1018-00009 · Client 1018 · Correspondence/IRS

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CALDERWOOD & HARKNESS LLP

Attorneys at Law

1735 Market Street, Suite 3100 Philadelphia, PA 19103

Telephone: (215) 884-7200 Facsimile: (215) 884-7201

600 Lexington Avenue New York, NY 10022

www.calderwoodharkness.com

March 22, 2024

VIA HAND DELIVERY AND FIRST-CLASS U.S. MAIL Copy via Certified Mail, Return Receipt Requested (No. 7020 1810 0003 4472 6891)

Appeals Officer Noreen Castañeda Internal Revenue Service IRS Appeals Office 290 Broadway, 30th Floor Manhattan, New York 10007

Re: Penterra Pharmaceuticals Corp. EIN: 22-3741856 Tax Years: 2017, 2018, 2019, 2020 IRS Exam Team ID: LB&I-NE-TP-2022-00641 C&H Matter Number: 1018-00009

Re: Acceptance of Settlement Offer — Penterra Pharmaceuticals Corp.; EIN 22-3741856; Tax Years 2017, 2018, 2019, 2020; Proposed IRC § 482 Transfer Pricing Adjustments

Dear Appeals Officer Castañeda:

I. Introduction and Authorization

Calderwood & Harkness LLP ("C&H" or the "Firm") represents Penterra Pharmaceuticals Corp. ("PPC" or the "Company"), a Delaware corporation headquartered at 2200 Independence Boulevard, Princeton Junction, New Jersey 08550. PPC is a publicly traded corporation listed on the Nasdaq Stock Market under ticker symbol PPCA. The Company is a multinational pharmaceutical enterprise engaged in the research, development, manufacture, and commercialization of proprietary therapeutic products across multiple therapeutic areas.

Our representation of PPC has been duly authorized pursuant to IRS Form 2848 (Power of Attorney and Declaration of Representative), which was filed with the Internal Revenue Service on June 8, 2022. The Form 2848 authorizes the following attorneys and practitioners at Calderwood & Harkness LLP to represent PPC in connection with the above-referenced examination and all related proceedings: Leonard Cross (Partner), Sylvia Hartwell (Partner), Garrett Simmons (Associate), and Leila Nazari (Associate). Calderwood & Harkness was retained as outside tax counsel to PPC effective June 2, 2022, shortly after the IRS opened its examination of the Company's federal income tax returns for the tax years at issue.

The purpose of this letter is to formally communicate PPC's acceptance, in its entirety, of the settlement offer extended by you on March 15, 2024, resolving all transfer pricing adjustments proposed by the Internal Revenue Service under Section 482 of the Internal Revenue Code ("IRC") for tax years 2017, 2018, 2019, and 2020. This letter sets forth the terms of the settlement as understood by PPC, identifies the agreed-upon adjustments for each tax year, addresses the treatment of penalties and interest, and requests that the settlement be memorialized through a Closing Agreement on IRS Form 906. We have enclosed a draft of the proposed Closing Agreement for your review and comment.

II. Background and Procedural History

We believe it is useful, for the sake of a complete record, to briefly summarize the procedural history of this matter from the inception of the examination through the present.

On May 16, 2022, the IRS Large Business & International Division ("LB&I") initiated an examination of PPC's federal income tax returns (Forms 1120) for tax years 2017, 2018, 2019, and 2020, as communicated to PPC by means of Letter 2205-A. The examination was assigned Exam Team identification number LB&I-NE-TP-2022-00641 and was conducted under the supervision of Supervisory Revenue Agent Gerald Meskill and Lead Revenue Agent Patricia Dunleavy.

During the course of the examination, the IRS issued a total of forty-seven (47) Information Document Requests ("IDRs") between June 2022 and September 2023. PPC, through undersigned counsel and in coordination with PPC's in-house tax department under the direction of Marcus Whitfield, Vice President of Global Tax, responded to each IDR in a timely and comprehensive manner. At no point during the examination did the IRS assert that PPC failed to cooperate or provide requested information. PPC produced, among other materials, voluminous financial data, intercompany agreements, board minutes, economic analyses, and contemporaneous transfer pricing documentation for each of the tax years under examination.

The examination focused principally on PPC's transfer pricing methodology governing intercompany transactions between PPC and its wholly owned Irish subsidiary, Penterra Biopharma International DAC ("PBI"), a designated activity company organized under the laws of Ireland. Two primary categories of intercompany transactions were at issue: (i) the qualified cost-sharing arrangement ("CSA") entered into between PPC and PBI, effective July 1, 2012, pursuant to which PBI shares in the costs and risks of intangible development activities in exchange for the right to exploit resulting intangible property outside the Americas region; and (ii) the legacy intellectual property royalty arrangement under which PBI pays a running royalty to PPC for the continued use of pre-CSA intangible property in non-Americas markets.

