Dear Ciarán,
Happy New Year. I hope the holidays treated you well. I am writing to raise a set of competent authority and Mutual Agreement Procedure ("MAP") considerations that Leonard Cross has asked me to coordinate with you on as part of our comprehensive Appeals and post-settlement planning for Penterra Pharmaceuticals Corp. ("PPC") (C&H Matter No. 1018-00009; EIN 22-3741856).
**Current Procedural Posture**
As you know, PPC filed its Formal Protest with IRS Appeals on December 22, 2023, contesting the Service's proposed IRC § 482 transfer pricing adjustments totaling $380.4 million on a net basis ($235.01 million related to the cost-sharing arrangement and $188.04 million related to the legacy IP royalty rate between PPC and Penterra Biopharma Ireland Ltd. ("PBI"), less a $42.65 million correlative offset) across tax years 2017–2020. The case has been assigned to Appeals Officer Noreen Castañeda, and we have requested conference dates in late February 2024 — we are targeting February 28, 2024.
Leonard has asked me to begin coordinating with Thornbury & Keogh on the competent authority / MAP dimension in parallel with our Appeals preparation. This email is intended to frame the key issues for your consideration, with a view toward scheduling a call in the coming weeks to discuss in detail.
**Double Taxation Risk and MAP Framework**
Our principal concern is straightforward: if the IRS ultimately sustains any portion of the proposed § 482 adjustment — whether through an Appeals settlement or otherwise — there is a meaningful risk of double taxation. A U.S. adjustment would increase PPC's U.S.-source income, while the corresponding income would already have been taxed in Ireland at PBI's level at the 12.5% Irish trading rate (or at 6.25% under Ireland's Knowledge Development box regime for qualifying IP income from FY 2016 forward). As you are well aware, PBI reported revenue of approximately €2.14 billion and pre-tax income of approximately €1.06 billion for FY 2020 alone, so the amounts in play on the Irish side are substantial.
The U.S.-Ireland Income Tax Treaty provides a MAP mechanism under which the competent authorities of both countries may resolve cases of taxation not in accordance with the treaty, including double taxation arising from transfer pricing adjustments. On the U.S. side, MAP requests are governed by Rev. Proc. 2015-41, and the IRS Competent Authority sits within the IRS Treaty and Transfer Pricing Operations division.
**Questions and Discussion Points**
I would appreciate your views on the following points:
1. **Irish Revenue's Likely Posture.** How would you expect the Irish Revenue Commissioners to view a U.S. § 482 adjustment to PPC's income that effectively reduces PBI's taxable profits in Ireland? Specifically, would Irish Revenue likely be receptive to granting a correlative adjustment to PBI (Irish Tax Reference 3218764T), or would they be inclined to resist? Given that the IRS's proposed adjustments challenge both the CSA cost-sharing percentages (CSA effective July 1, 2012; PCT payment of $312 million) and the royalty rate applicable to pre-CSA legacy IP (PPC's historical rate of 4.5% versus the IRS's proposed rate of 11.0%), I would welcome your assessment of how Irish Revenue would evaluate each component.
2. **Timing of MAP Request.** We are considering whether a MAP request should be filed proactively now — before the Appeals conference — or whether it is strategically preferable to wait until the Appeals resolution is finalized. As a general matter, MAP requests can be filed at any time after a proposed adjustment, but filing before settlement could complicate Appeals negotiations and potentially limit our flexibility. Leonard's current preference is to defer the formal MAP filing until after Appeals but to prepare the groundwork now, including coordinating with your team on the Irish-side requirements. Do you agree with that approach, or do you see reasons on the Irish side to move earlier?
3. **Impact on PBI's Knowledge Development box Claims.** If a settlement results in a reallocation of income from PBI to PPC, I would like your assessment of whether and how this would affect PBI's qualifying income calculations under Ireland's KDB regime (6.25% effective rate on qualifying IP income). Specifically, would a reduction in PBI's income base affect the KDB benefit calculations for FY 2017–2020, and if so, how would that interact with any correlative adjustment request?
4. **Irish Revenue Advance Coordination.** Do you believe it would be advisable to have a preliminary, informal discussion with Irish Revenue about the IRS examination and the possibility of a future MAP request? Or, in your judgment, would such an approach risk inviting unwanted scrutiny of PBI's Irish tax filings and transfer pricing positions at this stage?
5. **Documentary Requirements.** I would ask that you begin assembling Irish-side documentation that would be needed in connection with a MAP request, including PBI's Irish tax returns for TY 2017–2020, any Irish Revenue correspondence, and PBI's transfer pricing documentation filed in Ireland. As you will recall, we coordinated on PBI substance documentation in November 2022 and on PBI's KDB claims and Irish Revenue filings in connection with our response to IRS IDR No. 30 (dated April 10, 2023), so much of the relevant documentation should already be organized in your files.
**Settlement Scenario Analysis**
To put the MAP analysis in practical context: our internal settlement authority memo (prepared by Leonard, dated December 10, 2023) contemplates a target settlement range of 10–15% of the proposed $380.4 million adjustment, with a hard ceiling of 20%. At our target range, the adjustment would be roughly $38 million to $57 million. Even at this reduced level, double taxation relief through the competent authority process would be valuable to PPC.
By way of illustration, if a settlement results in an adjustment of approximately $47.6 million (roughly 12.5% of $380.4 million), the Irish tax impact at the 12.5% trading rate would be approximately €5.95 million — or potentially less to the extent the KDB rate applies to a portion of the reallocated income. PBI would want a corresponding correlative adjustment from Irish Revenue to avoid paying Irish tax on income that is now being taxed in the United States.
I would welcome your estimate of the likely Irish tax exposure across a range of settlement scenarios so we can present a complete picture to PPC.
**Practical Coordination**
I would like to schedule a call in the coming weeks to discuss these points in detail. Would the week of January 15 work for you? I am mindful of the five-hour time difference and am happy to accommodate a morning call Dublin time (i.e., early morning here on the East Coast).
A few additional notes:
- All MAP-related analysis and communications are protected under the attorney-client privilege. I ask that you continue to treat all such communications as confidential and privileged under the existing engagement protocols between C&H and T&K.
- I am also coordinating separately with you on the broader question of the potential Irish tax consequences of any settlement — the MAP question is one component of that larger analysis, and I expect to be in touch on the other components shortly.
- Leonard prepared a competent authority analysis memo in December 2023 that provides additional detail on the U.S.-side procedural and substantive framework. I can share it with you on a privileged basis once Leonard approves distribution; I will follow up on that.
There are no attachments to this email — I wanted to frame the issues first and then move to document exchange once we have had an initial discussion.
**Closing**
Ciarán, thank you for Thornbury & Keogh's ongoing and consistently excellent coordination throughout the examination. PPC appreciates the efficient support your team has provided — we are mindful that T&K's fees to date are approximately €312,500, and PPC values the work product and responsiveness that investment reflects.
Please let me know your availability for a call during the week of January 15, and do not hesitate to reach out in the meantime if you have any initial reactions to the points raised above.
I am copying Leonard Cross and Garrett Simmons for their awareness.
Best regards,
Leila Nazari Associate, Tax Department Calderwood & Harkness LLP 1735 Market Street, Suite 3100 Philadelphia, PA 19103 Tel: (215) 864-7233 Email: lnazari@calderwoodharkness.com