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letter-to-irs-mid-exam-conference-20230510.docx DOCUMENT M&A / Corporate

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CALDERWOOD & HARKNESS LLP

Attorneys at Law

1735 Market Street, Suite 3100 Philadelphia, Pennsylvania 19103 Telephone: (215) 564-8200 Facsimile: (215) 564-8201

600 Lexington Avenue New York, New York 10022 Telephone: (212) 848-1000 Facsimile: (212) 848-1001

www.calderwoodharkness.com

May 10, 2023

VIA FIRST CLASS MAIL AND SECURE ELECTRONIC DELIVERY

Supervisory Revenue Agent Gerald Meskill Team Manager Internal Revenue Service Large Business & International Division Northeast Compliance — Transfer Pricing Practice Examination of Penterra Pharmaceuticals Corp. EIN: 22-3741856 Tax Years Under Examination: 2017, 2018, 2019, 2020 Exam Team ID: LB&I-NE-TP-2022-00641

Re: Request for Mid-Examination Conference — Penterra Pharmaceuticals Corp., EIN 22-3741856, Tax Years 2017–2020, Exam Team LB&I-NE-TP-2022-00641

Dear Supervisory Revenue Agent Meskill:

I am writing to you in my capacity as Responsible Partner in the Tax Department of Calderwood & Harkness LLP, counsel of record for Penterra Pharmaceuticals Corp. ("PPC" or the "Company"), in connection with the above-referenced examination. As you are aware, Calderwood & Harkness is authorized to represent PPC before the Internal Revenue Service pursuant to IRS Form 2848, Power of Attorney and Declaration of Representative, filed with the examination team on June 8, 2022, designating the following individuals as PPC's authorized representatives: Leonard Cross, Sylvia Hartwell, Garrett Simmons, and Leila Nazari, each of whom is a member of or employed by this firm.

The purpose of this letter is to formally request a mid-examination conference with the examination team to discuss the current status of the examination, identify the issues that remain under active consideration, narrow the scope of remaining inquiry where possible, and establish a realistic and mutually agreed-upon timeline for the examination's conclusion. PPC has cooperated fully and in good faith with the examination team since the examination was opened nearly twelve months ago, and the Company remains committed to the prompt and efficient resolution of any matters at issue. PPC believes that a mid-examination conference at this juncture will serve the interests of all parties by focusing resources on genuinely disputed questions, avoiding unnecessary duplication of effort, and charting a clear path forward through the remaining stages of the examination process.

I. Background and Examination Status

The current examination was opened on May 16, 2022, upon PPC's receipt of IRS Letter 2205-A, notifying the Company that its federal income tax returns (Forms 1120) for tax years 2017, 2018, 2019, and 2020 had been selected for examination. The examination is being conducted by the Large Business & International Division, Northeast Compliance, Transfer Pricing Practice, under Exam Team ID LB&I-NE-TP-2022-00641.

Shortly after receipt of the examination notification, PPC engaged Calderwood & Harkness LLP on June 2, 2022, to serve as outside tax counsel for all aspects of the IRS examination defense, including the preparation of responses to Information Document Requests ("IDRs"), transfer pricing analysis and documentation, and representation through any administrative proceedings that may arise from the examination. Calderwood & Harkness has served as PPC's primary point of contact with the examination team since that date.

As the examination team is aware, the examination concerns PPC's transfer pricing methodology with respect to intercompany transactions between PPC's U.S. operations and its Irish subsidiary, Penterra Biopharma International DAC ("PBI"). The intercompany arrangements at issue include the following:

(a) Cost-Sharing Arrangement ("CSA"). PPC and PBI are parties to a qualified cost-sharing arrangement, effective July 1, 2012, under which PBI co-funds PPC's ongoing research and development costs in exchange for the rights to exploit PPC's pharmaceutical intellectual property in territories outside the Americas (the "non-Americas territories"). The CSA was entered into in accordance with the requirements of Treasury Regulation § 1.482-7 and has been in continuous effect throughout the four tax years under examination.

(b) Platform Contribution Transaction ("PCT"). In connection with the formation of the CSA, PBI made a lump-sum platform contribution transaction payment to PPC in the amount of $312 million. The PCT payment was determined on the basis of a contemporaneous valuation analysis and was intended to compensate PPC for PBI's use of pre-existing intangible property made available as platform contributions to the CSA.

(c) Legacy IP Royalty Arrangement. Separate from the CSA, PBI pays PPC a royalty at a rate of 4.5% of net sales for the exploitation of certain legacy intellectual property in non-Americas territories. This royalty rate was established on the basis of a comparable uncontrolled transaction ("CUT") analysis at the time the arrangement was put in place and has remained in effect throughout the periods under examination.

For completeness, PPC's relevant group structure is summarized as follows:

• Penterra Pharmaceuticals Corp. ("PPC") — a Delaware corporation with its principal offices at 2200 Independence Boulevard, Princeton Junction, New Jersey 08550. PPC is the U.S. parent corporation and the ultimate parent entity of the Penterra group for U.S. federal income tax purposes.

• Penterra Holdings Luxembourg S.à r.l. ("PHL") — a Luxembourg private limited liability company that is treated as a disregarded entity for U.S. federal income tax purposes. PHL is a wholly-owned subsidiary of PPC and serves as an intermediate holding company.

• Penterra Biopharma International DAC ("PBI") — a designated activity company organized under the laws of Ireland, with its registered office at 4th Floor, Claremont House, Sandyford Business Park, Dublin D18 K7T4, Ireland. PBI is a wholly-owned subsidiary of PHL and is the principal non-Americas operating entity of the Penterra group, responsible for commercializing Penterra's pharmaceutical products outside the Americas. PBI is the cost-sharing participant and licensee under the arrangements described above.

• Penterra Manufacturing Ireland Ltd. ("PMI") — a private limited company organized under the laws of Ireland, located in Cork, Ireland. PMI is a wholly-owned subsidiary of PBI and operates as a contract manufacturer of pharmaceutical products for PBI under an intercompany manufacturing agreement at a cost-plus 8% markup.

