Transfer Pricing

The Ninth Circuit's recent decision in Xilinx is based on the conclusion that the cost sharing regulations set forth in Reg. §1.482-7 (1995) are incompatible with, and are wholly divorced from, the general arm's-length standard of Code Sec. 482. At least one pundit has cheered the decision, suggesting that the arm's-length standard should be abandoned in favor of formulary apportionment and that Xilinx represents a first step in that direction. Given the regulatory history and the importance of the arm's-length standard in avoiding double taxation, the authors submit that the Ninth Circuit majority opinion in Xilinx erred in concluding that the arm's-length standard was irrelevant to the cost sharing regulations. In light of the importance of the arm's-length standard to international commerce through the avoidance of double taxation, the authors will be very interested to see how Treasury and the IRS respond to the majority opinion as the Xilinx case continues to move forward in the appellate process.