expects. In this re- now requires a controlled taxpayer only to reasonabl nticipate that it will derive benefits from the use of the spect German and U.S. rules agree. intangibles. 2 That meanis-that a controlled taxpayer is rect measurement of the anticipated benefits Also, both sets of rules provide for the dire ccause of the manner in which it proposes to use the efits from exploiting the covered intangible directly or indirect measurement of the benefits that would ap Thus an r&d pool may for instance consist of produc. proximate the distribution of the anticipated benef tion companies as well as of patent exploitation compa nies without their own production facilities xamples mention estimated units used, produced or sold, sales, and: operating profit. In addition the ger an rules explicitly mention the number of employees ditional income generated or costs saved from the use. the wage total, the invested capital, etc. of the: covered intangibles. This corresponds to the take the form of cost savings or income increases s benefits must be the most reliable measure of such ben However, a major difference between U Sand german key, i.e. the anticipated benefits, must be the most ob- "use."The German principles stipulate that only parties jective one in the individual case. Only if several keys that use services from the pool in an economically iden- ppe cretion tical the taxpayer to select a key. In other words, it is implic qualify for a participation in the cost sharing itly assumed that the best method for measuring the an- scheme.. From the explanation, it appears that an eco- nomically identical way of use would mean that the par ticipated benefits can be objectively determined ties show a high degree of similarity in their interest for The U. S. rules are more specific in that respect. From participating in the respective pool. That would suggest heir perspective the reliability of a taxpayers estimate embers must derive structurally of anticipated benefits is based on the completeness similar benefits from their participation in the cost shar and reliability of the data and the soundness of the ing arrangement. It would not be sufficient that their sumptions used in the projections. 30 As with the "best enefits can be measured reliably in a currency method rule"in the final Section 482 transfer pricing but would also stem from a comparable source, ther increases in license income or reductions of regulations, there is significant room for the IRS to sea ond guess unprepared or poorly prepared taxpayers 3 istrative costs. This is also supported by the examples The German principles demand that the reliability of the benefi ejections must be verified regularly and djusted if there have bee ast to the U.s. regulat chark for §1.482-7(c)(1)(Dec.19, 22Regs.1482-7(c)(1)( Preamble to Revision of Section 482 Cost Sharing Regu- 28 Para. 1. 2 Cost Sharing Prince les lations, 61. Fed. Reg. 21,955(May 13, 1996). Regs. 51.482-7(D(1); para. 3. 1 Cost Sharing Principles. Para. 1.1 Cost Sh 26 Para. 1. 2 Cost Sharing Principles gs.§ 32 Para. 3. 3 Cost Sharing Principles 3-22.00 Copyright 2000 TAX MANAGE EMENT INC, a subsidiary of The Bureau of National Affairs, Inc. TMTR ISSN 1063-2069