The tax years under examination are the taxable years ending December 31, 2017, December 31, 2018, December 31, 2019, and December 31, 2020, for which PPC filed its federal income tax returns on Forms 1120.

II. Summary of IDR Activity and Cooperation to Date

Since the examination was opened in May 2022, the examination team has issued a substantial and growing number of Information Document Requests. As of the date of this letter, PPC has received and responded to well over thirty IDRs, and the process of IDR issuance and response has been ongoing and intensive throughout the past eleven months. PPC has responded to each IDR in a thorough, complete, and timely manner, and at no point has PPC failed to meet an agreed-upon deadline for the production of requested materials.

The scope of PPC's cooperation and the volume of documentation provided to date are significant. By way of summary, and without attempting an exhaustive recitation of every IDR response, PPC has produced the following categories of documents and information:

• IDR No. 1 — Complete corporate structure and organizational charts for the Penterra group, including all entities relevant to the intercompany arrangements at issue, ownership percentages, functional descriptions, and jurisdictional information.

• IDR No. 2 — The complete CSA agreement, dated July 1, 2012, together with all amendments, supplements, and side letters executed through 2020, including the annual cost-sharing true-up protocols and documentation of changes to the cost-sharing ratios.

• IDR No. 3 — The legacy intellectual property license agreement between PPC and PBI, including all schedules, exhibits, amendments, and related correspondence regarding the determination and application of the 4.5% royalty rate.

• IDR No. 4 — Contemporaneous transfer pricing documentation for all four tax years under examination (2017, 2018, 2019, and 2020), as originally prepared by PPC's independent auditor and tax return preparer, Crestfield & Associates LLP, under the supervision of Martin Ogilvy, Engagement Partner, and Susan Lam, Transfer Pricing Partner. This documentation was prepared in accordance with the requirements of Internal Revenue Code ("IRC") § 6662(e) and the related Treasury Regulations, and includes detailed functional analyses, economic analyses, and best method determinations for each controlled transaction.

• IDR No. 5 — The original PCT valuation report and all supporting workpapers relating to the $312 million platform contribution transaction payment. The valuation report includes the discounted cash flow analysis, key assumptions, discount rate derivation, and projected income streams used to determine the arm's-length PCT payment.

• IDR No. 6 — Detailed R&D cost pool composition and allocation methodology for each year under examination. As reflected in the documentation, PPC's total qualified R&D costs during the examination period ranged from $487.3 million in 2017 to $598.4 million in 2020. PBI's share of these costs under the CSA ranged from 38.2% in 2017 to 42.7% in 2020, reflecting PBI's growing participation in the cost-sharing arrangement as the non-Americas commercial operations expanded.

• IDR No. 7 — PBI's Irish statutory financial statements and Irish corporation tax returns for each of the tax years 2017 through 2020, together with the related auditor's reports and Irish Revenue filings.

• IDR No. 8 — Personnel and headcount data for PBI, demonstrating that PBI's full-time employee count grew from 52 employees at the inception of the CSA in 2012 to 185 employees by the end of 2020. The response included detailed breakdowns by function (commercial, medical affairs, regulatory, supply chain, finance, and general administration), as well as information regarding the qualifications and roles of senior management personnel.

• IDR No. 9 — Board of directors minutes for PBI, covering 42 board meetings held in Dublin during the tax years 2017 through 2020. These minutes document the substantive decision-making activities of the PBI board, including pricing decisions, market entry and exit strategies, regulatory submissions, and capital allocation.

• IDR No. 10 — The intercompany manufacturing agreement between PBI and PMI, documenting the cost-plus 8% markup arrangement under which PMI manufactures pharmaceutical products for PBI at its Cork, Ireland facility.

• IDR No. 11 — Product-level revenue data by territory for PPC's three principal pharmaceutical products: Veritaxol, Imvara, and Cerulon. This data was provided at the individual country level across all territories in which PBI operates, covering each of the four tax years under examination.

• IDR No. 12 — PBI office lease documentation for its principal offices at Sandyford Business Park, Dublin, demonstrating PBI's occupancy of approximately 18,000 square feet of dedicated office space throughout the examination period.

• IDR No. 15 — Documentation of PBI's regulatory expenditures and submissions for non-Americas markets, including marketing authorization applications, clinical trial support, and post-marketing commitments. PBI's cumulative regulatory expenditures during the examination period totaled approximately €47.2 million.

• IDR No. 18 — Third-party distribution agreements between PBI and independent distributors in various non-Americas markets, demonstrating PBI's independent commercial decision-making, its negotiation of terms with unrelated parties, and its assumption of commercial risk in its territories.

• IDR No. 22 — PBI banking records with Glenmore Bank Ireland plc, including account statements, cash management documentation, and records of intercompany fund flows.

• IDR No. 25 — Comparable license agreements identified in support of PPC's CUT analysis of the 4.5% legacy IP royalty rate, together with the economic analysis supporting the selection and application of these comparables.

PPC's cooperation in this examination has required the coordination of substantial resources across multiple parties. In addition to the efforts of Calderwood & Harkness's examination team, PPC's internal tax department, led by Marcus Whitfield, Vice President of Global Tax, has devoted significant time and attention to the examination. Crestfield & Associates LLP, through Martin Ogilvy, Engagement Partner, and Susan Lam, Transfer Pricing Partner, has provided ongoing support in connection with the contemporaneous transfer pricing documentation and related analyses. Thornbury & Keogh, PBI's Irish tax advisors, under the direction of Ciarán Thornbury, Lead Partner, have assisted with the production of PBI's Irish financial and tax records and have been available to address questions regarding PBI's Irish operations and tax compliance. In addition, PPC has provided the examination team with access to independent economic analyses prepared by Whitmore Valuation Group LLC, which were prepared at the direction of counsel and reflect the expert judgment of Dr. Helena Vasquez, Managing Director, and Dr. Rohan Chakrabarti, Senior Director.

PPC's responsiveness and the breadth of the documentation produced to date reflect the Company's genuine commitment to a transparent and cooperative examination process. It is in this spirit of cooperation that PPC now requests a mid-examination conference to ensure that the remaining stages of the examination proceed as efficiently and productively as possible.

