1018-00009 · Client 1018 · Examination Proceedings

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PRIVILEGED & CONFIDENTIAL — ATTORNEY WORK PRODUCT

CALDERWOOD & HARKNESS LLP Conference Notes

Subject: IRS Opening Conference — Examination of Penterra Pharmaceuticals Corp. (EIN: 22-3741856)

Tax Years at Issue: 2017, 2018, 2019, 2020

IRS Exam Team ID: LB&I-NE-TP-2022-00641

C&H Matter Number: 1018-00009

Date of Conference: June 28, 2022

Time: 10:00 a.m. – 12:15 p.m. (EDT)

Location: IRS Large Business & International Division, Northeast Office (conference conducted via Northgate Data Systems video)

Notes Prepared By: Garrett Simmons, Lead Associate, Calderwood & Harkness LLP

Reviewed By: Leonard Cross, Responsible Partner, Calderwood & Harkness LLP

These notes are prepared for the purpose of facilitating legal representation of Penterra Pharmaceuticals Corp. by Calderwood & Harkness LLP in connection with the above-referenced IRS examination. These notes reflect the mental impressions, conclusions, opinions, and legal theories of counsel and are protected by the attorney-client privilege and the attorney work-product doctrine. These notes should not be disclosed to any person outside the privileged distribution list without the express written consent of Leonard Cross, Responsible Partner, Calderwood & Harkness LLP.

I. ATTENDEES

A. IRS Participants

1. Gerald Meskill — Supervisory Revenue Agent / Team Manager, Large Business & International Division, Northeast Transfer Pricing Practice. Meskill served as the senior IRS representative at the opening conference and led the discussion on behalf of the IRS examination team. Meskill will function as the Team Manager for the duration of the examination.

2. Patricia Dunleavy — Lead Revenue Agent, Large Business & International Division. Dunleavy will serve as the primary point of contact for day-to-day examination activities, including the issuance and management of Information Document Requests (IDRs) and the scheduling of follow-up conferences.

Not Present: Dr. Alan Washburne, IRS Economist, was not present at the opening conference. Meskill indicated that Dr. Washburne had not yet been formally assigned to the examination and would join the examination team at a later stage, likely following the initial IDR response phase. Additionally, IRS Office of Chief Counsel attorneys Franklin Rosario and Donna Hirabayashi were not present at this stage of the examination. Meskill stated that Chief Counsel would be consulted as needed as the examination progresses.

B. Taxpayer / Counsel Participants

1. Leonard Cross — Responsible Partner, Tax Department, Calderwood & Harkness LLP, Philadelphia office, 1735 Market Street, Suite 3100, Philadelphia, PA 19103. Cross led the discussion on behalf of the taxpayer and counsel.

2. Garrett Simmons — Lead Associate, Tax Department, Calderwood & Harkness LLP, Philadelphia office. Simmons attended in the role of lead working associate and prepared these notes.

3. Marcus Whitfield — Vice President, Global Tax, Penterra Pharmaceuticals Corp. ("PPC"), 2200 Independence Boulevard, Princeton Junction, NJ 08550. Whitfield attended as PPC's designated business representative for the examination.

C. Not Present but Noted as Involved in the Engagement

The following individuals were not present at the opening conference but have been identified as participants in the engagement and will be involved in various capacities as the examination proceeds:

• Sylvia Hartwell — Billing Partner, Calderwood & Harkness LLP. Hartwell will be involved in client management and billing oversight for the engagement. Hartwell is listed on the Form 2848 as an authorized representative.

• Leila Nazari — Working Associate, Calderwood & Harkness LLP. Nazari will handle research, document production coordination, and coordination with PPC's Irish advisors regarding PBI and PMI matters. Nazari is listed on the Form 2848 as an authorized representative.

• Deborah Staines — General Counsel, Penterra Pharmaceuticals Corp. Staines is copied on all correspondence related to the examination but did not attend the opening conference.

II. PRELIMINARY MATTERS

A. Representation Confirmation

Cross opened the conference by confirming Calderwood & Harkness LLP's representation of Penterra Pharmaceuticals Corp. in connection with the IRS examination for Tax Years 2017 through 2020. Cross stated that the firm's representation was pursuant to IRS Form 2848 (Power of Attorney and Declaration of Representative), which was filed with the IRS on June 8, 2022. The Form 2848 identifies the following individuals as authorized representatives for PPC with respect to Tax Years 2017, 2018, 2019, and 2020:

• Leonard Cross, Esq.

• Sylvia Hartwell, Esq.

• Garrett Simmons, Esq.

• Leila Nazari, Esq.

Meskill acknowledged receipt of the Form 2848 and confirmed that it was on file with the IRS examination team. Meskill stated that the IRS would direct all examination-related communications to Calderwood & Harkness LLP in accordance with the power of attorney designation.

Cross requested that all future correspondence, including IDRs, letters, notices, and any other communications related to the examination, be directed to him at Calderwood & Harkness LLP, 1735 Market Street, Suite 3100, Philadelphia, PA 19103, with copies sent to Marcus Whitfield at Penterra Pharmaceuticals Corp., 2200 Independence Boulevard, Princeton Junction, NJ 08550. Meskill confirmed this arrangement.

B. Engagement Background

Cross provided a brief overview of the engagement background for the record. Calderwood & Harkness LLP was formally engaged by Penterra Pharmaceuticals Corp. pursuant to an engagement letter executed on June 2, 2022. The IRS examination was opened on May 16, 2022, upon the issuance of an initial contact Letter 2205-A, which was received by PPC at its Princeton Junction headquarters.

For background purposes, the following was noted regarding PPC's corporate profile:

• Penterra Pharmaceuticals Corp. is a Delaware corporation, publicly traded on the Nasdaq Stock Market under the ticker symbol PPCA.

• PPC is headquartered at 2200 Independence Boulevard, Princeton Junction, NJ 08550.

• PPC's fiscal year-end is December 31.

• PPC was not enrolled in the Compliance Assurance Process (CAP) for any of the tax years at issue.

The federal income tax returns at issue are Forms 1120 (U.S. Corporation Income Tax Return) for Tax Years 2017, 2018, 2019, and 2020. All four returns were prepared by Crestfield & Associates LLP, PPC's independent accounting firm. The engagement partner at Crestfield & Associates responsible for the PPC engagement is Martin Ogilvy. The transfer pricing partner at Crestfield & Associates who oversaw the preparation of PPC's contemporaneous transfer pricing documentation is Susan Lam.

III. EXAMINATION SCOPE — AS DESCRIBED BY IRS

A. Overview of Examination Focus

Meskill opened the substantive portion of the conference by providing an overview of the examination's scope and focus areas. Meskill stated that the examination is being conducted by the LB&I Northeast Transfer Pricing Practice, reflecting the transfer pricing-centric nature of the issues identified by the IRS for examination.

Meskill stated that the primary focus of the examination is the transfer pricing methodology used in connection with intercompany transactions between Penterra Pharmaceuticals Corp. (the U.S. parent) and its Irish subsidiary, Penterra Biopharma International DAC ("PBI"). Meskill identified three principal areas of focus, which he described in turn. These three areas are set forth below, together with associated details discussed during the conference.

B. Area 1: Cost-Sharing Arrangement (CSA)

Meskill stated that the IRS intends to examine the qualified cost-sharing arrangement entered into between PPC and PBI. The CSA became effective on July 1, 2012, and has governed the allocation of intangible development costs between the two controlled participants since that date.

Meskill identified the following specific areas of focus within the CSA examination:

(i) Platform Contribution Transaction (PCT) Payment. The IRS will examine the platform contribution transaction payment of $312 million made by PBI to PPC on July 1, 2012, in connection with the inception of the CSA. The IRS intends to determine whether this PCT payment adequately compensated PPC for the pre-existing intangible property that PPC made available as platform contributions to the CSA. Meskill noted that the pre-existing IP consisted primarily of clinical-stage and approved oncology compounds, which represented significant value at the time of the CSA's inception. The IRS will review the PCT valuation report and supporting methodology to assess whether the payment was consistent with arm's-length principles under Treasury Regulations § 1.482-7(g).

(ii) Ongoing Cost-Sharing Ratios. The IRS will examine the cost-sharing ratios used to allocate research and development costs between PPC and PBI for each of the four tax years under examination (TY 2017–2020). Meskill indicated that the IRS would assess whether the cost-sharing percentages attributed to each participant are consistent with the participants' respective shares of reasonably anticipated benefits from the intangible property developed under the CSA.

(iii) Methodology for Calculating Reasonably Anticipated Benefits. The IRS will evaluate the methodology employed by PPC and PBI to calculate each participant's share of "reasonably anticipated benefits" under Treasury Regulations § 1.482-7(e). The IRS will assess the projections, assumptions, and economic models underlying the benefit allocation.

(iv) Composition and Accuracy of the Qualified R&D Cost Pool. The IRS will review the composition of the qualified research and development cost pool, including the determination of which costs were included in or excluded from the pool, and the accuracy of the cost pool amounts for each tax year.

Meskill noted that the IRS would request detailed information regarding PBI's cost-sharing percentages across the examination years. Cross noted the following internally for reference purposes (not disclosed to the IRS during the conference):

The progressive increase in PBI's cost-sharing percentage over the period reflects PBI's growing share of reasonably anticipated benefits as non-Americas revenue growth outpaced Americas revenue growth during the 2017–2020 period.

