Contract analysis

I. PURPOSE AND EXECUTIVE SUMMARY A. Purpose. The purpose of this memorandum is to analyze the extent to which the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (the "OECD Guidelines" or the "Guidelines"), in their 2017 edition as updated by the February 2022 revisions, may serve as persuasive authority in the defense of Penterra Pharmaceuticals Corp. ("PPC" or the "Company") a

1. Royalty Rate for Legacy IP: Whether PPC's 4.5% royalty rate charged to PBI for the license of pre-CSA legacy intellectual property (including patents, know-how, and trade secrets related to PPC's established pharmaceutical product portfolio) reflects an arm's-length price, or whether the IRS's anticipated proposed rate of 11.0% is more appropriate.

2. CSA Cost-Sharing Ratios: Whether PBI's cost-sharing percentages under the CSA (ranging from 38.2% in TY 2017 to 42.7% in TY 2020) appropriately reflect PBI's share of reasonably anticipated benefits from the intangibles developed under the CSA, or whether the IRS's proposed increase of 8 to 12 percentage points (to 48.2%–53.7%) is warranted.

3. PCT Payment Valuation: Whether PBI's $312 million PCT payment for the buy-in to pre-existing oncology and immunology intellectual property represents an arm's-length valuation, or whether the IRS's anticipated valuation of approximately $852 million (based on a lower weighted average cost of capital ("WACC") and different revenue projections) is more accurate. The aggregate proposed adjustments, if sustained, coul

II. BACKGROUND — THE OECD TRANSFER PRICING GUIDELINES A. Overview and Status of the OECD Guidelines The Organisation for Economic Co-operation and Development ("OECD") first issued its Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations in 1995, building on earlier reports by the OECD's Committee on Fiscal Affairs dating back to the 1970s. The 1995 Guidelines were intended to provide a c

III. LEGAL STATUS OF OECD GUIDELINES IN U.S. TAX CONTROVERSY A. Not Binding Authority — Statutory and Regulatory Hierarchy The starting point for any analysis of the OECD Guidelines' role in U.S. tax controversy is the recognition that the Guidelines are not binding legal authority in the United States. The hierarchy of authority in U.S. federal tax law is well established:

1. The Internal Revenue Code. The IRC, as enacted by Congress, represents the highest source of statutory authority in U.S. tax law. For transfer pricing purposes, the governing provision is IRC § 482, which authorizes the Secretary of the Treasury to distribute, apportion, or allocate gross income, deductions, credits, or allowances between or among two or more organizations, trades, or businesses owned or controlle

2. Treasury Regulations. The Treasury Regulations promulgated under IRC § 482 — particularly Treas. Reg. §§ 1.482-1 through 1.482-9 — provide detailed guidance on the application of the arm's-length standard, the selection of transfer pricing methods, and the specific rules applicable to particular categories of transactions (including intangible property transfers under Treas. Reg. § 1.482-4 and cost-sharing arrange

3. Revenue Rulings and Revenue Procedures. Published revenue rulings and revenue procedures represent the IRS's official position on the application of the law to specific factual situations. While not carrying the same weight as Treasury Regulations, they are treated as substantial authority for purposes of the substantial understatement penalty under IRC § 6662.

4. Judicial Decisions. Decisions of the U.S. Tax Court, U.S. Court of Federal Claims, U.S. District Courts, and the appellate courts constitute binding precedent within their respective jurisdictions and provide authoritative interpretations of the IRC and Treasury Regulations. The OECD Guidelines occupy none of these positions within the hierarchy. They are not enacted legislation, not promulgated as Treasury Regula

IV. CHAPTER VI — SPECIAL CONSIDERATIONS FOR INTANGIBLES: APPLICATION TO PPC A. Definition and Identification of Intangibles Chapter VI of the OECD Guidelines provides detailed guidance on the transfer pricing treatment of transactions involving intangible property. The chapter begins with a broad definition of "intangibles" for transfer pricing purposes, encompassing something that is not a physical asset or a financ

V. CHAPTER VIII — COST CONTRIBUTION ARRANGEMENTS: APPLICATION TO PPC A. Overview of Chapter VIII Framework Chapter VIII of the OECD Guidelines provides guidance on cost contribution arrangements — collaborative arrangements under which two or more enterprises agree to share the costs and risks of developing, producing, or obtaining assets, services, or rights, with each participant expected to benefit from the arrang

VI. CHAPTER I — THE ARM'S-LENGTH PRINCIPLE: FOUNDATIONAL SUPPORT A. Universality of the Arm's-Length Standard Chapter I of the OECD Guidelines, at paragraphs 1.6 through 1.14, articulates the arm's-length principle as the international consensus standard for evaluating intercompany transactions among related enterprises. The principle derives from Article 9 of the OECD Model Tax Convention on Income and on Capital, w