On October 12, 2023, the IRS examination team issued a Notice of Proposed Adjustment ("NOPA") proposing net adjustments totaling $380,400,000 across all four tax years. PPC received the corresponding 30-Day Letter on November 8, 2023. Pursuant to a written extension of time granted by the examination team, PPC timely filed its formal Protest on December 22, 2023. The Protest set forth PPC's detailed factual, legal, and economic objections to each of the proposed adjustments and requested a conference with the IRS Independent Office of Appeals.

The case was assigned to you, Appeals Officer Castañeda, in January 2024. An Appeals conference was held on February 28, 2024, at the IRS Appeals Office in Manhattan, New York. Calderwood & Harkness was represented at the conference by Leonard Cross, Sylvia Hartwell, and Garrett Simmons. PPC was represented by Marcus Whitfield (Vice President, Global Tax) and Deborah Staines (General Counsel). Dr. Helena Vasquez, Managing Director of Whitmore Valuation Group LLC, participated as PPC's independent economic expert and presented testimony regarding the arm's-length character of PPC's transfer pricing methodology.

Following the Appeals conference, and at your request, PPC submitted a supplemental written submission on March 8, 2024, which included additional comparable uncontrolled license agreement data and an updated benchmarking analysis prepared by Dr. Vasquez and her team at Whitmore Valuation Group LLC. This supplemental data further supported PPC's position that its transfer pricing methodology, including the CSA cost-sharing ratios and the legacy royalty rate, fell within the arm's-length range.

On March 15, 2024, you communicated a settlement offer to undersigned counsel proposing a resolution of all disputed transfer pricing adjustments for tax years 2017 through 2020. PPC has carefully reviewed the terms of that offer, and, as set forth in this letter, hereby accepts the settlement in its entirety.

III. Summary of Original Proposed Adjustments

For completeness and to provide context for the agreed-upon settlement, we briefly recite the IRS's proposed adjustments as set forth in the NOPA dated October 12, 2023.

A. CSA Cost-Sharing Ratio Adjustments

The IRS proposed increasing PBI's cost-sharing percentages under the CSA by approximately eight (8) to twelve (12) percentage points across each tax year. The IRS contended that the cost-sharing ratios, as applied by PPC and PBI, underallocated development costs to PBI relative to PBI's anticipated share of the reasonably anticipated benefits from the intangible development activities. The IRS's proposed adjustments would have resulted in additional cost-sharing payments from PBI to PPC, as follows:

B. Legacy IP Royalty Rate Adjustments

The IRS further proposed increasing the royalty rate applicable to PBI's license of pre-CSA legacy intangible property from 4.5% to 11.0% of non-Americas net sales. The IRS contended that the 4.5% royalty rate applied by PPC and PBI did not reflect the arm's-length compensation for the valuable pharmaceutical intellectual property licensed to PBI, and that an appropriate royalty rate—based on the IRS's own comparable uncontrolled transaction analysis—would be 11.0% of relevant net sales. The proposed royalty rate adjustments were as follows:

C. Correlative Offset

The examination team allowed a correlative offset of ($42,650,000) to avoid double-counting of income that would otherwise be attributed to PPC under both the CSA cost-sharing ratio adjustment and the legacy IP royalty rate adjustment.

D. Net Proposed Adjustment and Penalty

The net proposed adjustment across all four tax years, after application of the correlative offset, was $380,400,000. In addition, the IRS proposed the imposition of a twenty percent (20%) substantial valuation misstatement penalty under IRC § 6662(e) on the underpayment of tax attributable to the proposed transfer pricing adjustments. The estimated penalty amount was approximately $15,977,000.

PPC contested all of the proposed adjustments, including both the CSA cost-sharing ratio adjustments and the legacy IP royalty rate adjustments, in their entirety, in its Protest filed December 22, 2023, and through the presentations made at the Appeals conference on February 28, 2024.

IV. Acceptance of Settlement Offer

PPC hereby formally and unconditionally accepts the settlement offer communicated by Appeals Officer Castañeda on March 15, 2024, in its entirety and without modification. PPC's acceptance of the settlement has been duly authorized by the Company's senior management, including Rajesh Iyer, Chief Financial Officer, and Catherine Falk, Chief Executive Officer.

A. Total Settlement Adjustment Amount

The total agreed-upon adjustment under the settlement is $47,600,000 across all four tax years under examination (2017, 2018, 2019, and 2020). This settlement amount represents approximately 12.51% of the $380,400,000 net proposed adjustment originally set forth in the NOPA. PPC and the IRS have agreed that this amount represents a fair and reasonable resolution of the disputed transfer pricing issues, taking into account the respective litigation hazards faced by both parties.

B. Allocation of Settlement Adjustment by Tax Year

The parties have agreed to allocate the total settlement adjustment among the four tax years as follows:

The allocation above reflects the relative magnitude of the intercompany transactions and the specific facts and circumstances of each tax year, as discussed during the Appeals conference and in subsequent communications.