III. Request for Conference — Specific Objectives

PPC respectfully requests that the mid-examination conference address the following four objectives, each of which is described in greater detail below.

A. Objective 1: Clarify the Scope of Remaining Issues

As a threshold matter, PPC requests that the examination team identify which transfer pricing issues remain under active consideration and which, if any, issues the examination team has resolved or no longer intends to pursue. Nearly twelve months into the examination, PPC believes it would be beneficial for both parties to have a clear and mutual understanding of the issues that are the focus of the examination team's remaining work.

Specifically, PPC seeks clarity as to whether the examination continues to focus on some or all of the following transfer pricing issues:

(i) The CSA cost-sharing ratio, under which PBI's share of qualified R&D costs ranged from 38.2% in 2017 to 42.7% in 2020, and whether the examination team is considering an adjustment to these ratios;

(ii) The legacy IP royalty rate of 4.5% of net sales charged to PBI for exploitation of pre-CSA intellectual property in non-Americas territories, and whether the examination team believes this rate to be outside an arm's-length range;

(iii) The PCT valuation of $312 million, including whether the examination team or the IRS economist has developed an alternative valuation or has identified specific issues with the methodology, assumptions, or inputs used in PPC's valuation analysis; and

(iv) PBI's economic substance and its performance of Development, Enhancement, Maintenance, Protection, and Exploitation ("DEMPE") functions with respect to the intangible property exploited outside the Americas, including whether the examination team is considering an assertion that PBI lacks sufficient substance to be respected as the beneficial owner of the non-Americas intangible property rights under the CSA.

PPC believes that the extensive documentation produced to date compellingly demonstrates PBI's substantive operations and its performance of meaningful DEMPE functions. As reflected in the IDR responses summarized above, PBI employs 185 full-time employees across a range of commercial, regulatory, medical affairs, supply chain, and administrative functions. PBI exercises independent pricing and commercial decision-making authority across 68 country markets in the non-Americas territories. PBI has incurred cumulative regulatory expenditures of approximately €47.2 million during the examination period in connection with marketing authorization applications, clinical trial support, and post-marketing obligations in its territories. PBI's 42 board meetings during the examination period were held in Dublin and documented substantive governance and strategic decision-making. PPC submits that these facts, taken together, establish that PBI is far more than a nominal participant in the CSA and that its economic substance is well-supported by the contemporaneous record.

Clarification of the scope of remaining issues will enable PPC to focus its resources on the matters that are genuinely in dispute and to provide any additional information or analysis that the examination team may require to reach its conclusions.

B. Objective 2: Narrow Outstanding IDRs and Avoid Duplicative Requests

A second objective of the requested conference is to ensure that any remaining IDRs are appropriately scoped, sequenced, and coordinated to avoid unnecessary duplication of effort by both parties. PPC has been fully responsive to every IDR issued by the examination team to date, and the Company intends to continue its cooperative approach. However, as the examination matures, PPC believes it is important for the parties to engage in a constructive dialogue regarding the remaining information needs of the examination team.

PPC notes, by way of illustration, its prior objection to IDR No. 26, which was communicated to the examination team by letter dated February 15, 2023. Without revisiting the details of that objection in this letter, PPC raised concerns that certain aspects of IDR No. 26 were overly broad, sought information that had already been provided in prior IDR responses, and imposed burdensome production requirements that were not clearly related to the transfer pricing issues under examination. PPC believes that the issues raised in connection with IDR No. 26 underscore the value of a mid-examination conference at which the parties can discuss remaining information needs in an open and constructive forum, prioritize the most relevant areas of inquiry, and agree upon a reasonable sequence and timeline for any additional IDR responses.

PPC offers to work collaboratively with the examination team to identify and prioritize any remaining IDRs and to propose efficient methods for the production of additional information where warranted. PPC is confident that a conference focused on these issues will result in a more productive and efficient examination process going forward.

C. Objective 3: Establish a Realistic Timeline

PPC further requests that the mid-examination conference include a discussion of a projected timeline for the completion of the examination. The examination has now been open for nearly twelve months, and PPC has devoted — and continues to devote — substantial internal and external resources to the examination defense. While PPC does not suggest that the examination should be rushed or that the examination team should be subject to arbitrary deadlines, the Company believes that all parties would benefit from a mutual understanding of the anticipated remaining steps and a realistic schedule for their completion.

Specifically, PPC would welcome a discussion of the following:

(i) The anticipated number and scope of any remaining IDRs that the examination team intends to issue;

(ii) Any meetings, interviews, or discussions that the examination team anticipates with the IRS economist, Dr. Alan Washburne of the IRS Transfer Pricing Practice, or with IRS Office of Chief Counsel Attorney-Advisor Franklin Rosario, and the expected timing of any such meetings;

(iii) The expected date by which the examination team will have completed its factual development and economic analysis of the issues under examination; and

(iv) If applicable, the expected date for issuance of any proposed adjustments, including any Notice of Proposed Adjustment ("NOPA") that the examination team may contemplate.

PPC recognizes that the scope of this examination — spanning four tax years and involving significant and complex intercompany transactions — necessarily requires a substantial investment of time and effort by all parties. At the same time, PPC has a legitimate interest in understanding the expected timeline for the examination's conclusion so that it may plan its resources accordingly and address any statute of limitations considerations in a timely and orderly manner.

D. Objective 4: Present PPC's Affirmative Positions

Finally, PPC would welcome the opportunity at the mid-examination conference to present a summary of its affirmative transfer pricing positions. PPC believes that an early and substantive dialogue regarding the Company's positions will assist the examination team in its analysis and may facilitate the narrowing or resolution of issues without the need for formal proposed adjustments.

PPC's affirmative positions are supported by the contemporaneous transfer pricing documentation prepared by Crestfield & Associates LLP and by the independent economic analyses prepared by Whitmore Valuation Group LLC, under the direction of Dr. Helena Vasquez, Managing Director, and Dr. Rohan Chakrabarti, Senior Director. In summary, PPC would propose to address the following at the conference:

(i) CUT Analysis — Legacy IP Royalty Rate. PPC's CUT analysis in support of the 4.5% royalty rate is based on a set of 14 comparable uncontrolled pharmaceutical license agreements, identified through a rigorous and well-documented search process. The interquartile range of royalty rates observed in these comparable agreements is 3.1% to 6.8% of net sales, with a median of 4.4%. PPC's 4.5% royalty rate falls squarely within the interquartile range and is virtually identical to the median of the comparable set, providing strong support for the arm's-length character of the royalty.

