Contract analysis

I. Executive Summary This memorandum presents supplemental sensitivity analyses designed to stress-test and corroborate the primary economic analyses submitted in the bilateral Advance Pricing Agreement ("APA") application for Halcyon Semiconductor AG ("HSAG") and Halcyon Semiconductor Inc. ("HSI"). The APA is sought between the Internal Revenue Service, Advance Pricing and Mutual Agreement Program ("IRS APMA") and t

1. Tangible Goods (Semiconductor Wafer/Die Sales). HSAG manufactures and sells semiconductor wafers and dies to HSI for resale to third-party customers in North America. In fiscal year 2024, intercompany tangible goods sales totaled approximately €987.6 million (approximately $1,076 million at the average 2024 EUR/USD exchange rate of 1.0896).

2. Royalties (IP License). HSI pays royalties to HSAG under a license agreement covering semiconductor process technology and design intellectual property. In fiscal year 2024, royalty payments totaled approximately €68.4 million (approximately $70.5 million at the weighted average payment-date exchange rate of 1.0307).

3. Cost-Sharing Contributions under the Qualified Cost Sharing Arrangement ("QCSA"). HSI makes cost-sharing payments to HSAG under a qualified cost sharing arrangement pursuant to Treasury Regulations § 1.482-7. In fiscal year 2024, HSI's cost-sharing contribution totaled approximately €224.6 million (approximately $231.3 million). HSI's anticipated benefit share under the QCSA is 22.5%. Aggregate annual intercompany

II.A. Summary of Primary Economic Analyses The primary economic analyses supporting the APA application were prepared by Meridian Economics GmbH under the direction of Calderwood & Harkness LLP. These analyses comprise three principal components, each addressing one of the covered intercompany transactions. Benchmarking Study — Tangible Goods (CPM/TNMM Analysis). The primary transfer pricing analysis for the tangible

II.B. Regulatory Framework The sensitivity analyses presented in this memorandum are conducted within the following regulatory framework, which governs the arm's-length standard, transfer pricing methodology, and APA procedures applicable to the covered transactions: Internal Revenue Code and Treasury Regulations. Section 482 of the Internal Revenue Code authorizes the Secretary of the Treasury to distribute, apporti

II.C. Purpose of Sensitivity Testing in APA Context The sensitivity analyses presented in this memorandum serve three principal purposes in the context of the bilateral APA negotiations. First, the analyses are designed to anticipate and proactively address the scrutiny that IRS APMA and BZSt economists and examiners are expected to apply to the benchmarking methodology, comparable selection criteria, and PLI choices

III. Sensitivity Analysis 1: Alternative Profit Level Indicators for Tangible Goods Transaction

III.A. Overview and Rationale The primary CPM/TNMM analysis for the tangible goods transaction between HSAG and HSI uses operating margin on net resales ("OM") as the profit level indicator. Operating margin is the standard PLI for limited-risk distributors under Treasury Regulations § 1.482-5(b)(4), and it is the PLI most commonly accepted by both IRS APMA and the BZSt in APA proceedings involving distribution entit

1. Berry Ratio. The Berry ratio measures gross profit divided by operating expenses. It is sometimes considered an appropriate PLI for intermediary or distribution entities where the value of the distribution function is more closely related to operating expenses incurred than to the value of goods sold. The Berry ratio is recognized as a PLI under Treasury Regulations § 1.482-5(b)(4)(ii) and is discussed in the OECD

2. Gross Margin. The gross margin measures gross profit as a percentage of net revenue. While not a PLI explicitly enumerated in Treasury Regulations § 1.482-5(b)(4) (which focuses on net profit indicators), the gross margin is relevant to the Resale Price Method under Treasury Regulations § 1.482-3(c) and provides a useful corroborative indicator, particularly for evaluating whether the intercompany transfer price b

III.B. Berry Ratio Analysis We computed Berry ratios for each of the 17 comparable companies over fiscal years 2020 through 2024, using the same financial data sourced from Fenmore Services Inc. and Cascade Software that was used in the primary operating margin analysis. For each comparable company, the Berry ratio was calculated as gross profit divided by total operating expenses (where operating expenses include se