C. Tax Liability Resulting from Settlement

Based on the agreed-upon adjustment of $47,600,000, PPC estimates that the resulting additional federal income tax liability will be approximately $10,000,000 (rounded). This estimate reflects the application of the 21% corporate income tax rate enacted by the Tax Cuts and Jobs Act of 2017, which is applicable to tax years 2018, 2019, and 2020, as well as the blended effective rate applied to the 2017 tax year adjustment.

PPC understands that statutory interest will be computed on the resulting underpayment at the applicable federal underpayment rate under IRC § 6621 from the respective original due dates of each return through the date of payment. Based on PPC's preliminary calculations, the Company estimates that such accrued interest will be approximately $2,840,000, although PPC acknowledges that the final interest computation will be determined by the IRS and may differ from this estimate depending on the actual date of payment.

D. Penalty Abatement

PPC understands and accepts that the settlement provides for the full abatement of the proposed IRC § 6662(e) substantial valuation misstatement penalty, which was originally proposed at approximately $15,977,000. The abatement of the penalty reflects Appeals' acceptance of PPC's reasonable-cause defense under IRC § 6664(c) and, specifically, Appeals' recognition that PPC maintained contemporaneous transfer pricing documentation that met the requirements of IRC § 6662(e)(3)(B) and the applicable Treasury Regulations.

PPC's contemporaneous transfer pricing documentation for all four tax years under examination was prepared by Crestfield & Associates LLP, a nationally recognized accounting firm with significant transfer pricing expertise. The documentation was prepared consistent with the requirements of Treasury Regulation § 1.482-7 (governing qualified cost-sharing arrangements) and Treasury Regulation § 1.482-4 (governing transfers of intangible property), and was maintained and available at the time of the examination in compliance with IRC § 6662(e)(3)(B)(i) and (ii). PPC appreciates Appeals' thorough consideration of the penalty issue and its conclusion that PPC acted with reasonable cause and in good faith in determining its transfer pricing positions.

E. No Admission of Liability

PPC's acceptance of the settlement is made without any admission of liability or concession by PPC regarding the correctness, validity, or legal sufficiency of any of the IRS's proposed adjustments, legal theories, or economic analyses, whether as set forth in the NOPA, as advanced during the examination, or as discussed during the Appeals conference. The settlement constitutes a compromise reflecting both parties' good-faith assessment of the litigation hazards associated with the disputed transfer pricing positions, including the uncertainties inherent in the selection of comparable transactions, the application of the residual profit-split and comparable uncontrolled transaction methods, and the valuation of intangible property in the pharmaceutical industry. PPC reserves all rights with respect to its tax positions for tax years not covered by this settlement.

V. Closing Agreement — IRS Form 906

PPC respectfully requests that the settlement be memorialized through the execution of a Closing Agreement on IRS Form 906 (Closing Agreement on Final Determination Covering Specific Matters), pursuant to IRC § 7121. PPC believes that a Form 906 Closing Agreement is the appropriate vehicle to memorialize the agreed-upon resolution of the transfer pricing issues for tax years 2017 through 2020, and that such an agreement will provide certainty and finality for both PPC and the IRS.

To facilitate the prompt finalization of the Closing Agreement, C&H has prepared a draft Form 906 reflecting the material terms set forth in this letter, including the agreed-upon adjustment amounts for each tax year, the allocation methodology, the penalty abatement, and the scope of the matters covered by the agreement. The draft Closing Agreement is enclosed herewith for your review and comment. We welcome any revisions or additions that Appeals may wish to propose and are prepared to work cooperatively with your office to finalize the form and substance of the agreement in an expeditious manner.

PPC proposes that the Closing Agreement be executed at the earliest mutually convenient date, and respectfully requests that upon full execution of the Closing Agreement by all necessary parties, the examination for tax years 2017, 2018, 2019, and 2020 be formally closed and the case file reflected accordingly in the IRS's records.

VI. Authorized Signatories and Execution

PPC designates Marcus Whitfield, Vice President of Global Tax, as the authorized signatory for the Closing Agreement on behalf of Penterra Pharmaceuticals Corp. Mr. Whitfield has been duly authorized by PPC's Board of Directors and senior management to execute the Closing Agreement and any related documents necessary to effectuate the settlement. In the event that additional corporate authorization or documentation is required by the IRS, PPC will promptly provide the same.

Leonard Cross of Calderwood & Harkness LLP will serve as the primary point of contact for coordinating execution logistics, including the exchange of signature pages and the scheduling of any required in-person execution.

