Contract analysis

I. PRELIMINARY STATEMENT Penterra Pharmaceuticals Corp. ("PPC" or the "Taxpayer"), by and through its duly authorized representatives at Calderwood & Harkness LLP (IRS Form 2848 filed June 8, 2022), hereby respectfully submits this Formal Protest pursuant to Internal Revenue Service ("IRS") Publication 5 and Revenue Procedure 2015-41 in response to the proposed adjustments set forth in the Notice of Proposed Adjustme

II. IDENTIFICATION OF TAXPAYER AND REPRESENTATIVES A. Taxpayer Information The taxpayer filing this Formal Protest is: The principal corporate officers of PPC during the Years at Issue and at present include the following individuals: • Chief Executive Officer: Catherine Falk • Chief Financial Officer: Rajesh Iyer • General Counsel: Deborah Staines • **Vice President Global Tax:** Marcus Whitfield Mr. Whitfield, as V

III. STATEMENT OF FACTS The following constitutes PPC's statement of facts relevant to the issues raised in the NOPA and the 30-Day Letter. These facts are supported by the documentary record developed during the examination, the contemporaneous transfer pricing documentation maintained by PPC for each of the Years at Issue, and the declarations and supporting evidence to be provided to the Office of Appeals. A. PPC'

IV. SUMMARY OF PROPOSED ADJUSTMENTS BEING PROTESTED PPC protests each and every proposed adjustment set forth in the NOPA and the 30-Day Letter. The following summarizes the proposed adjustments. A. CSA Cost-Sharing Ratio Adjustments ($235,010,000) The IRS proposes to increase PBI's cost-sharing percentage under the CSA by approximately 8 to 12 percentage points for each of the four Years at Issue. The IRS asserts th

V. LAW AND ARGUMENT A. The Arm's-Length Standard Under IRC § 482

Section 482 of the Internal Revenue Code authorizes the Secretary of the Treasury, in any case of two or more organizations, trades, or businesses owned or controlled directly or indirectly by the same interests, to distribute, apportion, or allocate gross income, deductions, credits, or allowances between or among such organizations, trades, or businesses, if the Secretary determines that such distribution, apportio

1. Compliance with Treasury Regulation § 1.482-7 PPC's CSA is a qualified cost-sharing arrangement that fully complies with the requirements of Treasury Regulation § 1.482-7. The CSA involves eligible controlled participants — PPC and PBI, both of which are controlled entities that reasonably anticipate deriving benefits from the intangible development activity covered by the CSA. Treas. Reg. § 1.482-7(a)(1). The CSA

2. Whitmore Valuation Group CPM/TNMM Analysis In addition to the revenue-based RAB analysis that directly supports the CSA cost-sharing ratios, PPC's expert economists at Whitmore Valuation Group LLC have performed a Comparable Profits Method ("CPM") / Transactional Net Margin Method ("TNMM") analysis to confirm that PBI's overall profitability from its Non-Americas operations is consistent with arm's-length results.

3. Rebuttal of IRS's Proposed Cost-Sharing Percentages The IRS's proposed cost-sharing percentages of 48.2% to 53.7% for the four Years at Issue are fundamentally flawed and should be rejected for several independent reasons. First, the IRS's proposed percentages are based on RAB projections that systematically overstate U.S.-source reasonably anticipated benefits. Dr. Washburne's analysis improperly inflates the U.S

1. CUT Analysis Under Treasury Regulation § 1.482-4 PPC's 4.5% royalty rate under the Legacy IP License was established based on a CUT analysis performed at the time of execution and was subsequently confirmed in PPC's contemporaneous transfer pricing documentation for each of the Years at Issue. The CUT method is the specified method under Treasury Regulation § 1.482-4 for evaluating the arm's-length nature of royal

2. Flaws in the IRS's CUT Selection The IRS's proposed 11.0% royalty rate is derived from a CUT analysis prepared by Dr. Washburne that is fatally flawed in several critical respects. First, the IRS's selected CUTs are not reliably comparable to the Legacy IP License. Dr. Washburne's comparable set includes license agreements involving: (i) compounds at significantly earlier stages of development (pre-clinical and Ph

1. Income Method / DCF Valuation Under Treasury Regulation § 1.482-7(g)(4) Whitmore Valuation Group performed an income-method / Discounted cash flow ("DCF") analysis of the PCT in accordance with Treasury Regulation § 1.482-7(g)(4). The income method is the specified method under the regulations for determining the arm's-length consideration for platform contributions in a QCSA. The Whitmore DCF analysis was based o

2. Critique of IRS's PCT Valuation The IRS valued the PCT at $852,000,000 — more than 2.7 times PPC's actual $312,000,000 payment — using an income method with materially different assumptions. The IRS's PCT valuation is unreliable for the following reasons. First, the IRS's weighted average cost of capital of 7.2% is inappropriately low. A WACC of 7.2% fails to incorporate adequate risk premiums for pharmaceutical d

1. DEMPE Functions Performed by PBI PBI performs substantial Development, Enhancement, Maintenance, Protection, and Exploitation functions for the Non-Americas Territory. The DEMPE framework, as articulated in the OECD Transfer Pricing Guidelines (Chapter VI) and increasingly applied in U.S. transfer pricing analysis, evaluates whether an entity's claimed entitlement to intangible-related returns is supported by the

2. Objective Indicia of Substance PBI's economic substance is further demonstrated by the following objective indicia, each of which is supported by documentary evidence in the examination record: • Personnel: PBI employed 185 full-time employees in Dublin by the end of 2020, up from 52 employees at its establishment in 2012. This represents a nearly fourfold increase in headcount, reflecting the genuine growth and o

3. Legal Standard The economic substance doctrine, as codified at IRC § 7701(o), provides that a transaction shall be treated as having economic substance only if (i) the transaction changes in a meaningful way (apart from Federal income tax effects) the taxpayer's economic position, and (ii) the taxpayer has a substantial purpose (apart from Federal income tax effects) for entering into such transaction. PBI satisfi