(ii) CPM / TNMM Analysis — PBI's Operating Margins. PPC has performed a comparable profits method ("CPM") / transactional net margin method ("TNMM") analysis testing PBI's operating margins against those of 22 comparable distributors and IP-holding companies identified through a systematic benchmarking study. The results of this analysis demonstrate that PBI's operating margins during the examination period are consistent with those of comparable uncontrolled enterprises performing similar functions, assuming similar risks, and employing similar assets.

(iii) Income Method / DCF Analysis — PCT Valuation. PPC's valuation of the $312 million PCT payment is supported by an income method / Discounted cash flow ("DCF") analysis, applying a weighted average cost of capital ("WACC") of 9.8%. This analysis yields an arm's-length range for the PCT payment of $278 million to $361 million. The actual PCT payment of $312 million falls within this range, confirming the arm's-length character of the payment. PPC is prepared to present the key assumptions, inputs, and sensitivity analyses underlying this valuation at the conference.

PPC emphasizes that its contemporaneous transfer pricing documentation for all four tax years under examination was prepared by Crestfield & Associates LLP in accordance with the requirements of IRC § 6662(e) and the related Treasury Regulations, and satisfies the standards for penalty protection under IRC § 6662(e)(3)(B). The documentation reflects best method analyses for each controlled transaction, economic analyses supporting PPC's pricing, and detailed functional analyses of PPC, PBI, and the other relevant entities.

PPC notes that the Company was not a participant in the IRS Compliance Assurance Process ("CAP") for any of the tax years under examination. Accordingly, a mid-examination conference of the type requested in this letter is the appropriate and primary forum for substantive dialogue between the taxpayer and the examination team regarding the issues under examination. PPC believes that an early presentation of its affirmative positions, supported by the analyses described above, will enable the examination team to evaluate the Company's transfer pricing methodology in a comprehensive manner and may facilitate the efficient resolution of all or some of the issues under review.

IV. Proposed Conference Logistics

PPC proposes that the mid-examination conference take place at a mutually convenient date in late May or early June 2023. We recognize that scheduling may be subject to the availability of multiple participants and are prepared to be flexible in accommodating the examination team's preferences.

PPC proposes the following attendees on behalf of the taxpayer:

• Leonard Cross, Partner, Tax Department, Calderwood & Harkness LLP (Responsible Partner and lead representative)

• Garrett Simmons, Associate, Tax Department, Calderwood & Harkness LLP (lead associate for examination defense)

• Marcus Whitfield, Vice President, Global Tax, Penterra Pharmaceuticals Corp. (PPC's senior internal tax officer)

PPC suggests that the examination team be represented by, at minimum, Lead Revenue Agent Patricia Dunleavy, in addition to such other members of the examination team as Supervisory Revenue Agent Meskill deems appropriate. PPC further requests that, to the extent the IRS economist, Dr. Alan Washburne, or the IRS Office of Chief Counsel Attorney-Advisor Franklin Rosario, will be attending the conference or providing input on the issues to be discussed, they participate in or be available for the conference, so that the discussion may be as productive and comprehensive as possible.

PPC is prepared to conduct the conference in person at the IRS's offices or by videoconference, at the examination team's preference. If an in-person meeting is preferred, we would welcome the opportunity to meet at the examination team's location or at such other location as may be mutually convenient.

V. Statute of Limitations Acknowledgment

PPC acknowledges that it has cooperated with the examination team's requests to extend the statute of limitations on assessment as needed to facilitate the orderly conduct of the examination. Specifically, PPC has executed Form 872, Consent to Extend the Time to Assess Tax, with respect to tax years 2017 and 2018, extending the applicable assessment periods to dates agreed upon with the examination team.

PPC remains willing to discuss reasonable further extensions of the statute of limitations if such extensions are necessary to allow for the orderly completion of the examination. At the same time, PPC expressly reserves all of its rights with respect to any future requests for statute extensions, including the right to decline such requests or to condition its consent on appropriate terms, consistent with applicable law and IRS procedures.

VI. Conclusion

PPC reiterates its commitment to a cooperative and efficient examination process. The Company has devoted substantial resources to the examination over the past eleven months and intends to continue its approach of full and timely cooperation with the examination team.

PPC respectfully submits that a mid-examination conference at this stage of the examination will benefit all parties. Such a conference will focus the resources of both the examination team and the taxpayer on genuinely disputed issues, reduce the risk of duplicative or unnecessary IDRs, establish a clear and realistic timeline for the examination's conclusion, and provide an opportunity for PPC to present its affirmative transfer pricing positions in a substantive and constructive forum. PPC believes that this approach is consistent with the IRS's own guidance regarding the conduct of examinations and the use of mid-examination conferences to promote efficient administration.

We respectfully request that Supervisory Revenue Agent Meskill or Lead Revenue Agent Dunleavy contact the undersigned at Calderwood & Harkness LLP's Philadelphia office to arrange the conference at a mutually convenient date. I may be reached directly at the contact information below.

Leonard Cross Direct Dial: (215) 564-8217 Direct Facsimile: (215) 564-8318

Email: lcross@calderwoodharkness.com

Thank you for your attention to this request. We look forward to your prompt response.