VII. Next Steps and Administrative Matters

In order to implement the settlement and ensure an orderly closure of this matter, PPC proposes the following next steps and respectfully requests Appeals' confirmation and guidance on the administrative matters described below:

Amended Returns. Following execution of the Closing Agreement, PPC will prepare and file amended federal income tax returns (Forms 1120X) for tax years 2017, 2018, 2019, and 2020 to reflect the agreed-upon adjustments. The amended returns will be prepared in coordination with PPC's return preparer, Crestfield & Associates LLP, and will be filed in a timely manner consistent with applicable IRS procedures and any instructions provided by Appeals.

Payment of Tax and Interest. PPC will remit payment of the additional federal income tax due, estimated at approximately $10,000,000, together with all accrued statutory interest, upon receipt of the formal assessment notice from the IRS, or at such earlier time as may be directed by Appeals. PPC is prepared to make payment promptly upon receipt of appropriate instructions.

Interest Computation. PPC respectfully requests that Appeals provide written confirmation of the interest computation methodology to be applied, including the applicable underpayment rate(s) under IRC § 6621, the relevant compounding periods, and the specific dates from which interest will be computed for each tax year. PPC also requests that Appeals provide any specific payment instructions, including the designated remittance address or electronic payment procedures, to ensure that payment is properly credited to PPC's account.

Confirmation of Examination Closure. PPC respectfully requests that Appeals provide written confirmation of the formal closure of the examination for tax years 2017, 2018, 2019, and 2020, following execution of the Closing Agreement and payment of all amounts due. Such written confirmation will assist PPC in updating its financial records, tax provision, and public disclosure obligations under applicable securities laws.

VIII. Contact Information

All further communications regarding this matter, including correspondence, telephone calls, and any document exchange, should be directed to:

Leonard Cross Partner, Tax Department Calderwood & Harkness LLP 1735 Market Street, Suite 3100 Philadelphia, PA 19103 Telephone: (215) 884-7244

Email: lcross@calderwoodharkness.com

Sylvia Hartwell Partner, Tax Department Calderwood & Harkness LLP 600 Lexington Avenue New York, NY 10022 Telephone: (212) 596-3180

Email: shartwell@calderwoodharkness.com

The primary client contact for PPC is:

Marcus Whitfield Vice President, Global Tax Penterra Pharmaceuticals Corp. 2200 Independence Boulevard Princeton Junction, NJ 08550 Telephone: (609) 452-8100

Email: mwhitfield@penterra.com

IX. Closing

On behalf of PPC, we wish to express our sincere appreciation for your thorough, fair, and professional consideration of PPC's positions throughout the Appeals process. The Appeals conference on February 28, 2024, provided PPC with a meaningful opportunity to present its factual, legal, and economic case, and we are grateful for your willingness to engage substantively with the issues and to consider the supplemental materials provided on March 8, 2024. The settlement reflected in this letter represents, in our view, a reasonable and principled resolution of the disputed transfer pricing issues.

PPC is eager to finalize the Closing Agreement at the earliest practicable date and to bring this matter to a prompt and orderly conclusion. We stand ready to provide any additional information, documentation, or assistance that may be required to facilitate the execution of the Closing Agreement and the administrative closure of the examination.

We look forward to hearing from you at your earliest convenience regarding the next steps in this process. Please do not hesitate to contact the undersigned directly should you have any questions or require any further information.

Respectfully submitted,

CALDERWOOD & HARKNESS LLP

________________________________________

Leonard Cross Partner, Tax Department Calderwood & Harkness LLP 1735 Market Street, Suite 3100 Philadelphia, PA 19103 Licensed in New York, New Jersey, and the District of Columbia

Enclosure: Draft IRS Form 906 — Closing Agreement on Final Determination Covering Specific Matters (Penterra Pharmaceuticals Corp., EIN 22-3741856, Tax Years 2017, 2018, 2019, 2020)

cc: Marcus Whitfield, Vice President, Global Tax, Penterra Pharmaceuticals Corp. cc: Deborah Staines, General Counsel, Penterra Pharmaceuticals Corp. cc: Rajesh Iyer, Chief Financial Officer, Penterra Pharmaceuticals Corp. cc: Sylvia Hartwell, Partner, Calderwood & Harkness LLP cc: Garrett Simmons, Associate, Calderwood & Harkness LLP cc: Leila Nazari, Associate, Calderwood & Harkness LLP

Tax Year	PPC's Applied CSA %	IRS Proposed CSA %	Proposed Additional Cost-Sharing Payment
2017	38.2%	48.2%	$48,730,000
2018	39.6%	50.6%	$57,610,000
2019	41.1%	52.3%	$62,850,000
2020	42.7%	53.7%	$65,820,000
Total	$235,010,000
Tax Year	Proposed Additional Royalty Payment
2017	$52,949,000
2018	$49,549,500
2019	$44,967,000
2020	$40,566,500
Total	$188,040,000
Tax Year	Agreed-Upon Adjustment
2017	$11,200,000
2018	$12,400,000
2019	$12,800,000
2020	$11,200,000
Total	$47,600,000

