Contract analysis

I. Executive Summary The purpose of this memorandum is to analyze how the Internal Revenue Service's proposed transfer pricing adjustments under Section 482 of the Internal Revenue Code ("IRC") for tax years ("TY") 2017 through 2020 interact with Penterra Pharmaceuticals Corp.'s ("PPC" or the "Company") positions under the Global Intangible Low-Taxed Income provisions of IRC § 951A ("GILTI") and the Base Erosion and

II. Background: PPC's International IP Structure A. Corporate Structure PPC is a Delaware corporation headquartered at 2200 Independence Boulevard, Princeton Junction, New Jersey 08550. PPC's common stock trades on the Nasdaq Global Select Market under the ticker symbol "PPCA." PPC is a publicly traded pharmaceutical company with global operations focused on oncology, immunology, and rare disease therapeutics. PPC's

III. GILTI Analysis (IRC § 951A) A. Overview of GILTI Framework The GILTI provisions were enacted as part of the TCJA and are codified at IRC § 951A. GILTI is effective for taxable years of foreign corporations beginning after December 31, 2017, and for taxable years of United States shareholders in which or with which such taxable years of foreign corporations end. For PPC, a calendar-year taxpayer, GILTI applies be

1. CSA Cost-Sharing Adjustments. The IRS proposes to increase PBI's cost-sharing payments to PPC under the CSA by the following amounts: • 2018: $57.61 million (increase of 11.0 percentage points) • 2019: $62.85 million (increase of 11.2 percentage points) • 2020: $65.82 million (increase of 11.0 percentage points) Effect on PBI's Tested Income. If the proposed adjustments are sustained, PBI's deductible R&D cost-sha

2. Royalty Rate Adjustments. The IRS proposes to increase the royalty rate on PBI's legacy IP license from 4.5% to 11.0% of non-Americas net sales. The additional royalty payments from PBI to PPC would be: • 2018: $49.55 million • 2019: $44.97 million • 2020: $40.57 million Effect on PBI's Tested Income. PBI's deductible royalty expense to PPC increases by the above amounts, reducing PBI's pre-tax income and tested i

3. Correlative Offset. The IRS examination team has allowed a correlative offset of $42.65 million across all years to avoid double-counting between the CSA cost-sharing adjustments and the royalty rate adjustments. This offset reduces both the net increase in PPC's U.S. taxable income and the corresponding net decrease in PBI's tested income, proportionally reducing both the incremental U.S. tax and the GILTI offset

4. QBAI and DTIR Considerations. PBI's QBAI consists of the adjusted tax basis of depreciable tangible property used in PBI's trade or business, determined under the alternative depreciation system ("ADS") of IRC § 168(g). PBI is primarily an IP-holding and commercial entity; its tangible asset base is relatively modest, consisting principally of office furniture, computer equipment, leasehold improvements at the San

IV. BEAT Analysis (IRC § 59A) A. Overview of BEAT Framework The Base Erosion and Anti-Abuse Tax ("BEAT") was enacted by the TCJA and is codified at IRC § 59A. BEAT is effective for taxable years beginning after December 31, 2017. BEAT imposes a minimum tax on "applicable taxpayers" — defined as U.S. corporations (or groups filing consolidated returns) that satisfy two requirements:

1. Gross Receipts Test: The taxpayer has average annual gross receipts of at least $500 million for the three-taxable-year period ending with the preceding taxable year (IRC § 59A(e)(1)(A)); and

2. Base Erosion Percentage Test: The taxpayer has a "base erosion percentage" of 3% or more for the taxable year (IRC § 59A(e)(1)(B)) (2% for certain banks and registered securities dealers). PPC's FY 2020 revenue was $6.82 billion, far exceeding the $500 million gross receipts threshold. PPC satisfies the gross receipts test for each year at issue. The critical question for BEAT applicability is whether PPC meets th

1. Royalty Payments (Legacy IP License). Under the Legacy IP License, PBI pays royalties to PPC — that is, the cash flow direction is from PBI (the Irish entity) to PPC (the U.S. parent). PPC is the recipient of the royalty payments, not the payor. These inbound royalty payments increase PPC's U.S. taxable income. The Legacy IP royalty payments are therefore not base erosion payments from PPC's perspective. BEAT appl

2. Cost-Sharing Payments Under the CSA. Under the CSA, PBI makes cost-sharing payments to PPC as PBI's share of qualified R&D costs. These payments are inbound to PPC. PPC also funds its own share of R&D costs (the Americas share), but PPC's R&D expenditures are incurred domestically to fund R&D performed primarily in the United States at PPC's Princeton Junction research campus and its satellite R&D facilities. The

3. PMI Contract Manufacturing Payments. PMI (the Irish contract manufacturer, 620 employees) manufactures pharmaceutical products for PBI under a cost-plus 8% arrangement. PBI pays PMI for the manufacturing services; PPC does not directly contract with or pay PMI. The question is whether any portion of PPC's consolidated return includes direct or imputed payments to PMI that could constitute base erosion payments. Up

4. Other Potential Base Erosion Payments. We have reviewed the intercompany agreement matrix maintained by PPC's Global Tax Department (as provided by Marcus Whitfield on August 3, 2022) to identify any other potentially deductible payments made by PPC to PBI, PHL, PMI, or any other related foreign persons. Based on this review: • PPC does not appear to make material management fee, service fee, or administrative cha

1. Scenario: IRS Adjustments Sustained in Full ($380.4M Net). If the IRS's proposed § 482 adjustments are sustained in full, PPC's income increases (through higher royalty receipts and higher cost-sharing receipts from PBI). This has two consequences for BEAT: • Regular Tax Liability Increases. PPC's regular U.S. tax liability increases because its taxable income rises by the amount of the adjustments. The BEAT minim

2. Scenario: IRS Recharacterizes CSA or Challenges PBI's Substance Entirely. A more aggressive scenario would arise if the IRS were to disregard PBI entirely — for example, by asserting that PBI lacks economic substance under the DEMPE (Development, Enhancement, Maintenance, Protection, and Exploitation) framework, and that all income currently reported by PBI should be attributed to PPC. In this scenario: • All of P

3. Interaction Between GILTI and BEAT. Both GILTI and BEAT modify PPC's U.S. tax computation, but they do so in different ways and through different mechanisms. If PPC's GILTI inclusion increases PPC's regular tax liability (because GILTI is included in gross income under IRC § 951A and taxed at the effective GILTI rate), this makes it less likely that the BEAT minimum tax exceeds regular tax. The BEAT minimum tax is

V. Combined GILTI/BEAT Quantitative Impact Model (TY 2018–2020) A. Summary Table of Interactions The following table summarizes the interaction of the proposed IRC § 482 adjustments with PPC's GILTI and BEAT positions for TY 2018, 2019, and 2020. All amounts are in millions of dollars. These computations are illustrative and are subject to refinement upon receipt of PPC's filed GILTI computations and BEAT filings. ¹

VI. Additional Considerations A. TCJA Transition: TY 2017 TY 2017 is a pre-TCJA year for PPC, a calendar-year taxpayer. For TY 2017, the applicable U.S. corporate tax rate is 35%, and neither the GILTI nor the BEAT provisions are in effect. The TCJA was enacted on December 22, 2017, and its corporate rate reduction and international provisions are effective for taxable years beginning after December 31, 2017. Because