Jeffrey M. Kadet, Can a Cost Sharing Arrangement Prevent a Tax Shelter Label?, 153 Tax Notes 1095 (2016), https://digitalcommons.law.uw.edu/faculty-articles/1047
Microsoft, CSA, cost sharing agreement, transfer pricing, section 7525, profit shifting, international taxation, Puerto Rico
In connection with an ongoing effort of the government to examine certain Microsoft documents, the government on October 12, 2016, stated in a filed document that one of the transactions at issue is "unquestionably" a tax shelter for purposes of section 7525. The significance of that is in whether some written communications should be protected from IRS scrutiny by the section 7525 confidentiality privilege that may apply to tax advice between a taxpayer and tax practitioners. Under section 7525(b)(2), written communications will not qualify if they are "in connection with the promotion of the direct or indirect participation of the person in any tax shelter."
This article make the case that various countering briefs filed by Microsoft, KPMG, and certain amici do not tell the full story. They primarily maintain that there can be no tax shelter since the structure includes a cost sharing agreement, which is a structure that has been condoned by regulations for almost forty years. This article suggests that a fuller story must include background information on the Microsoft structuring, of which the cost sharing agreement is merely one piece.
With full details regarding the structuring and how Microsoft conducts the relevant operations being unknown, this article draws no conclusion about whether a section 7525 tax shelter label is appropriate. The article importantly notes, though, that the district court's ability to make a reasonable judgment would be best served if the parties provided a full picture of the relevant activities performed by Microsoft and the part played by the cost sharing agreement.