Respectfully submitted,

CALDERWOOD & HARKNESS LLP

By: ________

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

cc: Marcus Whitfield, Vice President, Global Tax, Penterra Pharmaceuticals Corp.

cc: Deborah Staines, General Counsel, Penterra Pharmaceuticals Corp.

cc: Revenue Agent Patricia Dunleavy, Internal Revenue Service, Large Business & International Division

cc: Sylvia Hartwell, Partner, Calderwood & Harkness LLP

cc: Garrett Simmons, Associate, Calderwood & Harkness LLP

CALDERWOOD & HARKNESS LLP
Attorneys at Law
1735 Market Street, Suite 3100 Philadelphia, Pennsylvania 19103 Telephone: (215) 564-8200 Facsimile: (215) 564-8201
600 Lexington Avenue New York, New York 10022 Telephone: (212) 848-1000 Facsimile: (212) 848-1001
www.calderwoodharkness.com
May 10, 2023
VIA FIRST CLASS MAIL AND SECURE ELECTRONIC DELIVERY
Supervisory Revenue Agent Gerald Meskill Team Manager Internal Revenue Service Large Business & International Division Northeast Compliance — Transfer Pricing Practice Examination of Penterra Pharmaceuticals Corp. EIN: 22-3741856 Tax Years Under Examination: 2017, 2018, 2019, 2020 Exam Team ID: LB&I-NE-TP-2022-00641
Re: Request for Mid-Examination Conference — Penterra Pharmaceuticals Corp., EIN 22-3741856, Tax Years 2017–2020, Exam Team LB&I-NE-TP-2022-00641
Dear Supervisory Revenue Agent Meskill:
I am writing to you in my capacity as Responsible Partner in the Tax Department of Calderwood & Harkness LLP, counsel of record for Penterra Pharmaceuticals Corp. ("PPC" or the "Company"), in connection with the above-referenced examination. As you are aware, Calderwood & Harkness is authorized to represent PPC before the Internal Revenue Service pursuant to IRS Form 2848, Power of Attorney and Declaration of Representative, filed with the examination team on June 8, 2022, designating the following individuals as PPC's authorized representatives: Leonard Cross, Sylvia Hartwell, Garrett Simmons, and Leila Nazari, each of whom is a member of or employed by this firm.
The purpose of this letter is to formally request a mid-examination conference with the examination team to discuss the current status of the examination, identify the issues that remain under active consideration, narrow the scope of remaining inquiry where possible, and establish a realistic and mutually agreed-upon timeline for the examination's conclusion. PPC has cooperated fully and in good faith with the examination team since the examination was opened nearly twelve months ago, and the Company remains committed to the prompt and efficient resolution of any matters at issue. PPC believes that a mid-examination conference at this juncture will serve the interests of all parties by focusing resources on genuinely disputed questions, avoiding unnecessary duplication of effort, and charting a clear path forward through the remaining stages of the examination process.
I. Background and Examination Status
The current examination was opened on May 16, 2022, upon PPC's receipt of IRS Letter 2205-A, notifying the Company that its federal income tax returns (Forms 1120) for tax years 2017, 2018, 2019, and 2020 had been selected for examination. The examination is being conducted by the Large Business & International Division, Northeast Compliance, Transfer Pricing Practice, under Exam Team ID LB&I-NE-TP-2022-00641.
Shortly after receipt of the examination notification, PPC engaged Calderwood & Harkness LLP on June 2, 2022, to serve as outside tax counsel for all aspects of the IRS examination defense, including the preparation of responses to Information Document Requests ("IDRs"), transfer pricing analysis and documentation, and representation through any administrative proceedings that may arise from the examination. Calderwood & Harkness has served as PPC's primary point of contact with the examination team since that date.
As the examination team is aware, the examination concerns PPC's transfer pricing methodology with respect to intercompany transactions between PPC's U.S. operations and its Irish subsidiary, Penterra Biopharma International DAC ("PBI"). The intercompany arrangements at issue include the following:
(a) Cost-Sharing Arrangement ("CSA"). PPC and PBI are parties to a qualified cost-sharing arrangement, effective July 1, 2012, under which PBI co-funds PPC's ongoing research and development costs in exchange for the rights to exploit PPC's pharmaceutical intellectual property in territories outside the Americas (the "non-Americas territories"). The CSA was entered into in accordance with the requirements of Treasury Regulation § 1.482-7 and has been in continuous effect throughout the four tax years under examination.
(b) Platform Contribution Transaction ("PCT"). In connection with the formation of the CSA, PBI made a lump-sum platform contribution transaction payment to PPC in the amount of $312 million. The PCT payment was determined on the basis of a contemporaneous valuation analysis and was intended to compensate PPC for PBI's use of pre-existing intangible property made available as platform contributions to the CSA.
(c) Legacy IP Royalty Arrangement. Separate from the CSA, PBI pays PPC a royalty at a rate of 4.5% of net sales for the exploitation of certain legacy intellectual property in non-Americas territories. This royalty rate was established on the basis of a comparable uncontrolled transaction ("CUT") analysis at the time the arrangement was put in place and has remained in effect throughout the periods under examination.
For completeness, PPC's relevant group structure is summarized as follows:
• Penterra Pharmaceuticals Corp. ("PPC") — a Delaware corporation with its principal offices at 2200 Independence Boulevard, Princeton Junction, New Jersey 08550. PPC is the U.S. parent corporation and the ultimate parent entity of the Penterra group for U.S. federal income tax purposes.
• Penterra Holdings Luxembourg S.à r.l. ("PHL") — a Luxembourg private limited liability company that is treated as a disregarded entity for U.S. federal income tax purposes. PHL is a wholly-owned subsidiary of PPC and serves as an intermediate holding company.
• Penterra Biopharma International DAC ("PBI") — a designated activity company organized under the laws of Ireland, with its registered office at 4th Floor, Claremont House, Sandyford Business Park, Dublin D18 K7T4, Ireland. PBI is a wholly-owned subsidiary of PHL and is the principal non-Americas operating entity of the Penterra group, responsible for commercializing Penterra's pharmaceutical products outside the Americas. PBI is the cost-sharing participant and licensee under the arrangements described above.
• Penterra Manufacturing Ireland Ltd. ("PMI") — a private limited company organized under the laws of Ireland, located in Cork, Ireland. PMI is a wholly-owned subsidiary of PBI and operates as a contract manufacturer of pharmaceutical products for PBI under an intercompany manufacturing agreement at a cost-plus 8% markup.
The tax years under examination are the taxable years ending December 31, 2017, December 31, 2018, December 31, 2019, and December 31, 2020, for which PPC filed its federal income tax returns on Forms 1120.
II. Summary of IDR Activity and Cooperation to Date