CALDERWOOD & HARKNESS LLP
Attorneys at Law
1735 Market Street, Suite 3100 Philadelphia, PA 19103
Telephone: (215) 884-7200 Facsimile: (215) 884-7201
600 Lexington Avenue New York, NY 10022
www.calderwoodharkness.com
March 22, 2024
VIA HAND DELIVERY AND FIRST-CLASS U.S. MAIL Copy via Certified Mail, Return Receipt Requested (No. 7020 1810 0003 4472 6891)
Appeals Officer Noreen Castañeda Internal Revenue Service IRS Appeals Office 290 Broadway, 30th Floor Manhattan, New York 10007
Re: Penterra Pharmaceuticals Corp. EIN: 22-3741856 Tax Years: 2017, 2018, 2019, 2020 IRS Exam Team ID: LB&I-NE-TP-2022-00641 C&H Matter Number: 1018-00009
Re: Acceptance of Settlement Offer — Penterra Pharmaceuticals Corp.; EIN 22-3741856; Tax Years 2017, 2018, 2019, 2020; Proposed IRC § 482 Transfer Pricing Adjustments
Dear Appeals Officer Castañeda:
I. Introduction and Authorization
Calderwood & Harkness LLP ("C&H" or the "Firm") represents Penterra Pharmaceuticals Corp. ("PPC" or the "Company"), a Delaware corporation headquartered at 2200 Independence Boulevard, Princeton Junction, New Jersey 08550. PPC is a publicly traded corporation listed on the Nasdaq Stock Market under ticker symbol PPCA. The Company is a multinational pharmaceutical enterprise engaged in the research, development, manufacture, and commercialization of proprietary therapeutic products across multiple therapeutic areas.
Our representation of PPC has been duly authorized pursuant to IRS Form 2848 (Power of Attorney and Declaration of Representative), which was filed with the Internal Revenue Service on June 8, 2022. The Form 2848 authorizes the following attorneys and practitioners at Calderwood & Harkness LLP to represent PPC in connection with the above-referenced examination and all related proceedings: Leonard Cross (Partner), Sylvia Hartwell (Partner), Garrett Simmons (Associate), and Leila Nazari (Associate). Calderwood & Harkness was retained as outside tax counsel to PPC effective June 2, 2022, shortly after the IRS opened its examination of the Company's federal income tax returns for the tax years at issue.
The purpose of this letter is to formally communicate PPC's acceptance, in its entirety, of the settlement offer extended by you on March 15, 2024, resolving all transfer pricing adjustments proposed by the Internal Revenue Service under Section 482 of the Internal Revenue Code ("IRC") for tax years 2017, 2018, 2019, and 2020. This letter sets forth the terms of the settlement as understood by PPC, identifies the agreed-upon adjustments for each tax year, addresses the treatment of penalties and interest, and requests that the settlement be memorialized through a Closing Agreement on IRS Form 906. We have enclosed a draft of the proposed Closing Agreement for your review and comment.
II. Background and Procedural History
We believe it is useful, for the sake of a complete record, to briefly summarize the procedural history of this matter from the inception of the examination through the present.
On May 16, 2022, the IRS Large Business & International Division ("LB&I") initiated an examination of PPC's federal income tax returns (Forms 1120) for tax years 2017, 2018, 2019, and 2020, as communicated to PPC by means of Letter 2205-A. The examination was assigned Exam Team identification number LB&I-NE-TP-2022-00641 and was conducted under the supervision of Supervisory Revenue Agent Gerald Meskill and Lead Revenue Agent Patricia Dunleavy.
During the course of the examination, the IRS issued a total of forty-seven (47) Information Document Requests ("IDRs") between June 2022 and September 2023. PPC, through undersigned counsel and in coordination with PPC's in-house tax department under the direction of Marcus Whitfield, Vice President of Global Tax, responded to each IDR in a timely and comprehensive manner. At no point during the examination did the IRS assert that PPC failed to cooperate or provide requested information. PPC produced, among other materials, voluminous financial data, intercompany agreements, board minutes, economic analyses, and contemporaneous transfer pricing documentation for each of the tax years under examination.
The examination focused principally on PPC's transfer pricing methodology governing intercompany transactions between PPC and its wholly owned Irish subsidiary, Penterra Biopharma International DAC ("PBI"), a designated activity company organized under the laws of Ireland. Two primary categories of intercompany transactions were at issue: (i) the qualified cost-sharing arrangement ("CSA") entered into between PPC and PBI, effective July 1, 2012, pursuant to which PBI shares in the costs and risks of intangible development activities in exchange for the right to exploit resulting intangible property outside the Americas region; and (ii) the legacy intellectual property royalty arrangement under which PBI pays a running royalty to PPC for the continued use of pre-CSA intangible property in non-Americas markets.
On October 12, 2023, the IRS examination team issued a Notice of Proposed Adjustment ("NOPA") proposing net adjustments totaling $380,400,000 across all four tax years. PPC received the corresponding 30-Day Letter on November 8, 2023. Pursuant to a written extension of time granted by the examination team, PPC timely filed its formal Protest on December 22, 2023. The Protest set forth PPC's detailed factual, legal, and economic objections to each of the proposed adjustments and requested a conference with the IRS Independent Office of Appeals.