C. Area 2: Legacy IP Royalty Rate

Meskill stated that the IRS also intends to examine the intercompany royalty rate applied to legacy pharmaceutical compounds — that is, compounds with intellectual property that predates the July 1, 2012 CSA effective date and is therefore not covered by the cost-sharing arrangement. These legacy compounds are licensed by PPC to PBI under a separate intercompany license agreement.

Dunleavy stated that the intercompany royalty rate applicable to these legacy compounds is 4.5% of net sales for non-Americas territories. The IRS will examine this royalty rate under the comparable uncontrolled transaction (CUT) method to determine whether it is consistent with arm's-length pricing. Dunleavy indicated that the IRS would seek to identify comparable third-party pharmaceutical licensing agreements involving similar therapeutic compounds, stage of development, and territorial scope in order to assess the appropriateness of the 4.5% royalty rate.

Meskill stated that the IRS would request the non-Americas net sales figures for legacy compounds for each tax year under examination. Cross noted the following internally for reference purposes (not disclosed to the IRS during the conference):

The declining trend in legacy compound net sales reflects patent expirations and generic competition in certain non-Americas markets during the examination period.

D. Area 3: Economic Substance of PBI

Dunleavy indicated that the IRS further intends to evaluate whether PBI possesses sufficient economic substance to justify its role as the intellectual property owner for non-Americas territories and as a participant in the cost-sharing arrangement with PPC. This line of inquiry addresses whether PBI is a genuine operational entity with real economic activity or whether it functions as a conduit or shell entity with key functions and risks residing at PPC in the United States.

Dunleavy identified the following specific areas of inquiry:

(i) Headcount, Physical Presence, and Operational Capacity. The IRS will examine PBI's employee headcount, physical office presence, and operational capabilities in Ireland, including the nature of the work performed by PBI's personnel and their qualifications.

(ii) Decision-Making Authority — DEMPE Functions. The IRS will evaluate PBI's decision-making authority with particular focus on DEMPE functions — Development, Enhancement, Maintenance, Protection, and Exploitation of intangible property. The IRS will assess whether PBI exercises genuine and substantive control over these functions or whether key decisions and oversight responsibilities remained with PPC personnel in the United States.

(iii) Location of Key Functions and Risks. Consistent with the DEMPE analysis, the IRS will assess whether key functions performed and risks assumed in connection with the intangible property and commercial exploitation activities were genuinely located at PBI in Ireland or whether they were directed and controlled from the United States.

(iv) Governance Structure and Board Activities. The IRS will examine PBI's governance structure, including the composition and activities of PBI's board of directors, the frequency of board meetings, and the substance of board decision-making as reflected in board minutes and related records.

Cross noted the following internally for reference purposes regarding PBI's economic substance profile (not disclosed to the IRS during the conference, but to be documented and presented in connection with IDR responses at the appropriate stage):

• PBI had 185 employees as of December 31, 2020, an increase from 52 employees at the time of incorporation in 2012.

• PBI maintains approximately 18,000 square feet of office space at Sandyford Business Park in Dublin, Ireland.

• PBI's board of directors held 42 board meetings during the 2017–2020 examination period.

• PBI incurred cumulative regulatory expenditures of approximately €47.2 million during the examination period.

• PBI exercised independent pricing decisions across 68 country markets in which PBI's products are sold or distributed.

E. Other Entities of Interest

Meskill indicated that the IRS may also request information regarding the following related entities in PPC's corporate structure:

(i) Penterra Holdings Luxembourg S.à r.l. ("PHL"). PHL is the intermediate holding entity in PPC's international structure. PHL is 100% owned by PPC and is the 100% owner of PBI. PHL is organized under Luxembourg law (RCS Number: B 168452). For U.S. federal income tax purposes, PHL is treated as a disregarded entity. The IRS may seek information regarding PHL's formation, capitalization, and role in the corporate structure, including whether PHL performed any substantive functions or merely served as a holding vehicle.

(ii) Penterra Manufacturing Ireland Ltd. ("PMI"). PMI is the contract manufacturer of biologics for non-Americas markets. PMI operates under a cost-plus arrangement with PBI, under which PMI is compensated at cost plus an 8% markup. PMI employs approximately 620 employees and operates from a manufacturing facility located at Unit 7, Ringaskiddy Industrial Estate, Co. Cork, Ireland. The IRS may examine the cost-plus markup to determine whether it is consistent with arm's-length pricing for contract manufacturing services.

Meskill further stated that the examination would encompass PPC's Forms 5471 (Information Return of U.S. Persons with Respect to Certain Foreign Corporations) filed with respect to PBI and PHL for all four tax years under examination (TY 2017, 2018, 2019, and 2020). The IRS will review the Forms 5471 for accuracy and completeness, including the schedules reporting intercompany transactions, earnings and profits, and previously taxed income.

F. Penalty Considerations

Dunleavy stated that the IRS would evaluate whether any transfer pricing adjustments that may be proposed during the course of the examination are subject to the substantial valuation misstatement penalty under Internal Revenue Code § 6662(e). Dunleavy noted that the penalty provisions applicable to transfer pricing adjustments are an integral part of the IRS's examination process, and the IRS would assess penalty applicability in connection with any proposed adjustments.

In response, Cross stated that PPC maintained contemporaneous transfer pricing documentation for all four tax years under examination, prepared in accordance with the penalty-protection standards set forth in IRC § 6662(e)(3)(B) and the corresponding Treasury Regulations. Cross stated that the contemporaneous documentation was prepared by Crestfield & Associates LLP as part of its ongoing engagement with PPC. Cross further stated that PPC would provide this documentation to the IRS in response to an appropriate IDR, as the documentation would demonstrate PPC's good-faith effort to establish arm's-length pricing and would support PPC's position that penalty protection applies.

Meskill acknowledged Cross's statement and indicated that the IRS would review the contemporaneous documentation in due course to assess its adequacy for penalty-protection purposes.

IV. ANTICIPATED IDR SCHEDULE AND PROCESS

A. IDR Issuance Plan

Dunleavy outlined the anticipated IDR (Information Document Request) process for the examination. Dunleavy stated that the first tranche of IDRs would be issued in early July 2022, consisting of approximately eight to ten individual IDRs covering the foundational categories of documents and data needed for the examination. Additional IDRs would follow on a rolling basis as the examination progresses and as the IRS identifies additional informational needs.

Dunleavy estimated that the IDR process could extend through mid-to-late 2023, depending on the pace of production and the complexity of the issues involved. The standard response period for each IDR would be 30 days from the date of issuance, with extensions available upon reasonable request. Cross acknowledged the 30-day standard and stated that C&H would endeavor to meet response deadlines but would request extensions where the volume or complexity of responsive materials warranted additional time.

Dunleavy noted that IDRs would cover, at a minimum, the following categories of documents and information:

1. Corporate structure and organizational charts for PPC and its relevant subsidiaries (PBI, PHL, PMI) for each tax year under examination.

2. The cost-sharing arrangement agreement between PPC and PBI, including all amendments, supplements, and side letters executed since the CSA's effective date of July 1, 2012.

3. The legacy IP license agreement between PPC and PBI, including all amendments.

4. Contemporaneous transfer pricing documentation for Tax Years 2017, 2018, 2019, and 2020, including all appendices, exhibits, and supporting schedules.

5. The PCT valuation report prepared in connection with the inception of the CSA on July 1, 2012, together with all supporting workpapers, financial models, assumptions, and underlying data.

6. R&D cost pool composition and allocation methodology documentation, including schedules detailing the costs included in and excluded from the qualified cost pool for each tax year.

7. PBI's financial statements (both statutory and management accounts) and Irish tax returns for each tax year under examination.

8. PBI personnel and headcount data, including employee rosters, organizational charts, job descriptions, and compensation information.

9. PBI board minutes and governance documents, including board resolutions, committee charters, and records of board meetings held during the 2017–2020 period.

10. The intercompany manufacturing agreement between PBI and PMI, including all amendments, pricing schedules, and cost-plus markup calculations.

11. Product revenue data by territory for the three principal products identified by the IRS (Veritaxol, Imvara, and Cerulon) for each tax year under examination.

12. PBI office lease and physical presence documentation, including lease agreements, floor plans, and utility records for the Sandyford Business Park facility.

13. Forms 5471 and related international informational returns for PBI and PHL for all four tax years.

14. Third-party distribution agreements for non-Americas territories.

15. Banking records for PBI, including account statements and transaction records from Glenmore Bank Ireland plc.

16. Regulatory expenditure and submission records for PBI, including regulatory filings, approval records, and associated costs.

17. Comparable license agreements used by PPC in its CUT analysis supporting the 4.5% legacy IP royalty rate, including all benchmarking studies and database searches.

B. IDR Response Protocols

Cross requested that all IDRs be directed to him at Calderwood & Harkness LLP, 1735 Market Street, Suite 3100, Philadelphia, PA 19103, with copies to Marcus Whitfield at Penterra Pharmaceuticals Corp. Meskill agreed to this arrangement and stated that IDRs would be issued in writing to Cross.

Cross stated that Calderwood & Harkness LLP would coordinate all IDR responses with the following parties:

• PPC's internal tax, legal, finance, and R&D departments, through Whitfield and Staines, for document collection and fact verification.

• Crestfield & Associates LLP, through transfer pricing partner Susan Lam, for workpapers, return data, and transfer pricing documentation supporting materials.