III.C. Gross Margin Analysis We computed gross margins for each of the 17 comparable companies over fiscal years 2020 through 2024. Gross margin is calculated as gross profit divided by net revenue. Five-year weighted average gross margins were computed for each comparable using annual revenues as the weighting factor, consistent with the methodology applied in the primary analysis. The resulting five-year weighted a

III.D. Conclusions on Alternative PLIs The alternative PLI analyses confirm that HSI's fiscal year 2024 results are consistent with arm's-length outcomes under all three profit level indicators tested: Under each PLI, HSI's result falls within the interquartile range and at or above the median. The consistency across three independent profit measures provides strong evidence that the intercompany pricing between HSAG

IV. Sensitivity Analysis 2: Alternative Comparable Screening Criteria for Tangible Goods

IV.A. Overview of Primary Search Criteria The primary benchmarking study for the tangible goods transaction identified 17 comparable North American semiconductor distributors through a systematic screening process. The principal search criteria applied in the primary analysis were as follows: • Geographic Focus: Companies headquartered in North America (United States and Canada), consistent with HSI's operating geogr

IV.B. Sensitivity Test 2A — Broader Industry Screen To test the sensitivity of the comparable set to the breadth of the industry screen, we expanded the SIC and NAICS codes to include electronic component distributors beyond the semiconductor sector. Specifically, we added SIC codes 5063 (Electrical Apparatus and Equipment, Wiring Supplies) and 5049 (Professional Equipment and Supplies, Not Elsewhere Classified), and

IV.C. Sensitivity Test 2B — Tighter Functional Screen To address the possibility that IRS APMA economists may favor a more restrictive comparable set, we applied more stringent functional comparability criteria to the primary 17-company set. Specifically, we eliminated comparables that exhibit any of the following characteristics: • Ownership of any proprietary product lines (i.e., branded products manufactured by th

IV.D. Sensitivity Test 2C — Alternative Size Filters The primary analysis applies a minimum annual revenue threshold of $100 million to ensure adequate data quality and scale comparability. To test the sensitivity of the comparable set to this threshold, we re-ran the screening process using a higher minimum revenue threshold of $500 million. The higher threshold reduced the comparable set from 17 to 9 companies. The

IV.E. Conclusions on Alternative Screening Criteria The three alternative screening tests confirm that the primary comparable set of 17 companies represents the best balance of functional comparability and statistical reliability. The alternative screens yield IQRs that are broadly consistent with the primary range, as summarized below: Under all four specifications, HSI's fiscal year 2024 operating margin of 4.80% f

V. Sensitivity Analysis 3: Multi-Year Weighted Average vs. Single-Year Testing

V.A. Rationale for Multi-Year Analysis The semiconductor industry is characterized by pronounced cyclicality, driven by the capital-intensive nature of wafer fabrication, the long lead times for capacity additions, and the boom-bust dynamics of end-market demand. As documented in the Industry Analysis Memorandum prepared by Meridian Economics GmbH (dated March 14, 2025), the semiconductor industry experienced a signi

V.B. Single-Year Results To test the sensitivity of the benchmarking results to the temporal period, we computed IQRs and median operating margins for the 17 comparable companies for each individual fiscal year from 2020 through 2024. The results are presented below: Several observations merit discussion: Year-by-year variation. As expected, the single-year IQRs exhibit significant variation across the five-year peri

V.C. Three-Year Rolling Average Results As an intermediate temporal specification, we computed three-year rolling average operating margins for both the 17 comparables and HSI over the three available rolling windows: HSI's three-year rolling average operating margin falls within the IQR in all three periods. The three-year rolling average provides an intermediate level of smoothing: it dampens year-to-year volatilit

V.D. Five-Year Weighted Average vs. Simple Average The primary analysis uses five-year weighted average operating margins, where each comparable company's annual operating margin is weighted by annual revenue. This weighting approach gives greater influence to years in which the comparable generated higher revenues, which may correlate with more representative operating conditions. As an alternative, we computed five

V.E. Conclusions on Temporal Testing The temporal sensitivity analyses confirm that the five-year weighted average is the most reliable approach for semiconductor industry benchmarking. It smooths cyclical distortions across the full business cycle and produces an IQR that is representative of arm's-length outcomes over a range of economic conditions. Key conclusions include: • HSI's actual operating margin falls wit

