Contract analysis

From: "Leonard Cross" To: "Marcus Whitfield" Cc: "Sylvia Hartwell" Subject: Going-Forward Transfer Pricing Recommendations — Post-Examination Advisory

With the IRS examination now formally behind us — the Form 906 Closing Agreement was executed on March 29, and Matter No. 1018-00009 is closed — I wanted to transmit the attached going-forward recommendations memorandum without delay. As you know, the outcome was a favorable one by any measure: the $47.6M settlement represents approximately 12.5% of the Service's $380.4M proposed adjustment, with full penalty abateme

That said, the examination surfaced areas where PPC can meaningfully strengthen its posture for TY 2021 and beyond, and that is the focus of the attached memo.

**Attached Memorandum — Summary of Key Themes**

Sylvia and I have prepared the attached memorandum (going-forward-recommendations-memo.docx) addressing five principal areas:

1. **Transfer Pricing Documentation Enhancements.** We recommend strengthening PPC's contemporaneous documentation well beyond the Crestfield & Associates baseline, specifically targeting the areas the IRS focused on during the 2017–2020 cycle. Enhanced documentation will also reinforce penalty protection under IRC § 6662(e)(3)(B).

2. **Cost-Sharing Arrangement Recalibration.** The IRS challenged PPC's cost-sharing percentages and proposed increases of 8–12 percentage points. We recommend a thorough review of the reasonably anticipated benefit methodology under Treas. Reg. § 1.482-7, with particular attention to ensuring that benefit projections are rigorously supported and contemporaneously documented going forward.

3. **Legacy IP Royalty Rate Review.** With legacy compound net sales declining from $814.6M in 2017 to $624.1M in 2020 — and presumably continuing to trend downward — the memo evaluates whether the 4.5% royalty rate remains defensible and recommends periodic benchmarking updates using the CUT method. As you may recall, Dr. Vasquez's analysis identified an interquartile range of 3.1%–6.8% with a median of 4.4%, which

4. **PBI Economic Substance and DEMPE Documentation.** Given the IRS's challenge to PBI's economic substance, we recommend further bolstering PBI's operational profile in Dublin — additional headcount beyond the 185 employees as of 2020, expanded board governance documentation beyond the 42 meetings conducted during the examination period, and more systematic documentation of DEMPE functions (Development, Enhancement

5. **Coordination with Thornbury & Keogh on Irish-Side Documentation.** Consistency between U.S. and Irish transfer pricing positions is essential, particularly in light of PBI's Knowledge Development box claims at the 6.25% rate. We outline a coordination framework in the memo.

Garrett Simmons has also prepared a separate, more detailed memorandum focused specifically on PBI substance enhancement recommendations (pbi-substance-enhancement-recommendations.docx), which will follow shortly.

In addition, we are preparing a separate memorandum analyzing whether PPC should pursue a bilateral Advance Pricing Agreement with the IRS and Irish Revenue (apa-consideration-memo.docx). That analysis will be transmitted under separate cover, but I would flag it now as a topic worth discussing in parallel with the recommendations in the attached memo.

I would like to schedule a call — or an in-person meeting if schedules permit — to walk through these recommendations with you, Deborah, and Rajesh. If Catherine would find it useful to participate as well, we would of course welcome her involvement. Sylvia, Garrett, and I would attend from our side. I would suggest targeting the week of April 22 if that works for your team. If PPC would find it helpful, we could als

As a reminder, Garrett has separately provided instructions for filing amended federal income tax returns (Forms 1120X) for TY 2017–2020 to reflect the $47.6M settlement adjustment, and Nazari has circulated a state tax impact analysis. I would propose covering both of those items on the same call so we can address all open post-examination workstreams in one session.

Marcus, on behalf of the entire Calderwood & Harkness team, I want to express our sincere appreciation for the trust and confidence that you and PPC placed in us throughout this examination. It was a complex matter handled under considerable scrutiny, and we are gratified by the result. We remain fully available for any follow-up questions as you review the attached memorandum.

Leonard Cross Partner, Tax Department Calderwood & Harkness LLP 1735 Market Street, Suite 3100 Philadelphia, PA 19103 Tel: (215) 864-7200 lcross@calderwoodharkness.com

Attachment: going-forward-recommendations-memo.docx