• Thornbury & Keogh, PBI's Irish tax advisor, through lead partner Ciarán Thornbury, for Irish-specific documents concerning PBI and PMI, including Irish financial statements, Irish tax returns, and Irish regulatory filings. Thornbury & Keogh is located at 22 Fitzwilliam Square, Dublin 2, Ireland.

Cross further noted that Calderwood & Harkness LLP would prepare and maintain a privilege log for any documents withheld from production on the grounds of attorney-client privilege or the attorney work-product doctrine. Cross stated that the privilege log would be prepared in accordance with established IRS practice and would identify each withheld document by date, author, recipient, subject matter, and the specific privilege asserted. Cross reserved all rights with respect to privileged materials and stated that the inadvertent production of privileged documents would not constitute a waiver of any applicable privilege.

C. IDR Enforcement Procedures

Meskill briefly mentioned the IRS's standard IDR enforcement procedures for the record. Meskill stated that if IDR responses are not timely submitted, the IRS may escalate through its established IDR enforcement process, which includes the issuance of a delinquency notice, followed by a pre-summons letter, and ultimately the issuance of a summons if compliance is not achieved. Meskill noted that this was a standard advisement provided at all opening conferences and was not intended to suggest any expectation of non-compliance.

Cross acknowledged the IRS's enforcement procedures and committed to providing timely responses to all IDRs, with formal extension requests submitted where the circumstances warranted additional response time.

V. KEY PRODUCTS IDENTIFIED

Meskill indicated that the IRS examination team had reviewed PPC's public filings and was familiar with PPC's product portfolio. Meskill specifically identified the following three products as relevant to the examination, given their significance to PBI's non-Americas revenue streams:

1. Veritaxol — Oncology. Veritaxol is PPC's blockbuster oncology compound and the largest revenue-generating product in PPC's portfolio. Global net sales in 2020 were approximately $3.12 billion, of which non-Americas net sales accounted for approximately $1.34 billion.

2. Imvara — Immunology. Imvara is PPC's leading immunology product. Global net sales in 2020 were approximately $1.87 billion, of which non-Americas net sales accounted for approximately $0.79 billion.

3. Cerulon — Rare Disease. Cerulon is PPC's rare disease therapeutic. Global net sales in 2020 were approximately $0.62 billion, of which non-Americas net sales accounted for approximately $0.28 billion.

The IRS stated that it would request detailed territory-level revenue breakdowns for all three products for each of the four tax years under examination. This data will be relevant to the IRS's assessment of PBI's cost-sharing ratios, the legacy IP royalty base, and PBI's economic substance.

VI. STATUTE OF LIMITATIONS DISCUSSION

Cross raised the issue of the statute of limitations for Tax Year 2017. Cross noted that the general three-year statute of limitations under IRC § 6501(a) for TY 2017 had expired, but that the extended six-year statute under IRC § 6501(e) might apply depending on the IRS's theories regarding omission of gross income. Cross inquired about the IRS's position on the statute of limitations for TY 2017 and whether the IRS anticipated requesting a consent to extend the period of limitations.

Meskill acknowledged that the statute for TY 2017 was approaching and stated that the IRS would request PPC's consent to extend the statute (via Form 872, Consent to Extend the Time to Assess Tax) if the IRS determined that additional time was needed to complete the examination of that tax year. Meskill stated that the IRS preferred to resolve statute of limitations issues cooperatively rather than through the issuance of a statutory notice of deficiency prior to the completion of the examination.

Cross stated that PPC would consider any formal request for a Form 872 extension, but emphasized the importance of proceeding efficiently to avoid the accumulation of extended open years. Cross noted that PPC's preference would be to resolve the examination within the existing statutory periods to the extent practicable.

No Form 872 was executed at the opening conference, and no formal request for an extension was made at this time. Meskill indicated that the IRS would issue a formal request if and when necessary.

Later Note (added by Simmons, updated as of file review): Forms 872 were ultimately executed for Tax Year 2017 and Tax Year 2018, extending the assessment period for both years through December 31, 2024. The extensions were executed following negotiations between Cross and Meskill in the fall of 2022.

VII. IRS ECONOMIST INVOLVEMENT

Meskill confirmed that an IRS economist from the IRS Transfer Pricing Practice would be assigned to the examination to evaluate the economic analyses underlying PPC's transfer pricing positions. The economist's role would include reviewing PPC's benchmarking analyses, CUT comparables, cost-plus studies, and PCT valuation methodology. The economist would also be expected to develop independent economic analyses and comparables sets for the IRS's use in assessing the arm's-length nature of PPC's intercompany pricing.

At the time of the opening conference, the IRS economist had not yet been formally assigned to the examination. The economist was later identified as Dr. Alan Washburne. Meskill indicated that the economist would join the examination following the initial IDR response phase, with the anticipated timeline for the economist's involvement being the first or second quarter of 2023.

Cross noted for the record that Calderwood & Harkness LLP had retained Whitmore Valuation Group LLC as an independent economic consultant to support PPC's defense of its transfer pricing positions in the examination. The Whitmore engagement is structured under a Kovel arrangement to ensure that communications between the economic consultant and counsel are protected by the attorney-client privilege. The Kovel letter was executed on June 20, 2022, and is referenced as Matter 1018-00009-KV. The lead economist at Whitmore Valuation Group is Dr. Helena Vasquez. Dr. Vasquez's scope of work includes benchmarking analysis, CUT analysis for the legacy IP royalty rate, CPM/TNMM analysis for manufacturing and distribution margins, and PCT valuation support.

VIII. IRS CHIEF COUNSEL INVOLVEMENT

Meskill stated that the IRS Office of Chief Counsel, Transfer Pricing branch, would be consulted as needed during the examination, particularly on legal issues relating to the application of Treasury Regulations § 1.482-7 to the CSA, the legal standards for economic substance, and any potential penalty issues. No Chief Counsel attorney was assigned to the examination at the time of the opening conference. Chief Counsel attorneys were subsequently identified as Attorney-Advisor Franklin Rosario and Senior Counsel Donna Hirabayashi.

IX. PPC'S PRELIMINARY STATEMENTS

A. Cross's Opening Remarks

Cross provided a brief overview of PPC's transfer pricing structure and expressed confidence in the arm's-length nature of PPC's intercompany arrangements across all four tax years under examination.

Cross made the following statements on behalf of PPC:

1. Cost-Sharing Arrangement Compliance. PPC's CSA was structured and documented in compliance with Treasury Regulations § 1.482-7. The ongoing cost-sharing ratios for each tax year reflect PPC's and PBI's respective shares of reasonably anticipated benefits from the intangible property developed under the CSA. The cost-sharing percentages were calculated using a methodology consistent with the regulatory framework and were supported by contemporaneous economic analysis.

2. Legacy IP Royalty Rate. The legacy IP royalty rate of 4.5% of non-Americas net sales was established using the comparable uncontrolled transaction (CUT) method. PPC identified comparable third-party pharmaceutical licensing agreements involving similar therapeutic areas, intellectual property at a similar stage of development, and comparable territorial scope. The 4.5% royalty rate falls within the arm's-length range established by these comparable transactions.

3. PBI Economic Substance. PBI possesses substantial economic substance in Ireland. PBI maintains dedicated personnel with relevant scientific, regulatory, commercial, and managerial expertise. PBI exercises independent decision-making authority with respect to DEMPE functions and commercial strategy across its 68 country markets. PBI conducts material operational activities through its offices at Sandyford Business Park and through its contract manufacturer, PMI, at the Ringaskiddy facility. PPC is confident that the IRS's review will confirm PBI's genuine operational role and economic substance.

4. Contemporaneous Documentation. PPC maintained contemporaneous transfer pricing documentation for all four tax years under examination. The documentation was prepared in accordance with the penalty-protection standards of IRC § 6662(e)(3)(B) and will be made available to the IRS in response to an appropriate IDR.

B. Whitfield's Comments

Whitfield confirmed PPC's willingness to cooperate fully with the IRS examination and stated that PPC would make its personnel, records, and facilities available to the examination team as reasonably required. Whitfield identified himself as the primary business contact at PPC for all tax matters arising in connection with the examination and stated that all requests for PPC's internal cooperation should be directed through him, in coordination with Calderwood & Harkness LLP.

Whitfield noted that PPC's independent auditor, Crestfield & Associates LLP, originally prepared the contemporaneous transfer pricing documentation for all four tax years and would provide supporting workpapers and data in connection with the examination. Whitfield stated that the engagement partner at Crestfield & Associates, Martin Ogilvy, and the transfer pricing partner, Susan Lam, were aware of the examination and prepared to assist with document production.

Whitfield further mentioned that PBI's Irish tax advisor, Thornbury & Keogh, under the direction of lead partner Ciarán Thornbury, would assist in producing Irish-specific documentation pertaining to PBI and PMI. Thornbury & Keogh is based at 22 Fitzwilliam Square, Dublin 2, Ireland, and has been PBI's Irish tax advisor since PBI's incorporation in 2012.

X. NEXT STEPS AND ACTION ITEMS

The following action items were identified during the opening conference:

1. C&H to confirm in writing. Cross to send written confirmation of attendance at the opening conference and a summary of the points discussed, addressed to Meskill. Cross noted that a letter dated June 22, 2022, was already in preparation prior to the conference and would be finalized and sent promptly following the conference.