Since the examination was opened in May 2022, the examination team has issued a substantial and growing number of Information Document Requests. As of the date of this letter, PPC has received and responded to well over thirty IDRs, and the process of IDR issuance and response has been ongoing and intensive throughout the past eleven months. PPC has responded to each IDR in a thorough, complete, and timely manner, and at no point has PPC failed to meet an agreed-upon deadline for the production of requested materials.
The scope of PPC's cooperation and the volume of documentation provided to date are significant. By way of summary, and without attempting an exhaustive recitation of every IDR response, PPC has produced the following categories of documents and information:
• IDR No. 1 — Complete corporate structure and organizational charts for the Penterra group, including all entities relevant to the intercompany arrangements at issue, ownership percentages, functional descriptions, and jurisdictional information.
• IDR No. 2 — The complete CSA agreement, dated July 1, 2012, together with all amendments, supplements, and side letters executed through 2020, including the annual cost-sharing true-up protocols and documentation of changes to the cost-sharing ratios.
• IDR No. 3 — The legacy intellectual property license agreement between PPC and PBI, including all schedules, exhibits, amendments, and related correspondence regarding the determination and application of the 4.5% royalty rate.
• IDR No. 4 — Contemporaneous transfer pricing documentation for all four tax years under examination (2017, 2018, 2019, and 2020), as originally prepared by PPC's independent auditor and tax return preparer, Crestfield & Associates LLP, under the supervision of Martin Ogilvy, Engagement Partner, and Susan Lam, Transfer Pricing Partner. This documentation was prepared in accordance with the requirements of Internal Revenue Code ("IRC") § 6662(e) and the related Treasury Regulations, and includes detailed functional analyses, economic analyses, and best method determinations for each controlled transaction.
• IDR No. 5 — The original PCT valuation report and all supporting workpapers relating to the $312 million platform contribution transaction payment. The valuation report includes the discounted cash flow analysis, key assumptions, discount rate derivation, and projected income streams used to determine the arm's-length PCT payment.
• IDR No. 6 — Detailed R&D cost pool composition and allocation methodology for each year under examination. As reflected in the documentation, PPC's total qualified R&D costs during the examination period ranged from $487.3 million in 2017 to $598.4 million in 2020. PBI's share of these costs under the CSA ranged from 38.2% in 2017 to 42.7% in 2020, reflecting PBI's growing participation in the cost-sharing arrangement as the non-Americas commercial operations expanded.
• IDR No. 7 — PBI's Irish statutory financial statements and Irish corporation tax returns for each of the tax years 2017 through 2020, together with the related auditor's reports and Irish Revenue filings.
• IDR No. 8 — Personnel and headcount data for PBI, demonstrating that PBI's full-time employee count grew from 52 employees at the inception of the CSA in 2012 to 185 employees by the end of 2020. The response included detailed breakdowns by function (commercial, medical affairs, regulatory, supply chain, finance, and general administration), as well as information regarding the qualifications and roles of senior management personnel.
• IDR No. 9 — Board of directors minutes for PBI, covering 42 board meetings held in Dublin during the tax years 2017 through 2020. These minutes document the substantive decision-making activities of the PBI board, including pricing decisions, market entry and exit strategies, regulatory submissions, and capital allocation.
• IDR No. 10 — The intercompany manufacturing agreement between PBI and PMI, documenting the cost-plus 8% markup arrangement under which PMI manufactures pharmaceutical products for PBI at its Cork, Ireland facility.
• IDR No. 11 — Product-level revenue data by territory for PPC's three principal pharmaceutical products: Veritaxol, Imvara, and Cerulon. This data was provided at the individual country level across all territories in which PBI operates, covering each of the four tax years under examination.
• IDR No. 12 — PBI office lease documentation for its principal offices at Sandyford Business Park, Dublin, demonstrating PBI's occupancy of approximately 18,000 square feet of dedicated office space throughout the examination period.
• IDR No. 15 — Documentation of PBI's regulatory expenditures and submissions for non-Americas markets, including marketing authorization applications, clinical trial support, and post-marketing commitments. PBI's cumulative regulatory expenditures during the examination period totaled approximately €47.2 million.
• IDR No. 18 — Third-party distribution agreements between PBI and independent distributors in various non-Americas markets, demonstrating PBI's independent commercial decision-making, its negotiation of terms with unrelated parties, and its assumption of commercial risk in its territories.
• IDR No. 22 — PBI banking records with Glenmore Bank Ireland plc, including account statements, cash management documentation, and records of intercompany fund flows.
• IDR No. 25 — Comparable license agreements identified in support of PPC's CUT analysis of the 4.5% legacy IP royalty rate, together with the economic analysis supporting the selection and application of these comparables.
PPC's cooperation in this examination has required the coordination of substantial resources across multiple parties. In addition to the efforts of Calderwood & Harkness's examination team, PPC's internal tax department, led by Marcus Whitfield, Vice President of Global Tax, has devoted significant time and attention to the examination. Crestfield & Associates LLP, through Martin Ogilvy, Engagement Partner, and Susan Lam, Transfer Pricing Partner, has provided ongoing support in connection with the contemporaneous transfer pricing documentation and related analyses. Thornbury & Keogh, PBI's Irish tax advisors, under the direction of Ciarán Thornbury, Lead Partner, have assisted with the production of PBI's Irish financial and tax records and have been available to address questions regarding PBI's Irish operations and tax compliance. In addition, PPC has provided the examination team with access to independent economic analyses prepared by Whitmore Valuation Group LLC, which were prepared at the direction of counsel and reflect the expert judgment of Dr. Helena Vasquez, Managing Director, and Dr. Rohan Chakrabarti, Senior Director.
PPC's responsiveness and the breadth of the documentation produced to date reflect the Company's genuine commitment to a transparent and cooperative examination process. It is in this spirit of cooperation that PPC now requests a mid-examination conference to ensure that the remaining stages of the examination proceed as efficiently and productively as possible.
III. Request for Conference — Specific Objectives
PPC respectfully requests that the mid-examination conference address the following four objectives, each of which is described in greater detail below.
A. Objective 1: Clarify the Scope of Remaining Issues
As a threshold matter, PPC requests that the examination team identify which transfer pricing issues remain under active consideration and which, if any, issues the examination team has resolved or no longer intends to pursue. Nearly twelve months into the examination, PPC believes it would be beneficial for both parties to have a clear and mutual understanding of the issues that are the focus of the examination team's remaining work.