The case was assigned to you, Appeals Officer Castañeda, in January 2024. An Appeals conference was held on February 28, 2024, at the IRS Appeals Office in Manhattan, New York. Calderwood & Harkness was represented at the conference by Leonard Cross, Sylvia Hartwell, and Garrett Simmons. PPC was represented by Marcus Whitfield (Vice President, Global Tax) and Deborah Staines (General Counsel). Dr. Helena Vasquez, Managing Director of Whitmore Valuation Group LLC, participated as PPC's independent economic expert and presented testimony regarding the arm's-length character of PPC's transfer pricing methodology.
Following the Appeals conference, and at your request, PPC submitted a supplemental written submission on March 8, 2024, which included additional comparable uncontrolled license agreement data and an updated benchmarking analysis prepared by Dr. Vasquez and her team at Whitmore Valuation Group LLC. This supplemental data further supported PPC's position that its transfer pricing methodology, including the CSA cost-sharing ratios and the legacy royalty rate, fell within the arm's-length range.
On March 15, 2024, you communicated a settlement offer to undersigned counsel proposing a resolution of all disputed transfer pricing adjustments for tax years 2017 through 2020. PPC has carefully reviewed the terms of that offer, and, as set forth in this letter, hereby accepts the settlement in its entirety.
III. Summary of Original Proposed Adjustments
For completeness and to provide context for the agreed-upon settlement, we briefly recite the IRS's proposed adjustments as set forth in the NOPA dated October 12, 2023.
A. CSA Cost-Sharing Ratio Adjustments
The IRS proposed increasing PBI's cost-sharing percentages under the CSA by approximately eight (8) to twelve (12) percentage points across each tax year. The IRS contended that the cost-sharing ratios, as applied by PPC and PBI, underallocated development costs to PBI relative to PBI's anticipated share of the reasonably anticipated benefits from the intangible development activities. The IRS's proposed adjustments would have resulted in additional cost-sharing payments from PBI to PPC, as follows:
B. Legacy IP Royalty Rate Adjustments
The IRS further proposed increasing the royalty rate applicable to PBI's license of pre-CSA legacy intangible property from 4.5% to 11.0% of non-Americas net sales. The IRS contended that the 4.5% royalty rate applied by PPC and PBI did not reflect the arm's-length compensation for the valuable pharmaceutical intellectual property licensed to PBI, and that an appropriate royalty rate—based on the IRS's own comparable uncontrolled transaction analysis—would be 11.0% of relevant net sales. The proposed royalty rate adjustments were as follows:
C. Correlative Offset
The examination team allowed a correlative offset of ($42,650,000) to avoid double-counting of income that would otherwise be attributed to PPC under both the CSA cost-sharing ratio adjustment and the legacy IP royalty rate adjustment.
D. Net Proposed Adjustment and Penalty
The net proposed adjustment across all four tax years, after application of the correlative offset, was $380,400,000. In addition, the IRS proposed the imposition of a twenty percent (20%) substantial valuation misstatement penalty under IRC § 6662(e) on the underpayment of tax attributable to the proposed transfer pricing adjustments. The estimated penalty amount was approximately $15,977,000.
PPC contested all of the proposed adjustments, including both the CSA cost-sharing ratio adjustments and the legacy IP royalty rate adjustments, in their entirety, in its Protest filed December 22, 2023, and through the presentations made at the Appeals conference on February 28, 2024.
IV. Acceptance of Settlement Offer
PPC hereby formally and unconditionally accepts the settlement offer communicated by Appeals Officer Castañeda on March 15, 2024, in its entirety and without modification. PPC's acceptance of the settlement has been duly authorized by the Company's senior management, including Rajesh Iyer, Chief Financial Officer, and Catherine Falk, Chief Executive Officer.
A. Total Settlement Adjustment Amount
The total agreed-upon adjustment under the settlement is $47,600,000 across all four tax years under examination (2017, 2018, 2019, and 2020). This settlement amount represents approximately 12.51% of the $380,400,000 net proposed adjustment originally set forth in the NOPA. PPC and the IRS have agreed that this amount represents a fair and reasonable resolution of the disputed transfer pricing issues, taking into account the respective litigation hazards faced by both parties.
B. Allocation of Settlement Adjustment by Tax Year
The parties have agreed to allocate the total settlement adjustment among the four tax years as follows:
The allocation above reflects the relative magnitude of the intercompany transactions and the specific facts and circumstances of each tax year, as discussed during the Appeals conference and in subsequent communications.
C. Tax Liability Resulting from Settlement