2. IRS to issue first tranche of IDRs. Dunleavy to issue the initial tranche of IDRs (approximately eight to ten) in early July 2022. Dunleavy indicated the target mailing date would be approximately July 8 or July 15, 2022.

3. C&H to begin document collection. Simmons to coordinate with PPC's internal teams, Crestfield & Associates (Susan Lam), and Thornbury & Keogh (Ciarán Thornbury) to begin assembling responsive documents in anticipation of the initial IDRs. Document collection efforts should prioritize the foundational categories identified by Dunleavy during the conference.

4. Privilege protocol implementation. Cross to ensure that the document preservation notice issued by PPC on June 6, 2022, remains in effect and is being followed across all relevant departments. Cross to ensure that privilege protocols are strictly followed in all document collection, review, and production activities. Simmons and Nazari to implement a privilege review process for all documents identified for potential production.

5. Whitmore engagement coordination. Cross to brief Dr. Helena Vasquez at Whitmore Valuation Group LLC on the IRS's stated focus areas as described during the opening conference and to begin scoping the economic analysis work that will be required to support PPC's transfer pricing positions. The initial briefing should address the CSA cost-sharing ratios, the PCT valuation, the legacy IP royalty rate CUT analysis, and PBI's functional profile.

6. Statute extension monitoring. Simmons to establish a tracking system for the statute of limitations dates for all four tax years under examination and to flag any IRS requests for Form 872 extensions promptly upon receipt. The tracking system should include advance notice triggers to ensure adequate time for internal deliberation regarding any requested extensions.

7. Follow-up conference. No specific follow-up conference date was set during the opening conference. Meskill indicated that the IRS would reach out to Calderwood & Harkness LLP after the first round of IDR responses to schedule a status call. Cross stated that C&H would be available at the IRS's convenience for a follow-up conference.

XI. INTERNAL OBSERVATIONS AND STRATEGIC NOTES

PRIVILEGED AND CONFIDENTIAL — ATTORNEY WORK PRODUCT FOR INTERNAL C&H USE ONLY — DO NOT PRODUCE

The following observations and strategic notes reflect the mental impressions, conclusions, opinions, and legal theories of Calderwood & Harkness attorneys. These notes are protected by the attorney work-product doctrine and the attorney-client privilege. Under no circumstances should these notes be disclosed to the IRS or any third party.

A. Cross's Observations

1. LB&I Campaign Alignment. The IRS's stated focus on economic substance and DEMPE functions is consistent with recent LB&I campaign priorities targeting pharmaceutical companies with IP structures involving Irish or other low-tax-jurisdiction subsidiaries. This examination appears to follow the pattern of other LB&I pharmaceutical examinations in the Northeast region. The IRS's approach suggests a coordinated effort to challenge common pharmaceutical transfer pricing structures, and we should anticipate the IRS applying analytical frameworks developed in other examinations in this campaign.

2. PCT Recharacterization Risk. The IRS's mention of the PCT valuation — notwithstanding that the PCT was effected on July 1, 2012, which is outside the examination years — is notable and suggests that the IRS may attempt to recharacterize the ongoing cost-sharing ratios and the legacy IP royalty rates for TY 2017–2020 based on an alleged undervaluation of the PCT payment. The theory would likely be that PPC received insufficient compensation for pre-existing IP at the CSA inception, and therefore the cost-sharing ratios and royalty rates for subsequent years are tainted or should be adjusted. C&H should anticipate this line of attack and prepare defensive arguments regarding the adequacy of the PCT payment, including the methodology employed and the assumptions underlying the 2012 valuation. We should also evaluate whether the IRS has the legal authority to challenge the PCT indirectly through adjustments to the examination years, particularly in light of the statute of limitations applicable to the 2012 tax year.

3. Royalty Rate Challenge. The CUT analysis supporting the 4.5% legacy IP royalty rate appears to be a significant focus of the examination. The IRS will likely identify its own set of comparable third-party pharmaceutical licensing agreements with higher royalty rates and argue that the arm's-length range exceeds PPC's selected rate. C&H should work with Dr. Vasquez at Whitmore Valuation Group to strengthen PPC's existing comparables set, to develop additional screening criteria that support the inclusion of PPC's selected comparables and the exclusion of the IRS's likely candidates, and to prepare rebuttal analyses addressing any differences in the comparability factors.

4. PBI Substance Position. PBI's economic substance case is strong. The combination of 185 employees, 42 board meetings during the examination period, cumulative regulatory expenditures of €47.2 million, and independent commercial decision-making across 68 country markets provides a robust factual foundation. However, the IRS will likely focus on specific DEMPE functions and attempt to identify individual decisions or activities that were directed from the United States. C&H should prepare a comprehensive functional analysis that documents PBI's role in each DEMPE function with specificity and identifies the PBI personnel responsible for each function. The presentation should be supported by contemporaneous documentation, including board minutes, internal correspondence, regulatory submissions, and pricing decision records.

5. Proactive Presentation Strategy. C&H should consider proactively presenting PBI's functional analysis and economic substance evidence early in the IDR process, rather than waiting for the IRS to form its own conclusions based on piecemeal document review. An early and comprehensive presentation may shape the IRS's understanding of PBI's role and reduce the likelihood of aggressive positions being adopted by the examination team.

B. Simmons's Observations

1. Crestfield Workpaper Coordination. It is essential to coordinate with Susan Lam at Crestfield & Associates promptly to obtain all workpapers underlying the original transfer pricing documentation for TY 2017–2020. The workpapers should be reviewed by C&H and Whitmore Valuation Group prior to production to ensure consistency with PPC's stated positions and to identify any potential vulnerabilities. The review should also assess whether the workpapers contain any internal analyses, draft positions, or alternative calculations that could be characterized as inconsistent with the final documentation.

2. PMI Cost-Plus Scrutiny. The IRS's reference to PMI's cost-plus arrangement (cost plus an 8% markup) suggests potential scrutiny of the manufacturing margin. Although the PMI arrangement was not identified as one of the three principal focus areas, the IRS's mention of PMI indicates it is on the exam team's radar. C&H should prepare a separate analysis supporting the arm's-length nature of the 8% cost-plus markup, including a benchmarking study of comparable contract manufacturing arrangements in the pharmaceutical biologics sector. This analysis should be coordinated with Dr. Vasquez at Whitmore.

3. PBI Knowledge Development box. PBI has claimed the Irish Knowledge Development box (KDB) regime at a 6.25% effective tax rate on qualifying income derived from qualifying assets. While the KDB is an Irish domestic tax provision and not directly at issue in the U.S. examination, the Irish-side tax benefits may draw the IRS's attention as evidence that the overall structure was designed to achieve a low effective tax rate on profits attributable to pharmaceutical IP. C&H should coordinate with Thornbury & Keogh on the disclosure strategy for Irish tax information, ensuring that any disclosures are carefully managed and do not inadvertently provide the IRS with ammunition for an economic substance or anti-abuse argument.

4. TCJA Rate Change Impact. The Tax Cuts and Jobs Act reduced the U.S. corporate income tax rate from 35% to 21%, effective for tax years beginning after December 31, 2017. This means TY 2017 is subject to the 35% rate, while TY 2018, 2019, and 2020 are subject to the 21% rate. This rate differential may influence the IRS's incentive structure regarding per-year adjustments. A transfer pricing adjustment for TY 2017 would generate significantly more tax revenue per dollar of adjustment than an equivalent adjustment for TY 2018–2020. C&H should be attentive to whether the IRS focuses disproportionate examination resources on TY 2017, and should model the tax exposure for each year separately.

5. Total Exposure Modeling. It will be necessary to model various adjustment scenarios to assess PPC's total potential exposure across all four tax years and all three examination focus areas. The modeling should account for primary tax, interest under IRC § 6601, and potential penalties under IRC § 6662(e). Note that PPC's FIN 48 reserve (ASC 740-10, Accounting for Uncertainty in Income Taxes) currently stands at $62.4 million for uncertain tax positions related to the Irish IP structure. C&H should assess whether the current reserve level is adequate in light of the scope of the examination and the IRS's stated focus areas, and should advise PPC's tax department and independent auditors accordingly.

XII. CLOSING

The opening conference concluded at approximately 12:15 p.m. EDT on June 28, 2022. The conference was conducted in a professional and cooperative manner. Both parties expressed a commitment to conducting the examination efficiently and in good faith.

These notes were finalized by Garrett Simmons on June 29, 2022.

These notes were reviewed and approved by Leonard Cross on June 30, 2022.

Distribution:

Internal (Calderwood & Harkness LLP):

• Leonard Cross, Responsible Partner

• Sylvia Hartwell, Billing Partner

• Leila Nazari, Working Associate

Client (under privilege):

• Marcus Whitfield, VP Global Tax, Penterra Pharmaceuticals Corp.

