Contract analysis

1. Executive Summary This Matter Status Report summarizes the activities undertaken by Calderwood & Harkness LLP ("C&H") during the fourth quarter of 2022 (October 1 through December 31, 2022) in defense of Penterra Pharmaceuticals Corp. ("PPC," EIN 22-3741856) against the ongoing IRS Large Business & International Division ("LB&I") transfer pricing examination (Exam Team Identifier LB&I-NE-TP-2022-00641) for Tax Yea

2. Examination Status and IRS Activity 2.1 Examining Team and Key IRS Personnel The IRS LB&I examining team assigned to PPC's transfer pricing examination consists of the following key personnel: Lead Revenue Agent Patricia Dunleavy remains the primary point of contact for all IDR-related communications. C&H's interactions with Ms. Dunleavy during Q4 2022 have been professional and have followed the established IDR r

3. Defense Workstream Updates 3.1 Functional Analysis The comprehensive functional analysis of PBI for the 2017–2020 period was completed in initial form in October 2022. This analysis was prepared by C&H in close coordination with WVG and represents a foundational element of PPC's defense against anticipated IRS challenges to PBI's economic substance and DEMPE functions. The functional analysis documents PBI's funct

1. IRC § 482 Arm's-Length Standard and Best Method Rule Analysis — Nazari and Simmons, July 20, 2022. This memorandum analyzes the general framework for IRS transfer pricing adjustments under IRC § 482, including the arm's-length standard, the best method rule, and the selection of the most reliable transfer pricing method for each category of intercompany transaction at issue.

2. QCSA Regulatory Analysis under Treas. Reg. § 1.482-7 — Nazari, August 5, 2022. This memorandum analyzes the regulatory requirements for qualified cost-sharing arrangements, including the cost-sharing percentage methodology, reasonably anticipated benefit calculations, and the PCT requirements applicable to PBI's CSA entered into on July 1, 2012.

3. Arm's-Length Royalty Rate under Treas. Reg. § 1.482-4 — Simmons, August 12, 2022. This memorandum analyzes the regulatory framework for evaluating the arm's-length character of royalty rates on intangible property, including the CUT method and the comparable adjustable transaction method.

4. Economic Substance Doctrine and DEMPE Functions Analysis — Nazari, August 18, 2022. This memorandum analyzes the economic substance doctrine as applied to transfer pricing arrangements, the OECD's DEMPE framework as adopted in the 2017 revisions to the Transfer Pricing Guidelines, and the relevance of DEMPE analysis to the IRS's anticipated challenges to PBI's functions and substance.

5. IRC § 6662(e) Penalty Protection and Reasonable Cause Defense — Simmons, September 2, 2022. This memorandum analyzes the substantial valuation misstatement penalty provisions of IRC § 6662(e), the contemporaneous documentation requirements for transfer pricing penalty protection, and the reasonable cause defense available to PPC.

6. TCJA Impact on Transfer Pricing Positions — TY 2017 at 35% vs. TY 2018–2020 at 21% — Nazari, August 25, 2022. This memorandum analyzes the impact of the Tax Cuts and Jobs Act of 2017 on PPC's transfer pricing positions, including the reduction in the U.S. corporate tax rate from 35% to 21% and the implications for the magnitude of any IRS transfer pricing adjustment.

7. Altera and Harborview Corporation Case Law Analysis — Simmons and Nazari, September 15, 2022. This memorandum analyzes the holdings and implications of Altera Corp. v. Commissioner, 941 F.3d 1200 (9th Cir. 2019), and Harborview Corporation, Inc. v. Commissioner, 900 F.3d 610 (8th Cir. 2018), for PPC's transfer pricing positions, including the treatment of stock-based compensation in cost-sharing arrangements and t

8. IRC § 367(d) Outbound IP Transfer Analysis — Nazari, September 28, 2022. This memorandum analyzes the potential application of IRC § 367(d) to PPC's 2012 transfer of intellectual property rights to PBI, including the interaction between § 367(d) and the CSA regulations.

9. OECD Transfer Pricing Guidelines (2017 & 2022 Revisions) as Persuasive Authority — Simmons, October 10, 2022. This memorandum analyzes the role of the OECD Transfer Pricing Guidelines as persuasive (but not binding) authority in IRS transfer pricing examinations and litigation, with particular attention to the 2017 revisions incorporating DEMPE analysis and the 2022 revisions addressing financial transactions.

10. IRS IDR Enforcement Procedures Research — Nazari, August 2022. This memorandum addresses the IRS's IDR enforcement process, including the escalation procedures set forth in the IRS's Internal Revenue Manual for IDR non-compliance, and the rights and obligations of taxpayers in responding to IDRs. The following additional research memorandum was completed during Q4 2022:

11. GILTI and BEAT Impact Analysis on PPC's Transfer Pricing Positions for TY 2018–2020 — Nazari, October 2022. This memorandum analyzes the interaction between PPC's transfer pricing positions and the Global Intangible Low-Taxed Income ("GILTI") provisions of IRC § 951A and the Base Erosion and Anti-Abuse Tax ("BEAT") provisions of IRC § 59A, both of which became effective for tax years beginning after December 31,

4. Cost-Sharing and Royalty Data Summary 4.1 CSA Cost-Sharing Ratios (PPC Position) The following table summarizes PBI's cost-sharing percentages and dollar amounts for each of the four tax years at issue, based on PPC's position: PBI's increasing cost-sharing percentage over the 2017–2020 period reflects the growth in PBI's reasonably anticipated benefits relative to PPC's, driven by increasing non-Americas revenue

5. Anticipated IRS Positions and Potential Exposure Based on the pattern and content of IDR requests received to date, the information gathered during the examination, and C&H's experience in comparable transfer pricing examinations, C&H anticipates that the IRS will challenge PPC's transfer pricing positions in the following four areas: (1) PCT Undervaluation. The IRS may assert that the $312 million PCT payment mad

6. Document Preservation and Privilege Document Preservation. The document preservation notice issued by C&H on June 6, 2022 to PPC, PBI, PHL, and PMI remains in full force and effect. The notice requires that all documents and electronically stored information potentially relevant to the IRS examination be preserved and protected from destruction, alteration, or loss. C&H has confirmed with PPC's legal and IT depart

7. Budget and Fee Status 7.1 Calderwood & Harkness Fees C&H's original engagement letter, executed in May 2022, estimated total professional fees in the range of $4.5 million to $7.0 million through Appeals resolution, depending on the scope and duration of the examination and any subsequent administrative proceedings. The fee estimate assumed a full IDR phase, potential NOPA and protest, and representation before th

8. Key Upcoming Events and Q1 2023 Outlook C&H anticipates the following key events and activities during Q1 2023: Continued IDR Responses. C&H will continue responding to outstanding and forthcoming IDRs. We anticipate that the pace of IDR issuance will continue through 2023, with a total of approximately 47 IDRs ultimately being issued through September 2023. The IDR response team of Simmons and Nazari will continu

9. Action Items The following action items are identified for Q1 2023:

10. Conclusion The IRS transfer pricing examination of PPC for Tax Years 2017–2020 continues to proceed as anticipated. Substantial progress was achieved during Q4 2022 across all major defense workstreams, including the completion of the functional analysis, the delivery of key economic analyses by WVG, and the continued timely response to IRS IDRs. PPC's transfer pricing positions remain well-supported, and C&H's d