The U.S. Treasury Department and Internal Revenue Service announced proposed regulations that provide further guidance to Section 482, which determines taxable income in connection with cost-sharing arrangements affecting intellectual property.

The changes could mean a big difference to the bottom lines of companies in the pharmaceutical and software industries, whose main asset is their intellectual property.

According to a release from the agencies, the section has occasionally been abused since Congress amended the regulations in 1986. At that time, Congress indicated that it did not intend to prevent the use of actual research and development cost-sharing arrangements, but expected the results of those arrangements to be consistent with the matching income standard. 

The regulations would limit cost-sharing arrangements that allow companies to undervalue patents, licenses, trademarks and other intellectual property when they are transferred to a subsidiary from a parent company. Treasury rules require companies to value intellectual property at the same price they would charge a competitor to acquire them. The IRS has questioned such pricing, a practice that can be abused when parent companies inflate or undervalue the price of goods sold between international subsidiaries to gain tax benefits.

The agencies said that the proposed regulations provide additional guidance to ensure that "congressional intent is fulfilled," and require any cost-sharing arrangements to produce results consistent with the results that would have been realized if uncontrolled taxpayers had engaged in the same transaction under the same circumstances. Both agencies welcome comments on the proposed changes.The regulations and transition rules can be found at www.treas.gov.

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