Filed to: Matter 1018-00009

PRIVILEGED & CONFIDENTIAL — ATTORNEY WORK PRODUCT DO NOT DISTRIBUTE OUTSIDE PRIVILEGED DISTRIBUTION LIST

Tax Year	PBI Cost-Sharing Percentage	Total Qualified R&D Costs
2017	38.2%	$487.3 million
2018	39.6%	$523.8 million
2019	41.1%	$561.2 million
2020	42.7%	$598.4 million
Tax Year	Non-Americas Net Sales (Legacy Compounds)
2017	$814.6 million
2018	$762.3 million
2019	$691.8 million
2020	$624.1 million

PRIVILEGED & CONFIDENTIAL — ATTORNEY WORK PRODUCT
CALDERWOOD & HARKNESS LLP Conference Notes
Subject: IRS Opening Conference — Examination of Penterra Pharmaceuticals Corp. (EIN: 22-3741856)
Tax Years at Issue: 2017, 2018, 2019, 2020
IRS Exam Team ID: LB&I-NE-TP-2022-00641
C&H Matter Number: 1018-00009
Date of Conference: June 28, 2022
Time: 10:00 a.m. – 12:15 p.m. (EDT)
Location: IRS Large Business & International Division, Northeast Office (conference conducted via Northgate Data Systems video)
Notes Prepared By: Garrett Simmons, Lead Associate, Calderwood & Harkness LLP
Reviewed By: Leonard Cross, Responsible Partner, Calderwood & Harkness LLP
These notes are prepared for the purpose of facilitating legal representation of Penterra Pharmaceuticals Corp. by Calderwood & Harkness LLP in connection with the above-referenced IRS examination. These notes reflect the mental impressions, conclusions, opinions, and legal theories of counsel and are protected by the attorney-client privilege and the attorney work-product doctrine. These notes should not be disclosed to any person outside the privileged distribution list without the express written consent of Leonard Cross, Responsible Partner, Calderwood & Harkness LLP.
I. ATTENDEES
A. IRS Participants
1.  Gerald Meskill — Supervisory Revenue Agent / Team Manager, Large Business & International Division, Northeast Transfer Pricing Practice. Meskill served as the senior IRS representative at the opening conference and led the discussion on behalf of the IRS examination team. Meskill will function as the Team Manager for the duration of the examination.
2.  Patricia Dunleavy — Lead Revenue Agent, Large Business & International Division. Dunleavy will serve as the primary point of contact for day-to-day examination activities, including the issuance and management of Information Document Requests (IDRs) and the scheduling of follow-up conferences.
Not Present: Dr. Alan Washburne, IRS Economist, was not present at the opening conference. Meskill indicated that Dr. Washburne had not yet been formally assigned to the examination and would join the examination team at a later stage, likely following the initial IDR response phase. Additionally, IRS Office of Chief Counsel attorneys Franklin Rosario and Donna Hirabayashi were not present at this stage of the examination. Meskill stated that Chief Counsel would be consulted as needed as the examination progresses.
B. Taxpayer / Counsel Participants
1.  Leonard Cross — Responsible Partner, Tax Department, Calderwood & Harkness LLP, Philadelphia office, 1735 Market Street, Suite 3100, Philadelphia, PA 19103. Cross led the discussion on behalf of the taxpayer and counsel.
2.  Garrett Simmons — Lead Associate, Tax Department, Calderwood & Harkness LLP, Philadelphia office. Simmons attended in the role of lead working associate and prepared these notes.
3.  Marcus Whitfield — Vice President, Global Tax, Penterra Pharmaceuticals Corp. ("PPC"), 2200 Independence Boulevard, Princeton Junction, NJ 08550. Whitfield attended as PPC's designated business representative for the examination.
C. Not Present but Noted as Involved in the Engagement
The following individuals were not present at the opening conference but have been identified as participants in the engagement and will be involved in various capacities as the examination proceeds:
•  Sylvia Hartwell — Billing Partner, Calderwood & Harkness LLP. Hartwell will be involved in client management and billing oversight for the engagement. Hartwell is listed on the Form 2848 as an authorized representative.
•  Leila Nazari — Working Associate, Calderwood & Harkness LLP. Nazari will handle research, document production coordination, and coordination with PPC's Irish advisors regarding PBI and PMI matters. Nazari is listed on the Form 2848 as an authorized representative.
•  Deborah Staines — General Counsel, Penterra Pharmaceuticals Corp. Staines is copied on all correspondence related to the examination but did not attend the opening conference.
II. PRELIMINARY MATTERS
A. Representation Confirmation
Cross opened the conference by confirming Calderwood & Harkness LLP's representation of Penterra Pharmaceuticals Corp. in connection with the IRS examination for Tax Years 2017 through 2020. Cross stated that the firm's representation was pursuant to IRS Form 2848 (Power of Attorney and Declaration of Representative), which was filed with the IRS on June 8, 2022. The Form 2848 identifies the following individuals as authorized representatives for PPC with respect to Tax Years 2017, 2018, 2019, and 2020:
•  Leonard Cross, Esq.
•  Sylvia Hartwell, Esq.
•  Garrett Simmons, Esq.
•  Leila Nazari, Esq.
Meskill acknowledged receipt of the Form 2848 and confirmed that it was on file with the IRS examination team. Meskill stated that the IRS would direct all examination-related communications to Calderwood & Harkness LLP in accordance with the power of attorney designation.
Cross requested that all future correspondence, including IDRs, letters, notices, and any other communications related to the examination, be directed to him at Calderwood & Harkness LLP, 1735 Market Street, Suite 3100, Philadelphia, PA 19103, with copies sent to Marcus Whitfield at Penterra Pharmaceuticals Corp., 2200 Independence Boulevard, Princeton Junction, NJ 08550. Meskill confirmed this arrangement.
B. Engagement Background
Cross provided a brief overview of the engagement background for the record. Calderwood & Harkness LLP was formally engaged by Penterra Pharmaceuticals Corp. pursuant to an engagement letter executed on June 2, 2022. The IRS examination was opened on May 16, 2022, upon the issuance of an initial contact Letter 2205-A, which was received by PPC at its Princeton Junction headquarters.
For background purposes, the following was noted regarding PPC's corporate profile:
•  Penterra Pharmaceuticals Corp. is a Delaware corporation, publicly traded on the Nasdaq Stock Market under the ticker symbol PPCA.
•  PPC is headquartered at 2200 Independence Boulevard, Princeton Junction, NJ 08550.
•  PPC's fiscal year-end is December 31.
•  PPC was not enrolled in the Compliance Assurance Process (CAP) for any of the tax years at issue.
The federal income tax returns at issue are Forms 1120 (U.S. Corporation Income Tax Return) for Tax Years 2017, 2018, 2019, and 2020. All four returns were prepared by Crestfield & Associates LLP, PPC's independent accounting firm. The engagement partner at Crestfield & Associates responsible for the PPC engagement is Martin Ogilvy. The transfer pricing partner at Crestfield & Associates who oversaw the preparation of PPC's contemporaneous transfer pricing documentation is Susan Lam.
III. EXAMINATION SCOPE — AS DESCRIBED BY IRS
A. Overview of Examination Focus
Meskill opened the substantive portion of the conference by providing an overview of the examination's scope and focus areas. Meskill stated that the examination is being conducted by the LB&I Northeast Transfer Pricing Practice, reflecting the transfer pricing-centric nature of the issues identified by the IRS for examination.
Meskill stated that the primary focus of the examination is the transfer pricing methodology used in connection with intercompany transactions between Penterra Pharmaceuticals Corp. (the U.S. parent) and its Irish subsidiary, Penterra Biopharma International DAC ("PBI"). Meskill identified three principal areas of focus, which he described in turn. These three areas are set forth below, together with associated details discussed during the conference.
B. Area 1: Cost-Sharing Arrangement (CSA)
Meskill stated that the IRS intends to examine the qualified cost-sharing arrangement entered into between PPC and PBI. The CSA became effective on July 1, 2012, and has governed the allocation of intangible development costs between the two controlled participants since that date.
Meskill identified the following specific areas of focus within the CSA examination:
(i) Platform Contribution Transaction (PCT) Payment. The IRS will examine the platform contribution transaction payment of $312 million made by PBI to PPC on July 1, 2012, in connection with the inception of the CSA. The IRS intends to determine whether this PCT payment adequately compensated PPC for the pre-existing intangible property that PPC made available as platform contributions to the CSA. Meskill noted that the pre-existing IP consisted primarily of clinical-stage and approved oncology compounds, which represented significant value at the time of the CSA's inception. The IRS will review the PCT valuation report and supporting methodology to assess whether the payment was consistent with arm's-length principles under Treasury Regulations § 1.482-7(g).
(ii) Ongoing Cost-Sharing Ratios. The IRS will examine the cost-sharing ratios used to allocate research and development costs between PPC and PBI for each of the four tax years under examination (TY 2017–2020). Meskill indicated that the IRS would assess whether the cost-sharing percentages attributed to each participant are consistent with the participants' respective shares of reasonably anticipated benefits from the intangible property developed under the CSA.
(iii) Methodology for Calculating Reasonably Anticipated Benefits. The IRS will evaluate the methodology employed by PPC and PBI to calculate each participant's share of "reasonably anticipated benefits" under Treasury Regulations § 1.482-7(e). The IRS will assess the projections, assumptions, and economic models underlying the benefit allocation.
(iv) Composition and Accuracy of the Qualified R&D Cost Pool. The IRS will review the composition of the qualified research and development cost pool, including the determination of which costs were included in or excluded from the pool, and the accuracy of the cost pool amounts for each tax year.
Meskill noted that the IRS would request detailed information regarding PBI's cost-sharing percentages across the examination years. Cross noted the following internally for reference purposes (not disclosed to the IRS during the conference):
The progressive increase in PBI's cost-sharing percentage over the period reflects PBI's growing share of reasonably anticipated benefits as non-Americas revenue growth outpaced Americas revenue growth during the 2017–2020 period.
C. Area 2: Legacy IP Royalty Rate