Specifically, PPC seeks clarity as to whether the examination continues to focus on some or all of the following transfer pricing issues:
(i) The CSA cost-sharing ratio, under which PBI's share of qualified R&D costs ranged from 38.2% in 2017 to 42.7% in 2020, and whether the examination team is considering an adjustment to these ratios;
(ii) The legacy IP royalty rate of 4.5% of net sales charged to PBI for exploitation of pre-CSA intellectual property in non-Americas territories, and whether the examination team believes this rate to be outside an arm's-length range;
(iii) The PCT valuation of $312 million, including whether the examination team or the IRS economist has developed an alternative valuation or has identified specific issues with the methodology, assumptions, or inputs used in PPC's valuation analysis; and
(iv) PBI's economic substance and its performance of Development, Enhancement, Maintenance, Protection, and Exploitation ("DEMPE") functions with respect to the intangible property exploited outside the Americas, including whether the examination team is considering an assertion that PBI lacks sufficient substance to be respected as the beneficial owner of the non-Americas intangible property rights under the CSA.
PPC believes that the extensive documentation produced to date compellingly demonstrates PBI's substantive operations and its performance of meaningful DEMPE functions. As reflected in the IDR responses summarized above, PBI employs 185 full-time employees across a range of commercial, regulatory, medical affairs, supply chain, and administrative functions. PBI exercises independent pricing and commercial decision-making authority across 68 country markets in the non-Americas territories. PBI has incurred cumulative regulatory expenditures of approximately €47.2 million during the examination period in connection with marketing authorization applications, clinical trial support, and post-marketing obligations in its territories. PBI's 42 board meetings during the examination period were held in Dublin and documented substantive governance and strategic decision-making. PPC submits that these facts, taken together, establish that PBI is far more than a nominal participant in the CSA and that its economic substance is well-supported by the contemporaneous record.
Clarification of the scope of remaining issues will enable PPC to focus its resources on the matters that are genuinely in dispute and to provide any additional information or analysis that the examination team may require to reach its conclusions.
B. Objective 2: Narrow Outstanding IDRs and Avoid Duplicative Requests
A second objective of the requested conference is to ensure that any remaining IDRs are appropriately scoped, sequenced, and coordinated to avoid unnecessary duplication of effort by both parties. PPC has been fully responsive to every IDR issued by the examination team to date, and the Company intends to continue its cooperative approach. However, as the examination matures, PPC believes it is important for the parties to engage in a constructive dialogue regarding the remaining information needs of the examination team.
PPC notes, by way of illustration, its prior objection to IDR No. 26, which was communicated to the examination team by letter dated February 15, 2023. Without revisiting the details of that objection in this letter, PPC raised concerns that certain aspects of IDR No. 26 were overly broad, sought information that had already been provided in prior IDR responses, and imposed burdensome production requirements that were not clearly related to the transfer pricing issues under examination. PPC believes that the issues raised in connection with IDR No. 26 underscore the value of a mid-examination conference at which the parties can discuss remaining information needs in an open and constructive forum, prioritize the most relevant areas of inquiry, and agree upon a reasonable sequence and timeline for any additional IDR responses.
PPC offers to work collaboratively with the examination team to identify and prioritize any remaining IDRs and to propose efficient methods for the production of additional information where warranted. PPC is confident that a conference focused on these issues will result in a more productive and efficient examination process going forward.
C. Objective 3: Establish a Realistic Timeline
PPC further requests that the mid-examination conference include a discussion of a projected timeline for the completion of the examination. The examination has now been open for nearly twelve months, and PPC has devoted — and continues to devote — substantial internal and external resources to the examination defense. While PPC does not suggest that the examination should be rushed or that the examination team should be subject to arbitrary deadlines, the Company believes that all parties would benefit from a mutual understanding of the anticipated remaining steps and a realistic schedule for their completion.
Specifically, PPC would welcome a discussion of the following:
(i) The anticipated number and scope of any remaining IDRs that the examination team intends to issue;
(ii) Any meetings, interviews, or discussions that the examination team anticipates with the IRS economist, Dr. Alan Washburne of the IRS Transfer Pricing Practice, or with IRS Office of Chief Counsel Attorney-Advisor Franklin Rosario, and the expected timing of any such meetings;
(iii) The expected date by which the examination team will have completed its factual development and economic analysis of the issues under examination; and
(iv) If applicable, the expected date for issuance of any proposed adjustments, including any Notice of Proposed Adjustment ("NOPA") that the examination team may contemplate.
PPC recognizes that the scope of this examination — spanning four tax years and involving significant and complex intercompany transactions — necessarily requires a substantial investment of time and effort by all parties. At the same time, PPC has a legitimate interest in understanding the expected timeline for the examination's conclusion so that it may plan its resources accordingly and address any statute of limitations considerations in a timely and orderly manner.
D. Objective 4: Present PPC's Affirmative Positions
Finally, PPC would welcome the opportunity at the mid-examination conference to present a summary of its affirmative transfer pricing positions. PPC believes that an early and substantive dialogue regarding the Company's positions will assist the examination team in its analysis and may facilitate the narrowing or resolution of issues without the need for formal proposed adjustments.
PPC's affirmative positions are supported by the contemporaneous transfer pricing documentation prepared by Crestfield & Associates LLP and by the independent economic analyses prepared by Whitmore Valuation Group LLC, under the direction of Dr. Helena Vasquez, Managing Director, and Dr. Rohan Chakrabarti, Senior Director. In summary, PPC would propose to address the following at the conference:
