Contract analysis

I. Purpose of Memorandum This memorandum summarizes the pre-filing conference held on May 19, 2025, with the Internal Revenue Service Advance Pricing and Mutual Agreement Program ("APMA") within the Large Business & International ("LB&I") Division, pursuant to Section 3 of Revenue Procedure 2015-41, 2015-35 I.R.B. 263. The conference was conducted in accordance with the anonymous pre-filing conference procedures set

II. Conference Logistics A. Date, Time, and Format The pre-filing conference was held on May 19, 2025, commencing at 10:00 a.m. Eastern Time and concluding at approximately 12:15 p.m. Eastern Time. The total duration of the substantive meeting was approximately two hours and fifteen minutes. The conference was conducted in person at the IRS APMA offices in Washington, D.C. Leonard Cross (Partner, Tax) and Leila Nazar

III. Summary of Discussion Points A. Overview of Taxpayer and Transactions Presented Calderwood & Harkness opened the substantive discussion by providing the APMA team with an overview of the taxpayer group and the intercompany transactions proposed to be covered by the bilateral APA. The presentation followed the structure of the pre-filing memorandum and elaborated on key points as follows. Taxpayer Group Descripti

1. Tangible Goods (Wafer/Die Sales). The German parent manufactures semiconductor wafers and singulated die at its fabrication facilities and sells finished and semi-finished products to the US subsidiary under a master intercompany supply agreement. The US subsidiary resells these products to third-party customers in North America. For fiscal year 2024, intercompany sales of tangible goods amounted to approximately

2. Royalties (IP License). The US subsidiary pays a running royalty to the German parent for the right to use licensed semiconductor process technology and design libraries in connection with its distribution, marketing, and design-support activities. The royalty is computed as a percentage of the US subsidiary's net resale revenue. For fiscal year 2024, the royalty payments amounted to approximately €68 million.

3. Cost-Sharing Contributions (R&D CSA). The German parent and the US subsidiary are parties to a Qualified Cost Sharing Arrangement ("CSA") for next-generation semiconductor process research and development. Under the CSA, the US subsidiary contributes approximately 22.5% of qualified R&D costs, reflecting its anticipated share of the benefits from North American exploitation of the developed intangible property. Fo

1. Tangible Goods — CPM/TNMM. C&H presented the proposed use of the Comparable Profits Method ("CPM") under Treasury Regulation § 1.482-5 for the intercompany sales of semiconductor wafers and singulated die from the German parent to the US subsidiary. C&H noted that the CPM, as applied under US domestic regulations, is the functional equivalent of the Transactional Net Margin Method ("TNMM") under Chapter II of the

2. Royalties — CUT Method. C&H presented the proposed use of the Comparable Uncontrolled Transaction ("CUT") method under Treasury Regulation § 1.482-4(c) for the intercompany royalty paid by the US subsidiary to the German parent for licensed semiconductor process technology and design libraries. Benchmark Set. C&H described a benchmarking study identifying eight comparable uncontrolled license agreements for semico

3. Cost-Sharing Arrangement — Income Method (PCT Valuation). C&H described the Qualified Cost Sharing Arrangement ("CSA") between the German parent and the US subsidiary, which was executed on July 15, 2018. Under the CSA, the US subsidiary participates with a 22.5% anticipated benefit share, reflecting its share of the reasonably anticipated benefits from the exploitation of developed intangible property in the Nort

1. User Fee. APMA confirmed that the large-case APA user fee of $113,500 (as currently in effect for 2025) is applicable to this filing. The user fee is to accompany the formal APA application and should be made payable to the United States Treasury. APMA noted that the user fee is non-refundable regardless of the outcome of the APA process.

2. Application Completeness and Expected Contents. APMA provided general guidance on the expected contents of the formal APA application, in accordance with Section 4 of Revenue Procedure 2015-41. The following items were identified as required or expected components of a complete application: (a) Completed IRS Form 14661 (Advance Pricing Agreement Request); (b) A supporting narrative describing the covered transacti

3. Timeline Expectations. APMA provided the following guidance on expected timelines: (a) Upon filing of the formal application (currently targeted for July 7, 2025), the case will be assigned to a designated APMA team within approximately 60 to 90 days. The assigned team will include a team leader, an economist, and potentially additional specialists depending on the complexity of the case. (b) Bilateral negotiation

4. Confidentiality and Privilege. APMA confirmed that information submitted in the APA application is treated as confidential under Section 10 of Revenue Procedure 2015-41 and is not shared with IRS examination teams absent the taxpayer's written consent. The APMA team leader noted that the APA process is a separate administrative process from the examination function and that the information provided in the applicat

IV. Action Items The following action items arise from the pre-filing conference and are organized by responsible party. All dates are firm deadlines intended to support the July 7, 2025 formal application filing date. A. Action Items for Calderwood & Harkness LLP B. Action Items for Client (HSAG/HSI) C. Action Items for German Counsel (Kettner Pflüger Rechtsanwälte) D. Action Items for Meridian Economics GmbH

V. Assessment and Strategic Observations A. Overall IRS Receptivity The pre-filing conference was constructive and productive. The APMA team was prepared, having reviewed the anonymous pre-filing memorandum in advance, and engaged substantively with the proposed covered transactions and transfer pricing methods. Notably, APMA expressed no fundamental objections to the bilateral approach under the US-Germany Treaty, t

1. CUT Comparables for Royalty. The royalty analysis generated the most extensive questioning during the conference, and we assess the CUT method for the IP royalty as the most significant area of potential IRS scrutiny. The APMA economist's questions regarding the comparability of the licensed technology (process node generation), the terms and conditions of the comparable licenses, and the currency of the comparabl

2. CSA/PCT Valuation. APMA's heightened scrutiny of cost-sharing arrangements in the semiconductor sector is consistent with broader IRS enforcement trends in recent years. The IRS has taken aggressive positions on PCT valuations in several high-profile cases involving technology companies, and the APMA team leader's explicit reference to "heightened scrutiny" in this industry should be taken seriously. The original

3. Rollback Period. While APMA indicated a willingness to consider the rollback to cover tax years 2022 through 2024, the team leader's comments made clear that the availability and quality of contemporaneous transfer pricing documentation for each rollback year will be a significant factor in APMA's evaluation. The rollback request will be strengthened materially if the US Local Files for each of the three rollback

VI. Next Steps and Upcoming Milestones The following table sets forth the key milestones and target dates for the period between the pre-filing conference and the formal APA application filing, as well as subsequent milestones through the German BZSt submission and the FY 2024 contemporaneous documentation deadline: The C&H team should schedule a working session for the week of May 26, 2025, to review incoming client

VII. Distribution This memorandum is for internal Calderwood & Harkness LLP distribution only. Distribution is limited to the following individuals: • Leonard Cross, Partner, Tax • Sylvia Hartwell, Partner, Tax • Leila Nazari, Senior Associate, Tax • Robert Jansen, Associate, Tax This memorandum is not to be distributed externally to the client, German counsel, Meridian Economics, or any other third party without the

VIII. Preparer Information Prepared by: ________________________________________ Leila Nazari Senior Associate, Tax Calderwood & Harkness LLP 599 Lexington Avenue, 38th Floor New York, New York 10022 Assisted by: ________________________________________ Robert Jansen Associate, Tax Calderwood & Harkness LLP Reviewed and Approved by: ________________________________________ Leonard Cross Partner, Tax Calderwood & Hark