Based on the agreed-upon adjustment of $47,600,000, PPC estimates that the resulting additional federal income tax liability will be approximately $10,000,000 (rounded). This estimate reflects the application of the 21% corporate income tax rate enacted by the Tax Cuts and Jobs Act of 2017, which is applicable to tax years 2018, 2019, and 2020, as well as the blended effective rate applied to the 2017 tax year adjustment.
PPC understands that statutory interest will be computed on the resulting underpayment at the applicable federal underpayment rate under IRC § 6621 from the respective original due dates of each return through the date of payment. Based on PPC's preliminary calculations, the Company estimates that such accrued interest will be approximately $2,840,000, although PPC acknowledges that the final interest computation will be determined by the IRS and may differ from this estimate depending on the actual date of payment.
D. Penalty Abatement
PPC understands and accepts that the settlement provides for the full abatement of the proposed IRC § 6662(e) substantial valuation misstatement penalty, which was originally proposed at approximately $15,977,000. The abatement of the penalty reflects Appeals' acceptance of PPC's reasonable-cause defense under IRC § 6664(c) and, specifically, Appeals' recognition that PPC maintained contemporaneous transfer pricing documentation that met the requirements of IRC § 6662(e)(3)(B) and the applicable Treasury Regulations.
PPC's contemporaneous transfer pricing documentation for all four tax years under examination was prepared by Crestfield & Associates LLP, a nationally recognized accounting firm with significant transfer pricing expertise. The documentation was prepared consistent with the requirements of Treasury Regulation § 1.482-7 (governing qualified cost-sharing arrangements) and Treasury Regulation § 1.482-4 (governing transfers of intangible property), and was maintained and available at the time of the examination in compliance with IRC § 6662(e)(3)(B)(i) and (ii). PPC appreciates Appeals' thorough consideration of the penalty issue and its conclusion that PPC acted with reasonable cause and in good faith in determining its transfer pricing positions.
E. No Admission of Liability
PPC's acceptance of the settlement is made without any admission of liability or concession by PPC regarding the correctness, validity, or legal sufficiency of any of the IRS's proposed adjustments, legal theories, or economic analyses, whether as set forth in the NOPA, as advanced during the examination, or as discussed during the Appeals conference. The settlement constitutes a compromise reflecting both parties' good-faith assessment of the litigation hazards associated with the disputed transfer pricing positions, including the uncertainties inherent in the selection of comparable transactions, the application of the residual profit-split and comparable uncontrolled transaction methods, and the valuation of intangible property in the pharmaceutical industry. PPC reserves all rights with respect to its tax positions for tax years not covered by this settlement.
V. Closing Agreement — IRS Form 906
PPC respectfully requests that the settlement be memorialized through the execution of a Closing Agreement on IRS Form 906 (Closing Agreement on Final Determination Covering Specific Matters), pursuant to IRC § 7121. PPC believes that a Form 906 Closing Agreement is the appropriate vehicle to memorialize the agreed-upon resolution of the transfer pricing issues for tax years 2017 through 2020, and that such an agreement will provide certainty and finality for both PPC and the IRS.
To facilitate the prompt finalization of the Closing Agreement, C&H has prepared a draft Form 906 reflecting the material terms set forth in this letter, including the agreed-upon adjustment amounts for each tax year, the allocation methodology, the penalty abatement, and the scope of the matters covered by the agreement. The draft Closing Agreement is enclosed herewith for your review and comment. We welcome any revisions or additions that Appeals may wish to propose and are prepared to work cooperatively with your office to finalize the form and substance of the agreement in an expeditious manner.
PPC proposes that the Closing Agreement be executed at the earliest mutually convenient date, and respectfully requests that upon full execution of the Closing Agreement by all necessary parties, the examination for tax years 2017, 2018, 2019, and 2020 be formally closed and the case file reflected accordingly in the IRS's records.
VI. Authorized Signatories and Execution
PPC designates Marcus Whitfield, Vice President of Global Tax, as the authorized signatory for the Closing Agreement on behalf of Penterra Pharmaceuticals Corp. Mr. Whitfield has been duly authorized by PPC's Board of Directors and senior management to execute the Closing Agreement and any related documents necessary to effectuate the settlement. In the event that additional corporate authorization or documentation is required by the IRS, PPC will promptly provide the same.
Leonard Cross of Calderwood & Harkness LLP will serve as the primary point of contact for coordinating execution logistics, including the exchange of signature pages and the scheduling of any required in-person execution.
VII. Next Steps and Administrative Matters