(i) CUT Analysis — Legacy IP Royalty Rate. PPC's CUT analysis in support of the 4.5% royalty rate is based on a set of 14 comparable uncontrolled pharmaceutical license agreements, identified through a rigorous and well-documented search process. The interquartile range of royalty rates observed in these comparable agreements is 3.1% to 6.8% of net sales, with a median of 4.4%. PPC's 4.5% royalty rate falls squarely within the interquartile range and is virtually identical to the median of the comparable set, providing strong support for the arm's-length character of the royalty.
(ii) CPM / TNMM Analysis — PBI's Operating Margins. PPC has performed a comparable profits method ("CPM") / transactional net margin method ("TNMM") analysis testing PBI's operating margins against those of 22 comparable distributors and IP-holding companies identified through a systematic benchmarking study. The results of this analysis demonstrate that PBI's operating margins during the examination period are consistent with those of comparable uncontrolled enterprises performing similar functions, assuming similar risks, and employing similar assets.
(iii) Income Method / DCF Analysis — PCT Valuation. PPC's valuation of the $312 million PCT payment is supported by an income method / Discounted cash flow ("DCF") analysis, applying a weighted average cost of capital ("WACC") of 9.8%. This analysis yields an arm's-length range for the PCT payment of $278 million to $361 million. The actual PCT payment of $312 million falls within this range, confirming the arm's-length character of the payment. PPC is prepared to present the key assumptions, inputs, and sensitivity analyses underlying this valuation at the conference.
PPC emphasizes that its contemporaneous transfer pricing documentation for all four tax years under examination was prepared by Crestfield & Associates LLP in accordance with the requirements of IRC § 6662(e) and the related Treasury Regulations, and satisfies the standards for penalty protection under IRC § 6662(e)(3)(B). The documentation reflects best method analyses for each controlled transaction, economic analyses supporting PPC's pricing, and detailed functional analyses of PPC, PBI, and the other relevant entities.
PPC notes that the Company was not a participant in the IRS Compliance Assurance Process ("CAP") for any of the tax years under examination. Accordingly, a mid-examination conference of the type requested in this letter is the appropriate and primary forum for substantive dialogue between the taxpayer and the examination team regarding the issues under examination. PPC believes that an early presentation of its affirmative positions, supported by the analyses described above, will enable the examination team to evaluate the Company's transfer pricing methodology in a comprehensive manner and may facilitate the efficient resolution of all or some of the issues under review.
IV. Proposed Conference Logistics
PPC proposes that the mid-examination conference take place at a mutually convenient date in late May or early June 2023. We recognize that scheduling may be subject to the availability of multiple participants and are prepared to be flexible in accommodating the examination team's preferences.
PPC proposes the following attendees on behalf of the taxpayer:
• Leonard Cross, Partner, Tax Department, Calderwood & Harkness LLP (Responsible Partner and lead representative)
• Garrett Simmons, Associate, Tax Department, Calderwood & Harkness LLP (lead associate for examination defense)
• Marcus Whitfield, Vice President, Global Tax, Penterra Pharmaceuticals Corp. (PPC's senior internal tax officer)
PPC suggests that the examination team be represented by, at minimum, Lead Revenue Agent Patricia Dunleavy, in addition to such other members of the examination team as Supervisory Revenue Agent Meskill deems appropriate. PPC further requests that, to the extent the IRS economist, Dr. Alan Washburne, or the IRS Office of Chief Counsel Attorney-Advisor Franklin Rosario, will be attending the conference or providing input on the issues to be discussed, they participate in or be available for the conference, so that the discussion may be as productive and comprehensive as possible.
PPC is prepared to conduct the conference in person at the IRS's offices or by videoconference, at the examination team's preference. If an in-person meeting is preferred, we would welcome the opportunity to meet at the examination team's location or at such other location as may be mutually convenient.
V. Statute of Limitations Acknowledgment
PPC acknowledges that it has cooperated with the examination team's requests to extend the statute of limitations on assessment as needed to facilitate the orderly conduct of the examination. Specifically, PPC has executed Form 872, Consent to Extend the Time to Assess Tax, with respect to tax years 2017 and 2018, extending the applicable assessment periods to dates agreed upon with the examination team.
PPC remains willing to discuss reasonable further extensions of the statute of limitations if such extensions are necessary to allow for the orderly completion of the examination. At the same time, PPC expressly reserves all of its rights with respect to any future requests for statute extensions, including the right to decline such requests or to condition its consent on appropriate terms, consistent with applicable law and IRS procedures.
VI. Conclusion
PPC reiterates its commitment to a cooperative and efficient examination process. The Company has devoted substantial resources to the examination over the past eleven months and intends to continue its approach of full and timely cooperation with the examination team.
PPC respectfully submits that a mid-examination conference at this stage of the examination will benefit all parties. Such a conference will focus the resources of both the examination team and the taxpayer on genuinely disputed issues, reduce the risk of duplicative or unnecessary IDRs, establish a clear and realistic timeline for the examination's conclusion, and provide an opportunity for PPC to present its affirmative transfer pricing positions in a substantive and constructive forum. PPC believes that this approach is consistent with the IRS's own guidance regarding the conduct of examinations and the use of mid-examination conferences to promote efficient administration.
We respectfully request that Supervisory Revenue Agent Meskill or Lead Revenue Agent Dunleavy contact the undersigned at Calderwood & Harkness LLP's Philadelphia office to arrange the conference at a mutually convenient date. I may be reached directly at the contact information below.
Leonard Cross Direct Dial: (215) 564-8217 Direct Facsimile: (215) 564-8318
Email: lcross@calderwoodharkness.com
Thank you for your attention to this request. We look forward to your prompt response.
Respectfully submitted,
CALDERWOOD & HARKNESS LLP
By: ________
Leonard Cross Partner, Tax Department Calderwood & Harkness LLP 1735 Market Street, Suite 3100 Philadelphia, Pennsylvania 19103 Admitted in New York, New Jersey, and the District of Columbia
cc: Marcus Whitfield, Vice President, Global Tax, Penterra Pharmaceuticals Corp.
cc: Deborah Staines, General Counsel, Penterra Pharmaceuticals Corp.
cc: Revenue Agent Patricia Dunleavy, Internal Revenue Service, Large Business & International Division
cc: Sylvia Hartwell, Partner, Calderwood & Harkness LLP
cc: Garrett Simmons, Associate, Calderwood & Harkness LLP

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