Meskill stated that the IRS also intends to examine the intercompany royalty rate applied to legacy pharmaceutical compounds — that is, compounds with intellectual property that predates the July 1, 2012 CSA effective date and is therefore not covered by the cost-sharing arrangement. These legacy compounds are licensed by PPC to PBI under a separate intercompany license agreement.
Dunleavy stated that the intercompany royalty rate applicable to these legacy compounds is 4.5% of net sales for non-Americas territories. The IRS will examine this royalty rate under the comparable uncontrolled transaction (CUT) method to determine whether it is consistent with arm's-length pricing. Dunleavy indicated that the IRS would seek to identify comparable third-party pharmaceutical licensing agreements involving similar therapeutic compounds, stage of development, and territorial scope in order to assess the appropriateness of the 4.5% royalty rate.
Meskill stated that the IRS would request the non-Americas net sales figures for legacy compounds for each tax year under examination. Cross noted the following internally for reference purposes (not disclosed to the IRS during the conference):
The declining trend in legacy compound net sales reflects patent expirations and generic competition in certain non-Americas markets during the examination period.
D. Area 3: Economic Substance of PBI
Dunleavy indicated that the IRS further intends to evaluate whether PBI possesses sufficient economic substance to justify its role as the intellectual property owner for non-Americas territories and as a participant in the cost-sharing arrangement with PPC. This line of inquiry addresses whether PBI is a genuine operational entity with real economic activity or whether it functions as a conduit or shell entity with key functions and risks residing at PPC in the United States.
Dunleavy identified the following specific areas of inquiry:
(i) Headcount, Physical Presence, and Operational Capacity. The IRS will examine PBI's employee headcount, physical office presence, and operational capabilities in Ireland, including the nature of the work performed by PBI's personnel and their qualifications.
(ii) Decision-Making Authority — DEMPE Functions. The IRS will evaluate PBI's decision-making authority with particular focus on DEMPE functions — Development, Enhancement, Maintenance, Protection, and Exploitation of intangible property. The IRS will assess whether PBI exercises genuine and substantive control over these functions or whether key decisions and oversight responsibilities remained with PPC personnel in the United States.
(iii) Location of Key Functions and Risks. Consistent with the DEMPE analysis, the IRS will assess whether key functions performed and risks assumed in connection with the intangible property and commercial exploitation activities were genuinely located at PBI in Ireland or whether they were directed and controlled from the United States.
(iv) Governance Structure and Board Activities. The IRS will examine PBI's governance structure, including the composition and activities of PBI's board of directors, the frequency of board meetings, and the substance of board decision-making as reflected in board minutes and related records.
Cross noted the following internally for reference purposes regarding PBI's economic substance profile (not disclosed to the IRS during the conference, but to be documented and presented in connection with IDR responses at the appropriate stage):
•  PBI had 185 employees as of December 31, 2020, an increase from 52 employees at the time of incorporation in 2012.
•  PBI maintains approximately 18,000 square feet of office space at Sandyford Business Park in Dublin, Ireland.
•  PBI's board of directors held 42 board meetings during the 2017–2020 examination period.
•  PBI incurred cumulative regulatory expenditures of approximately €47.2 million during the examination period.
•  PBI exercised independent pricing decisions across 68 country markets in which PBI's products are sold or distributed.
E. Other Entities of Interest
Meskill indicated that the IRS may also request information regarding the following related entities in PPC's corporate structure:
(i) Penterra Holdings Luxembourg S.à r.l. ("PHL"). PHL is the intermediate holding entity in PPC's international structure. PHL is 100% owned by PPC and is the 100% owner of PBI. PHL is organized under Luxembourg law (RCS Number: B 168452). For U.S. federal income tax purposes, PHL is treated as a disregarded entity. The IRS may seek information regarding PHL's formation, capitalization, and role in the corporate structure, including whether PHL performed any substantive functions or merely served as a holding vehicle.
(ii) Penterra Manufacturing Ireland Ltd. ("PMI"). PMI is the contract manufacturer of biologics for non-Americas markets. PMI operates under a cost-plus arrangement with PBI, under which PMI is compensated at cost plus an 8% markup. PMI employs approximately 620 employees and operates from a manufacturing facility located at Unit 7, Ringaskiddy Industrial Estate, Co. Cork, Ireland. The IRS may examine the cost-plus markup to determine whether it is consistent with arm's-length pricing for contract manufacturing services.
Meskill further stated that the examination would encompass PPC's Forms 5471 (Information Return of U.S. Persons with Respect to Certain Foreign Corporations) filed with respect to PBI and PHL for all four tax years under examination (TY 2017, 2018, 2019, and 2020). The IRS will review the Forms 5471 for accuracy and completeness, including the schedules reporting intercompany transactions, earnings and profits, and previously taxed income.
F. Penalty Considerations
Dunleavy stated that the IRS would evaluate whether any transfer pricing adjustments that may be proposed during the course of the examination are subject to the substantial valuation misstatement penalty under Internal Revenue Code § 6662(e). Dunleavy noted that the penalty provisions applicable to transfer pricing adjustments are an integral part of the IRS's examination process, and the IRS would assess penalty applicability in connection with any proposed adjustments.
In response, Cross stated that PPC maintained contemporaneous transfer pricing documentation for all four tax years under examination, prepared in accordance with the penalty-protection standards set forth in IRC § 6662(e)(3)(B) and the corresponding Treasury Regulations. Cross stated that the contemporaneous documentation was prepared by Crestfield & Associates LLP as part of its ongoing engagement with PPC. Cross further stated that PPC would provide this documentation to the IRS in response to an appropriate IDR, as the documentation would demonstrate PPC's good-faith effort to establish arm's-length pricing and would support PPC's position that penalty protection applies.
Meskill acknowledged Cross's statement and indicated that the IRS would review the contemporaneous documentation in due course to assess its adequacy for penalty-protection purposes.
IV. ANTICIPATED IDR SCHEDULE AND PROCESS
A. IDR Issuance Plan
Dunleavy outlined the anticipated IDR (Information Document Request) process for the examination. Dunleavy stated that the first tranche of IDRs would be issued in early July 2022, consisting of approximately eight to ten individual IDRs covering the foundational categories of documents and data needed for the examination. Additional IDRs would follow on a rolling basis as the examination progresses and as the IRS identifies additional informational needs.
Dunleavy estimated that the IDR process could extend through mid-to-late 2023, depending on the pace of production and the complexity of the issues involved. The standard response period for each IDR would be 30 days from the date of issuance, with extensions available upon reasonable request. Cross acknowledged the 30-day standard and stated that C&H would endeavor to meet response deadlines but would request extensions where the volume or complexity of responsive materials warranted additional time.
Dunleavy noted that IDRs would cover, at a minimum, the following categories of documents and information:
1.  Corporate structure and organizational charts for PPC and its relevant subsidiaries (PBI, PHL, PMI) for each tax year under examination.
2.  The cost-sharing arrangement agreement between PPC and PBI, including all amendments, supplements, and side letters executed since the CSA's effective date of July 1, 2012.
3.  The legacy IP license agreement between PPC and PBI, including all amendments.
4.  Contemporaneous transfer pricing documentation for Tax Years 2017, 2018, 2019, and 2020, including all appendices, exhibits, and supporting schedules.
5.  The PCT valuation report prepared in connection with the inception of the CSA on July 1, 2012, together with all supporting workpapers, financial models, assumptions, and underlying data.
6.  R&D cost pool composition and allocation methodology documentation, including schedules detailing the costs included in and excluded from the qualified cost pool for each tax year.
7.  PBI's financial statements (both statutory and management accounts) and Irish tax returns for each tax year under examination.
8.  PBI personnel and headcount data, including employee rosters, organizational charts, job descriptions, and compensation information.
9.  PBI board minutes and governance documents, including board resolutions, committee charters, and records of board meetings held during the 2017–2020 period.
10.  The intercompany manufacturing agreement between PBI and PMI, including all amendments, pricing schedules, and cost-plus markup calculations.
11.  Product revenue data by territory for the three principal products identified by the IRS (Veritaxol, Imvara, and Cerulon) for each tax year under examination.
12.  PBI office lease and physical presence documentation, including lease agreements, floor plans, and utility records for the Sandyford Business Park facility.
13.  Forms 5471 and related international informational returns for PBI and PHL for all four tax years.
14.  Third-party distribution agreements for non-Americas territories.
15.  Banking records for PBI, including account statements and transaction records from Glenmore Bank Ireland plc.
16.  Regulatory expenditure and submission records for PBI, including regulatory filings, approval records, and associated costs.
17.  Comparable license agreements used by PPC in its CUT analysis supporting the 4.5% legacy IP royalty rate, including all benchmarking studies and database searches.
B. IDR Response Protocols
Cross requested that all IDRs be directed to him at Calderwood & Harkness LLP, 1735 Market Street, Suite 3100, Philadelphia, PA 19103, with copies to Marcus Whitfield at Penterra Pharmaceuticals Corp. Meskill agreed to this arrangement and stated that IDRs would be issued in writing to Cross.
Cross stated that Calderwood & Harkness LLP would coordinate all IDR responses with the following parties:
•  PPC's internal tax, legal, finance, and R&D departments, through Whitfield and Staines, for document collection and fact verification.
