Contract analysis

I. Purpose and Executive Summary The purpose of this memorandum is to recommend settlement authority parameters for anticipated IRS Appeals proceedings following the Internal Revenue Service's issuance of its Notice of Proposed Adjustment ("NOPA") dated October 12, 2023, and the 30-Day Letter issued November 8, 2023, in connection with the transfer pricing examination of Penterra Pharmaceuticals Corp. ("PPC") for tax

II. Background — The IRS Proposed Adjustments A. Overview of the Examination The IRS LB&I Northeast Transfer Pricing Practice opened its examination of PPC's tax years 2017 through 2020 on May 16, 2022, upon issuance of Letter 2205-A (Notification of Examination). The examination has been conducted by a dedicated transfer pricing examination team comprised of the following individuals: • Supervisory Revenue Agent (Te

1. CSA Cost-Sharing Ratio Adjustments ($235.01 Million) The IRS asserts that PBI's cost-sharing percentages under the cost-sharing arrangement (effective July 1, 2012) understate the value of PPC's U.S.-source contributions to the joint development of intangible property. Under the CSA, PPC and PBI share the costs of research and development ("R&D") in proportion to their respective reasonably anticipated benefits ("

2. Legacy IP Royalty Rate Adjustments ($188.04 Million) In addition to the CSA adjustments, the IRS proposes increasing the royalty rate payable by PBI to PPC under the legacy intellectual property license agreement. Under this agreement, PBI pays PPC a royalty for the right to exploit certain pre-CSA legacy intellectual property in non-Americas markets. PPC established a royalty rate of 4.5% of net sales, supported

3. Correlative Offset (−$42.65 Million) Recognizing a degree of overlap between the CSA cost-sharing adjustments and the royalty rate adjustments — both of which seek to increase income allocable to PPC from the same intercompany relationship — the IRS allowed a correlative offset of $42.65 million across the four examination years. This offset is intended to prevent double-counting of income that would otherwise be

4. Economic Substance Challenge The IRS's NOPA also asserts, in part, that PBI lacked sufficient economic substance to justify its role as the owner of intangible property rights for non-Americas markets and as a bona fide participant in the CSA. Specifically, the IRS argues that the key DEMPE functions — Development, Enhancement, Maintenance, Protection, and Exploitation — with respect to the intangible property rem

5. Penalty. The IRS has proposed an IRC § 6662(e) substantial valuation misstatement penalty. The penalty is calculated as 20% of the underpayment of tax attributable to the proposed transfer pricing adjustments. Based on the $380.4 million net proposed adjustment and a 21% federal corporate tax rate, the proposed penalty is approximately $15.98 million ($380.4M × 21% × 20% = $15.98M). C. Net Proposed Adjustment Summ

III. Assessment of PPC's Defensive Positions This section provides C&H's assessment of PPC's defensive positions on each of the IRS's proposed adjustments. These assessments draw upon the detailed analysis contained in the separate Hazards of Litigation Analysis memorandum dated December 5, 2023, the economic reports and rebuttal analyses prepared by Whitmore Valuation Group, and C&H's extensive experience in transfe

IV. Appeals Process Considerations A. Nature of IRS Appeals The IRS Office of Appeals (now formally known as the IRS Independent Office of Appeals following the Taxpayer First Act of 2019) functions as an independent dispute resolution forum within the IRS. The Appeals Officer assigned to PPC's case will evaluate the hazards of litigation for both the IRS and PPC under the framework established by Revenue Procedure 2

V. Recommended Settlement Authority Parameters Based on the analysis set forth in Sections II through IV above, and the detailed probability assessments contained in the separate Hazards of Litigation Analysis memorandum, C&H recommends the following settlement authority parameters for the Appeals proceedings. A. Target Range: 10–15% of Proposed Adjustment C&H recommends a target settlement range of 10% to 15% of the

VI. Financial Impact Analysis A. Comparison Table: Full Assessment vs. Target Settlement The following table compares PPC's total cash exposure under three scenarios: full IRS assessment, settlement at the target midpoint (12.5%), and settlement at the hard ceiling (20%): A settlement at the target midpoint would save PPC approximately $90.5 million compared to full IRS assessment. Even at the hard ceiling, the savin

VII. Competent Authority / Mutual Agreement Procedure Considerations A transfer pricing adjustment under IRC § 482 may give rise to economic double taxation of PBI in Ireland if the Irish Revenue Commissioners do not grant a corresponding adjustment to reduce PBI's Irish taxable income. The United States–Ireland Income Tax Treaty (the "Treaty") provides for competent authority relief under the mutual agreement proced