VI. Sensitivity Analysis 4: Impact of Comparability Adjustments on IQR

VI.A. Overview of Comparability Adjustments Applied In the primary benchmarking analysis, working capital adjustments were applied to the 17 comparable companies to normalize for differences in working capital intensity between the comparables and HSI. Working capital adjustments are a standard comparability enhancement under Treasury Regulations § 1.482-1(d)(2) and the OECD Transfer Pricing Guidelines at paragraphs

VI.B. Sensitivity Test 4A — Unadjusted (No Working Capital Adjustments) To assess the impact of working capital adjustments on the IQR, we recomputed the five-year weighted average operating margins for the 17 comparable companies without applying any working capital adjustments. The unadjusted results reflect the comparables' operating margins as reported in their financial statements, without normalization for work

VI.C. Sensitivity Test 4B — Alternative Risk-Free Rate Assumption The primary analysis uses a risk-free rate of 4.25%, based on the average yield on 1-year U.S. Treasury securities during fiscal year 2024. To test the sensitivity of the working capital adjustments to the risk-free rate assumption, we recomputed the adjustments using two alternative rates:

1. SOFR-based rate: The Secured Overnight Financing Rate averaged approximately 5.33% during fiscal year 2024. While SOFR is a secured overnight rate rather than a term risk-free rate, it provides an alternative benchmark that some IRS economists have referenced in transfer pricing analyses. 2. 5-year U.S. Treasury yield: The average yield on 5-year U.S. Treasury securities during fiscal year 2024 was approximately 4

VI.D. Sensitivity Test 4C — Country Risk / Geographic Adjustments The primary analysis uses North American comparables to benchmark HSI, a U.S. entity. Because both the tested party and the comparables operate in the same geographic market (North America), geographic or country-risk adjustments are unnecessary and were not applied in the primary analysis. This approach is consistent with Treasury Regulations § 1.482-

VI.E. Conclusions on Comparability Adjustments The comparability adjustment sensitivity analyses yield the following conclusions:

1. Working capital adjustments improve comparability and are consistent with best practices under Treasury Regulations § 1.482-1(d)(2) and the OECD Transfer Pricing Guidelines at paragraphs 3.47 through 3.54. The adjustments narrow the IQR by approximately 80 basis points (from a range of 410 basis points unadjusted to 330 basis points adjusted), enhancing the reliability and precision of the arm's-length range.

2. The IQR is robust with and without adjustments. HSI's fiscal year 2024 operating margin of 4.80% falls within the arm's-length range in all tested specifications — with full working capital adjustments, without working capital adjustments, and with alternative risk-free rate assumptions.

3. The risk-free rate assumption has a modest impact on the IQR, with boundary shifts of no more than 20 basis points under alternative rate assumptions. The median is invariant to the risk-free rate choice.

4. Geographic adjustments are not warranted for the primary analysis, given that both the tested party and the comparables operate in North America. For APA negotiation purposes, we recommend presenting the working-capital-adjusted IQR as the primary range while noting that the unadjusted results provide consistent support. The choice of risk-free rate is unlikely to be a significant point of negotiation, as its impa

VII. Sensitivity Analysis 5: Royalty Rate — Alternative CUT Screening and Corroboration

VII.A. Primary CUT Analysis Recap The primary transfer pricing analysis for the royalty transaction between HSI and HSAG applies the Comparable Uncontrolled Transaction method under Treasury Regulations § 1.482-4(c). Under the license agreement between the parties, HSI pays a royalty to HSAG calculated as 6.0% of HSI's net revenue attributable to products incorporating HSAG's licensed semiconductor process technology

VII.B. Sensitivity Test 5A — Broader Technology Licensing Screen To test the sensitivity of the CUT analysis to the breadth of the technology licensing screen, we expanded the search criteria to include license agreements covering adjacent technology sectors beyond semiconductor process and design IP. Specifically, we included license agreements for broader electronics technologies (including printed circuit board de

VII.C. Sensitivity Test 5B — Tighter Comparability Criteria During the May 19, 2025 pre-filing conference, IRS APMA representatives expressed concern regarding the breadth of the primary CUT comparable set, questioning whether certain of the eight comparable license agreements involve technology that is sufficiently comparable to HSAG's advanced-node semiconductor process technology. To address this concern, we appli