In order to implement the settlement and ensure an orderly closure of this matter, PPC proposes the following next steps and respectfully requests Appeals' confirmation and guidance on the administrative matters described below:
Amended Returns. Following execution of the Closing Agreement, PPC will prepare and file amended federal income tax returns (Forms 1120X) for tax years 2017, 2018, 2019, and 2020 to reflect the agreed-upon adjustments. The amended returns will be prepared in coordination with PPC's return preparer, Crestfield & Associates LLP, and will be filed in a timely manner consistent with applicable IRS procedures and any instructions provided by Appeals.
Payment of Tax and Interest. PPC will remit payment of the additional federal income tax due, estimated at approximately $10,000,000, together with all accrued statutory interest, upon receipt of the formal assessment notice from the IRS, or at such earlier time as may be directed by Appeals. PPC is prepared to make payment promptly upon receipt of appropriate instructions.
Interest Computation. PPC respectfully requests that Appeals provide written confirmation of the interest computation methodology to be applied, including the applicable underpayment rate(s) under IRC § 6621, the relevant compounding periods, and the specific dates from which interest will be computed for each tax year. PPC also requests that Appeals provide any specific payment instructions, including the designated remittance address or electronic payment procedures, to ensure that payment is properly credited to PPC's account.
Confirmation of Examination Closure. PPC respectfully requests that Appeals provide written confirmation of the formal closure of the examination for tax years 2017, 2018, 2019, and 2020, following execution of the Closing Agreement and payment of all amounts due. Such written confirmation will assist PPC in updating its financial records, tax provision, and public disclosure obligations under applicable securities laws.
VIII. Contact Information
All further communications regarding this matter, including correspondence, telephone calls, and any document exchange, should be directed to:
Leonard Cross Partner, Tax Department Calderwood & Harkness LLP 1735 Market Street, Suite 3100 Philadelphia, PA 19103 Telephone: (215) 884-7244
Email: lcross@calderwoodharkness.com
Sylvia Hartwell Partner, Tax Department Calderwood & Harkness LLP 600 Lexington Avenue New York, NY 10022 Telephone: (212) 596-3180
Email: shartwell@calderwoodharkness.com
The primary client contact for PPC is:
Marcus Whitfield Vice President, Global Tax Penterra Pharmaceuticals Corp. 2200 Independence Boulevard Princeton Junction, NJ 08550 Telephone: (609) 452-8100
Email: mwhitfield@penterra.com
IX. Closing
On behalf of PPC, we wish to express our sincere appreciation for your thorough, fair, and professional consideration of PPC's positions throughout the Appeals process. The Appeals conference on February 28, 2024, provided PPC with a meaningful opportunity to present its factual, legal, and economic case, and we are grateful for your willingness to engage substantively with the issues and to consider the supplemental materials provided on March 8, 2024. The settlement reflected in this letter represents, in our view, a reasonable and principled resolution of the disputed transfer pricing issues.
PPC is eager to finalize the Closing Agreement at the earliest practicable date and to bring this matter to a prompt and orderly conclusion. We stand ready to provide any additional information, documentation, or assistance that may be required to facilitate the execution of the Closing Agreement and the administrative closure of the examination.
We look forward to hearing from you at your earliest convenience regarding the next steps in this process. Please do not hesitate to contact the undersigned directly should you have any questions or require any further information.
Respectfully submitted,
CALDERWOOD & HARKNESS LLP
________________________________________
Leonard Cross Partner, Tax Department Calderwood & Harkness LLP 1735 Market Street, Suite 3100 Philadelphia, PA 19103 Licensed in New York, New Jersey, and the District of Columbia
Enclosure: Draft IRS Form 906 — Closing Agreement on Final Determination Covering Specific Matters (Penterra Pharmaceuticals Corp., EIN 22-3741856, Tax Years 2017, 2018, 2019, 2020)
cc: Marcus Whitfield, Vice President, Global Tax, Penterra Pharmaceuticals Corp. cc: Deborah Staines, General Counsel, Penterra Pharmaceuticals Corp. cc: Rajesh Iyer, Chief Financial Officer, Penterra Pharmaceuticals Corp. cc: Sylvia Hartwell, Partner, Calderwood & Harkness LLP cc: Garrett Simmons, Associate, Calderwood & Harkness LLP cc: Leila Nazari, Associate, Calderwood & Harkness LLP
Tax Year | PPC's Applied CSA % | IRS Proposed CSA % | Proposed Additional Cost-Sharing Payment
2017 | 38.2% | 48.2% | $48,730,000
2018 | 39.6% | 50.6% | $57,610,000
2019 | 41.1% | 52.3% | $62,850,000
2020 | 42.7% | 53.7% | $65,820,000
Total | $235,010,000
Tax Year | Proposed Additional Royalty Payment
2017 | $52,949,000
2018 | $49,549,500
2019 | $44,967,000
2020 | $40,566,500
Total | $188,040,000
Tax Year | Agreed-Upon Adjustment
2017 | $11,200,000
2018 | $12,400,000
2019 | $12,800,000
2020 | $11,200,000
Total | $47,600,000

CALDERWOOD & HARKNESS LLP

CALDERWOOD & HARKNESS LLP

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