•  Crestfield & Associates LLP, through transfer pricing partner Susan Lam, for workpapers, return data, and transfer pricing documentation supporting materials.
•  Thornbury & Keogh, PBI's Irish tax advisor, through lead partner Ciarán Thornbury, for Irish-specific documents concerning PBI and PMI, including Irish financial statements, Irish tax returns, and Irish regulatory filings. Thornbury & Keogh is located at 22 Fitzwilliam Square, Dublin 2, Ireland.
Cross further noted that Calderwood & Harkness LLP would prepare and maintain a privilege log for any documents withheld from production on the grounds of attorney-client privilege or the attorney work-product doctrine. Cross stated that the privilege log would be prepared in accordance with established IRS practice and would identify each withheld document by date, author, recipient, subject matter, and the specific privilege asserted. Cross reserved all rights with respect to privileged materials and stated that the inadvertent production of privileged documents would not constitute a waiver of any applicable privilege.
C. IDR Enforcement Procedures
Meskill briefly mentioned the IRS's standard IDR enforcement procedures for the record. Meskill stated that if IDR responses are not timely submitted, the IRS may escalate through its established IDR enforcement process, which includes the issuance of a delinquency notice, followed by a pre-summons letter, and ultimately the issuance of a summons if compliance is not achieved. Meskill noted that this was a standard advisement provided at all opening conferences and was not intended to suggest any expectation of non-compliance.
Cross acknowledged the IRS's enforcement procedures and committed to providing timely responses to all IDRs, with formal extension requests submitted where the circumstances warranted additional response time.
V. KEY PRODUCTS IDENTIFIED
Meskill indicated that the IRS examination team had reviewed PPC's public filings and was familiar with PPC's product portfolio. Meskill specifically identified the following three products as relevant to the examination, given their significance to PBI's non-Americas revenue streams:
1.  Veritaxol — Oncology. Veritaxol is PPC's blockbuster oncology compound and the largest revenue-generating product in PPC's portfolio. Global net sales in 2020 were approximately $3.12 billion, of which non-Americas net sales accounted for approximately $1.34 billion.
2.  Imvara — Immunology. Imvara is PPC's leading immunology product. Global net sales in 2020 were approximately $1.87 billion, of which non-Americas net sales accounted for approximately $0.79 billion.
3.  Cerulon — Rare Disease. Cerulon is PPC's rare disease therapeutic. Global net sales in 2020 were approximately $0.62 billion, of which non-Americas net sales accounted for approximately $0.28 billion.
The IRS stated that it would request detailed territory-level revenue breakdowns for all three products for each of the four tax years under examination. This data will be relevant to the IRS's assessment of PBI's cost-sharing ratios, the legacy IP royalty base, and PBI's economic substance.
VI. STATUTE OF LIMITATIONS DISCUSSION
Cross raised the issue of the statute of limitations for Tax Year 2017. Cross noted that the general three-year statute of limitations under IRC § 6501(a) for TY 2017 had expired, but that the extended six-year statute under IRC § 6501(e) might apply depending on the IRS's theories regarding omission of gross income. Cross inquired about the IRS's position on the statute of limitations for TY 2017 and whether the IRS anticipated requesting a consent to extend the period of limitations.
Meskill acknowledged that the statute for TY 2017 was approaching and stated that the IRS would request PPC's consent to extend the statute (via Form 872, Consent to Extend the Time to Assess Tax) if the IRS determined that additional time was needed to complete the examination of that tax year. Meskill stated that the IRS preferred to resolve statute of limitations issues cooperatively rather than through the issuance of a statutory notice of deficiency prior to the completion of the examination.
Cross stated that PPC would consider any formal request for a Form 872 extension, but emphasized the importance of proceeding efficiently to avoid the accumulation of extended open years. Cross noted that PPC's preference would be to resolve the examination within the existing statutory periods to the extent practicable.
No Form 872 was executed at the opening conference, and no formal request for an extension was made at this time. Meskill indicated that the IRS would issue a formal request if and when necessary.
Later Note (added by Simmons, updated as of file review): Forms 872 were ultimately executed for Tax Year 2017 and Tax Year 2018, extending the assessment period for both years through December 31, 2024. The extensions were executed following negotiations between Cross and Meskill in the fall of 2022.
VII. IRS ECONOMIST INVOLVEMENT
Meskill confirmed that an IRS economist from the IRS Transfer Pricing Practice would be assigned to the examination to evaluate the economic analyses underlying PPC's transfer pricing positions. The economist's role would include reviewing PPC's benchmarking analyses, CUT comparables, cost-plus studies, and PCT valuation methodology. The economist would also be expected to develop independent economic analyses and comparables sets for the IRS's use in assessing the arm's-length nature of PPC's intercompany pricing.
At the time of the opening conference, the IRS economist had not yet been formally assigned to the examination. The economist was later identified as Dr. Alan Washburne. Meskill indicated that the economist would join the examination following the initial IDR response phase, with the anticipated timeline for the economist's involvement being the first or second quarter of 2023.
Cross noted for the record that Calderwood & Harkness LLP had retained Whitmore Valuation Group LLC as an independent economic consultant to support PPC's defense of its transfer pricing positions in the examination. The Whitmore engagement is structured under a Kovel arrangement to ensure that communications between the economic consultant and counsel are protected by the attorney-client privilege. The Kovel letter was executed on June 20, 2022, and is referenced as Matter 1018-00009-KV. The lead economist at Whitmore Valuation Group is Dr. Helena Vasquez. Dr. Vasquez's scope of work includes benchmarking analysis, CUT analysis for the legacy IP royalty rate, CPM/TNMM analysis for manufacturing and distribution margins, and PCT valuation support.
VIII. IRS CHIEF COUNSEL INVOLVEMENT
Meskill stated that the IRS Office of Chief Counsel, Transfer Pricing branch, would be consulted as needed during the examination, particularly on legal issues relating to the application of Treasury Regulations § 1.482-7 to the CSA, the legal standards for economic substance, and any potential penalty issues. No Chief Counsel attorney was assigned to the examination at the time of the opening conference. Chief Counsel attorneys were subsequently identified as Attorney-Advisor Franklin Rosario and Senior Counsel Donna Hirabayashi.
IX. PPC'S PRELIMINARY STATEMENTS
A. Cross's Opening Remarks
Cross provided a brief overview of PPC's transfer pricing structure and expressed confidence in the arm's-length nature of PPC's intercompany arrangements across all four tax years under examination.
Cross made the following statements on behalf of PPC:
1.  Cost-Sharing Arrangement Compliance. PPC's CSA was structured and documented in compliance with Treasury Regulations § 1.482-7. The ongoing cost-sharing ratios for each tax year reflect PPC's and PBI's respective shares of reasonably anticipated benefits from the intangible property developed under the CSA. The cost-sharing percentages were calculated using a methodology consistent with the regulatory framework and were supported by contemporaneous economic analysis.
2.  Legacy IP Royalty Rate. The legacy IP royalty rate of 4.5% of non-Americas net sales was established using the comparable uncontrolled transaction (CUT) method. PPC identified comparable third-party pharmaceutical licensing agreements involving similar therapeutic areas, intellectual property at a similar stage of development, and comparable territorial scope. The 4.5% royalty rate falls within the arm's-length range established by these comparable transactions.
3.  PBI Economic Substance. PBI possesses substantial economic substance in Ireland. PBI maintains dedicated personnel with relevant scientific, regulatory, commercial, and managerial expertise. PBI exercises independent decision-making authority with respect to DEMPE functions and commercial strategy across its 68 country markets. PBI conducts material operational activities through its offices at Sandyford Business Park and through its contract manufacturer, PMI, at the Ringaskiddy facility. PPC is confident that the IRS's review will confirm PBI's genuine operational role and economic substance.
4.  Contemporaneous Documentation. PPC maintained contemporaneous transfer pricing documentation for all four tax years under examination. The documentation was prepared in accordance with the penalty-protection standards of IRC § 6662(e)(3)(B) and will be made available to the IRS in response to an appropriate IDR.
B. Whitfield's Comments
Whitfield confirmed PPC's willingness to cooperate fully with the IRS examination and stated that PPC would make its personnel, records, and facilities available to the examination team as reasonably required. Whitfield identified himself as the primary business contact at PPC for all tax matters arising in connection with the examination and stated that all requests for PPC's internal cooperation should be directed through him, in coordination with Calderwood & Harkness LLP.
Whitfield noted that PPC's independent auditor, Crestfield & Associates LLP, originally prepared the contemporaneous transfer pricing documentation for all four tax years and would provide supporting workpapers and data in connection with the examination. Whitfield stated that the engagement partner at Crestfield & Associates, Martin Ogilvy, and the transfer pricing partner, Susan Lam, were aware of the examination and prepared to assist with document production.
Whitfield further mentioned that PBI's Irish tax advisor, Thornbury & Keogh, under the direction of lead partner Ciarán Thornbury, would assist in producing Irish-specific documentation pertaining to PBI and PMI. Thornbury & Keogh is based at 22 Fitzwilliam Square, Dublin 2, Ireland, and has been PBI's Irish tax advisor since PBI's incorporation in 2012.
X. NEXT STEPS AND ACTION ITEMS
The following action items were identified during the opening conference:
1.  C&H to confirm in writing. Cross to send written confirmation of attendance at the opening conference and a summary of the points discussed, addressed to Meskill. Cross noted that a letter dated June 22, 2022, was already in preparation prior to the conference and would be finalized and sent promptly following the conference.
2.  IRS to issue first tranche of IDRs. Dunleavy to issue the initial tranche of IDRs (approximately eight to ten) in early July 2022. Dunleavy indicated the target mailing date would be approximately July 8 or July 15, 2022.
3.  C&H to begin document collection. Simmons to coordinate with PPC's internal teams, Crestfield & Associates (Susan Lam), and Thornbury & Keogh (Ciarán Thornbury) to begin assembling responsive documents in anticipation of the initial IDRs. Document collection efforts should prioritize the foundational categories identified by Dunleavy during the conference.
4.  Privilege protocol implementation. Cross to ensure that the document preservation notice issued by PPC on June 6, 2022, remains in effect and is being followed across all relevant departments. Cross to ensure that privilege protocols are strictly followed in all document collection, review, and production activities. Simmons and Nazari to implement a privilege review process for all documents identified for potential production.
5.  Whitmore engagement coordination. Cross to brief Dr. Helena Vasquez at Whitmore Valuation Group LLC on the IRS's stated focus areas as described during the opening conference and to begin scoping the economic analysis work that will be required to support PPC's transfer pricing positions. The initial briefing should address the CSA cost-sharing ratios, the PCT valuation, the legacy IP royalty rate CUT analysis, and PBI's functional profile.
6.  Statute extension monitoring. Simmons to establish a tracking system for the statute of limitations dates for all four tax years under examination and to flag any IRS requests for Form 872 extensions promptly upon receipt. The tracking system should include advance notice triggers to ensure adequate time for internal deliberation regarding any requested extensions.
7.  Follow-up conference. No specific follow-up conference date was set during the opening conference. Meskill indicated that the IRS would reach out to Calderwood & Harkness LLP after the first round of IDR responses to schedule a status call. Cross stated that C&H would be available at the IRS's convenience for a follow-up conference.
XI. INTERNAL OBSERVATIONS AND STRATEGIC NOTES
PRIVILEGED AND CONFIDENTIAL — ATTORNEY WORK PRODUCT FOR INTERNAL C&H USE ONLY — DO NOT PRODUCE
The following observations and strategic notes reflect the mental impressions, conclusions, opinions, and legal theories of Calderwood & Harkness attorneys. These notes are protected by the attorney work-product doctrine and the attorney-client privilege. Under no circumstances should these notes be disclosed to the IRS or any third party.
A. Cross's Observations
1.  LB&I Campaign Alignment. The IRS's stated focus on economic substance and DEMPE functions is consistent with recent LB&I campaign priorities targeting pharmaceutical companies with IP structures involving Irish or other low-tax-jurisdiction subsidiaries. This examination appears to follow the pattern of other LB&I pharmaceutical examinations in the Northeast region. The IRS's approach suggests a coordinated effort to challenge common pharmaceutical transfer pricing structures, and we should anticipate the IRS applying analytical frameworks developed in other examinations in this campaign.
2.  PCT Recharacterization Risk. The IRS's mention of the PCT valuation — notwithstanding that the PCT was effected on July 1, 2012, which is outside the examination years — is notable and suggests that the IRS may attempt to recharacterize the ongoing cost-sharing ratios and the legacy IP royalty rates for TY 2017–2020 based on an alleged undervaluation of the PCT payment. The theory would likely be that PPC received insufficient compensation for pre-existing IP at the CSA inception, and therefore the cost-sharing ratios and royalty rates for subsequent years are tainted or should be adjusted. C&H should anticipate this line of attack and prepare defensive arguments regarding the adequacy of the PCT payment, including the methodology employed and the assumptions underlying the 2012 valuation. We should also evaluate whether the IRS has the legal authority to challenge the PCT indirectly through adjustments to the examination years, particularly in light of the statute of limitations applicable to the 2012 tax year.
3.  Royalty Rate Challenge. The CUT analysis supporting the 4.5% legacy IP royalty rate appears to be a significant focus of the examination. The IRS will likely identify its own set of comparable third-party pharmaceutical licensing agreements with higher royalty rates and argue that the arm's-length range exceeds PPC's selected rate. C&H should work with Dr. Vasquez at Whitmore Valuation Group to strengthen PPC's existing comparables set, to develop additional screening criteria that support the inclusion of PPC's selected comparables and the exclusion of the IRS's likely candidates, and to prepare rebuttal analyses addressing any differences in the comparability factors.
4.  PBI Substance Position. PBI's economic substance case is strong. The combination of 185 employees, 42 board meetings during the examination period, cumulative regulatory expenditures of €47.2 million, and independent commercial decision-making across 68 country markets provides a robust factual foundation. However, the IRS will likely focus on specific DEMPE functions and attempt to identify individual decisions or activities that were directed from the United States. C&H should prepare a comprehensive functional analysis that documents PBI's role in each DEMPE function with specificity and identifies the PBI personnel responsible for each function. The presentation should be supported by contemporaneous documentation, including board minutes, internal correspondence, regulatory submissions, and pricing decision records.
5.  Proactive Presentation Strategy. C&H should consider proactively presenting PBI's functional analysis and economic substance evidence early in the IDR process, rather than waiting for the IRS to form its own conclusions based on piecemeal document review. An early and comprehensive presentation may shape the IRS's understanding of PBI's role and reduce the likelihood of aggressive positions being adopted by the examination team.
B. Simmons's Observations
1.  Crestfield Workpaper Coordination. It is essential to coordinate with Susan Lam at Crestfield & Associates promptly to obtain all workpapers underlying the original transfer pricing documentation for TY 2017–2020. The workpapers should be reviewed by C&H and Whitmore Valuation Group prior to production to ensure consistency with PPC's stated positions and to identify any potential vulnerabilities. The review should also assess whether the workpapers contain any internal analyses, draft positions, or alternative calculations that could be characterized as inconsistent with the final documentation.
2.  PMI Cost-Plus Scrutiny. The IRS's reference to PMI's cost-plus arrangement (cost plus an 8% markup) suggests potential scrutiny of the manufacturing margin. Although the PMI arrangement was not identified as one of the three principal focus areas, the IRS's mention of PMI indicates it is on the exam team's radar. C&H should prepare a separate analysis supporting the arm's-length nature of the 8% cost-plus markup, including a benchmarking study of comparable contract manufacturing arrangements in the pharmaceutical biologics sector. This analysis should be coordinated with Dr. Vasquez at Whitmore.
3.  PBI Knowledge Development box. PBI has claimed the Irish Knowledge Development box (KDB) regime at a 6.25% effective tax rate on qualifying income derived from qualifying assets. While the KDB is an Irish domestic tax provision and not directly at issue in the U.S. examination, the Irish-side tax benefits may draw the IRS's attention as evidence that the overall structure was designed to achieve a low effective tax rate on profits attributable to pharmaceutical IP. C&H should coordinate with Thornbury & Keogh on the disclosure strategy for Irish tax information, ensuring that any disclosures are carefully managed and do not inadvertently provide the IRS with ammunition for an economic substance or anti-abuse argument.
4.  TCJA Rate Change Impact. The Tax Cuts and Jobs Act reduced the U.S. corporate income tax rate from 35% to 21%, effective for tax years beginning after December 31, 2017. This means TY 2017 is subject to the 35% rate, while TY 2018, 2019, and 2020 are subject to the 21% rate. This rate differential may influence the IRS's incentive structure regarding per-year adjustments. A transfer pricing adjustment for TY 2017 would generate significantly more tax revenue per dollar of adjustment than an equivalent adjustment for TY 2018–2020. C&H should be attentive to whether the IRS focuses disproportionate examination resources on TY 2017, and should model the tax exposure for each year separately.
5.  Total Exposure Modeling. It will be necessary to model various adjustment scenarios to assess PPC's total potential exposure across all four tax years and all three examination focus areas. The modeling should account for primary tax, interest under IRC § 6601, and potential penalties under IRC § 6662(e). Note that PPC's FIN 48 reserve (ASC 740-10, Accounting for Uncertainty in Income Taxes) currently stands at $62.4 million for uncertain tax positions related to the Irish IP structure. C&H should assess whether the current reserve level is adequate in light of the scope of the examination and the IRS's stated focus areas, and should advise PPC's tax department and independent auditors accordingly.
XII. CLOSING
The opening conference concluded at approximately 12:15 p.m. EDT on June 28, 2022. The conference was conducted in a professional and cooperative manner. Both parties expressed a commitment to conducting the examination efficiently and in good faith.
These notes were finalized by Garrett Simmons on June 29, 2022.
These notes were reviewed and approved by Leonard Cross on June 30, 2022.
Distribution:
Internal (Calderwood & Harkness LLP):
•  Leonard Cross, Responsible Partner
•  Sylvia Hartwell, Billing Partner
•  Leila Nazari, Working Associate
Client (under privilege):
•  Marcus Whitfield, VP Global Tax, Penterra Pharmaceuticals Corp.
Filed to: Matter 1018-00009
PRIVILEGED & CONFIDENTIAL — ATTORNEY WORK PRODUCT DO NOT DISTRIBUTE OUTSIDE PRIVILEGED DISTRIBUTION LIST
Tax Year | PBI Cost-Sharing Percentage | Total Qualified R&D Costs
2017 | 38.2% | $487.3 million
2018 | 39.6% | $523.8 million
2019 | 41.1% | $561.2 million
2020 | 42.7% | $598.4 million
Tax Year | Non-Americas Net Sales (Legacy Compounds)
2017 | $814.6 million
2018 | $762.3 million
2019 | $691.8 million
2020 | $624.1 million