VIII. Alternative — Tax Court Litigation A. Costs and Timeline In the event that Appeals negotiations fail to produce an acceptable settlement, or if the Appeals Officer's best offer exceeds the 20% hard ceiling, PPC would receive a statutory notice of deficiency (commonly referred to as the "90-Day Letter") and would have 90 days to file a petition with the United States Tax Court. C&H estimates the following costs

IX. Recommended Authorization A. Specific Recommendations Based on the foregoing analysis, C&H respectfully requests that PPC management authorize the following settlement parameters:

1. Target Resolution Range. C&H is authorized to negotiate at IRS Appeals with a target resolution range of 10–15% of the $380.4 million net proposed adjustment, corresponding to a total income adjustment of $38.04 million to $57.06 million across tax years 2017–2020, with a preferred midpoint of approximately $47.6 million (12.5%).

2. Hard Ceiling. The maximum authorized settlement is 20% of the proposed adjustment ($76.08 million total income adjustment). Any settlement above this amount requires additional approval from CEO Catherine Falk and CFO Rajesh Iyer before execution.

3. Penalty Abatement. Full abatement of the IRC § 6662(e) substantial valuation misstatement penalty (approximately $15.98 million) is a non-negotiable condition of any settlement. C&H is not authorized to agree to any settlement that includes acceptance of any portion of the penalty.

4. Year-by-Year Allocation. Any agreed adjustment shall be allocated across tax years 2017–2020 on a principled basis consistent with the relative magnitude of the IRS's proposed adjustments for each year. C&H is authorized to negotiate the specific allocation within the overall approved settlement amount without requiring additional authorization, provided the total adjustment remains within the approved parameters.

5. Settlement Documentation. C&H is authorized to execute settlement documents on behalf of PPC, including IRS Form 906 (Closing Agreement on Final Determination Covering Specific Matters), within the approved parameters. C&H will provide copies of all executed settlement documents to PPC management and General Counsel promptly upon execution. B. Requested Approvals C&H requests that the following approvals be confir

X. Total Engagement Cost Projection The following is a summary of professional fees incurred to date and projected through resolution of the matter at Appeals: C&H's legal fees to date (through December 2023) of approximately $4.2 million remain within the original engagement estimate range of $4.5 million to $7.0 million for the examination and protest phase. Projected additional C&H fees through Appeals resolution

XI. Next Steps C&H recommends the following action items, each of which is time-sensitive given the December 22, 2023 deadline for filing the Formal Protest:

1. Obtain Written Settlement Authority. Marcus Whitfield and Deborah Staines should confirm the settlement authority parameters described in Section IX above in writing to C&H at the earliest opportunity. C&H also requests that a briefing be scheduled with Rajesh Iyer (CFO) and Catherine Falk (CEO) to obtain their confirmation of the 20% hard ceiling.

2. File Formal Protest. C&H will file the Formal Protest with the IRS on or before the December 22, 2023 deadline. The Protest is substantially complete and is currently in final review. A draft will be circulated to Marcus Whitfield and Deborah Staines for review and comment no later than December 15, 2023.

3. Await Case Assignment to IRS Appeals. Following the filing of the Formal Protest, the case will be transferred from the LB&I examination team to IRS Appeals. C&H anticipates formal case assignment to an Appeals Officer in January 2024.

4. Request Appeals Conference Scheduling. Upon assignment, C&H will contact the Appeals Officer to request scheduling of an Appeals conference. Our target is to schedule the conference for late February 2024, subject to the Appeals Officer's availability.

5. Finalize Whitmore Rebuttal. Dr. Vasquez and Dr. Chakrabarti of Whitmore Valuation Group will finalize the rebuttal memorandum addressing Dr. Washburne's economic analysis. The target completion date for this memorandum is January 2024. C&H will submit the rebuttal to the Appeals Officer as part of the Appeals conference materials.

6. Prepare Appeals Conference Materials. C&H will prepare a comprehensive Appeals conference presentation, supporting document binder, and witness preparation materials. The document binder will include the Formal Protest, all relevant economic analyses, the contemporaneous transfer pricing documentation, the PBI functional analysis, and selected IDR responses. C&H will also conduct witness preparation sessions with

7. Continue Irish Tax Coordination. C&H will continue coordination with Thornbury & Keogh in Dublin on Irish tax aspects of the examination, including the potential impact of any settlement on PBI's Irish tax position and the scope of any MAP request.

XII. Conclusion Calderwood & Harkness LLP is confident that Penterra Pharmaceuticals Corp.'s transfer pricing positions are defensible and well-supported across all three categories of proposed adjustment. PPC's contemporaneous documentation, prepared by Crestfield & Associates, is comprehensive and satisfies penalty-protection standards. The independent economic analyses performed by Whitmore Valuation Group corrobo