1018-00009 · Client 1018 · IDR Responses

idr-40-response.docx DOCUMENT M&A / Corporate

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CALDERWOOD & HARKNESS LLP Attorneys at Law

1735 Market Street, Suite 3100 Philadelphia, PA 19103 Telephone: (215) 564-8800 Facsimile: (215) 564-8801

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

July 18, 2023

VIA HAND DELIVERY AND ELECTRONIC TRANSMISSION

Revenue Agent Patricia Dunleavy Large Business & International Division Internal Revenue Service IRS Exam Team ID LB&I-NE-TP-2022-00641 600 Arch Street, Room 6106 Philadelphia, PA 19106

Re: Penterra Pharmaceuticals Corp. (EIN: 22-3741856) — Response to Information Document Request No. 40 Tax Years Under Examination: 2017, 2018, 2019, 2020 Calderwood & Harkness LLP Matter No.: 1018-00009

Dear Revenue Agent Dunleavy:

This firm, Calderwood & Harkness LLP ("C&H"), serves as authorized representative of Penterra Pharmaceuticals Corp. ("PPC" or the "Company") in connection with the examination referenced above. Our authority to act on behalf of PPC is established pursuant to IRS Form 2848, Power of Attorney and Declaration of Representative, filed with the Internal Revenue Service on June 8, 2022, which designates the following individuals as authorized representatives: Leonard Cross (Responsible Partner), Sylvia Hartwell (Billing Partner), Garrett Simmons (Lead Associate), and Leila Nazari (Working Associate), all of the Tax Department of Calderwood & Harkness LLP. I write on behalf of the firm in my capacity as Lead Associate assigned to this matter.

This letter constitutes PPC's formal response to Information Document Request No. 40 ("IDR No. 40"), which was received by counsel on or about July 5, 2023, and which requests the production of Forms 5471 and related international informational returns filed by PPC for the tax years under examination. PPC is a Delaware corporation, publicly traded on the Nasdaq Stock Market under the ticker symbol "PPCA," with its principal executive offices located at 2200 Independence Boulevard, Princeton Junction, New Jersey 08550. PPC files its consolidated federal income tax returns on a calendar-year basis, with a fiscal year ending December 31.

Set forth below is a description of the scope of IDR No. 40, the documents produced in response thereto, and certain notes and qualifications applicable to this production.

I. SCOPE OF IDR NO. 40

IDR No. 40 requests that PPC produce all Forms 5471 (Information Return of U.S. Persons with Respect to Certain Foreign Corporations) filed by PPC with its consolidated federal income tax returns (Forms 1120) for the tax years ended December 31, 2017, December 31, 2018, December 31, 2019, and December 31, 2020 (collectively, the "Tax Years Under Examination" or "TY 2017," "TY 2018," "TY 2019," and "TY 2020," respectively).

Specifically, the IDR requests production of Forms 5471 for each controlled foreign corporation ("CFC") in which PPC held a direct or indirect ownership interest during the Tax Years Under Examination. Based on PPC's corporate structure as it existed during the relevant period, the CFCs for which Forms 5471 were filed are as follows:

(a) Penterra Biopharma International DAC ("PBI") — a Designated Activity Company organized and existing under the laws of Ireland, with its registered office located at 4th Floor, Claremont House, Sandyford Business Park, Dublin D18 K7T4, Ireland. PBI's Irish Tax Reference Number is 3218764T. PBI is classified as a controlled foreign corporation within the meaning of Internal Revenue Code ("IRC") § 957(a) for each of the Tax Years Under Examination.

(b) Penterra Holdings Luxembourg S.à r.l. ("PHL") — a Société à responsabilité limitée organized and existing under the laws of the Grand Duchy of Luxembourg, with its registered office located at 14, rue Aldringen, L-1118 Luxembourg. PHL's Luxembourg Registre de Commerce et des Sociétés ("RCS") number is B 168452. As described in further detail below, PHL made an election to be treated as a disregarded entity for U.S. federal tax purposes pursuant to Treasury Regulation § 301.7701-3; however, Forms 5471 were filed with respect to PHL as a matter of compliance and completeness.

In addition to the Forms 5471 for PBI and PHL, IDR No. 40 requests production of any related international informational returns or schedules filed by PPC in connection with these entities for the Tax Years Under Examination. PPC has interpreted this request to encompass Forms 8858, Schedules P, and any other ancillary schedules or attachments filed contemporaneously with the Forms 5471 for PBI and PHL.

II. DOCUMENTS PRODUCED

In response to IDR No. 40, PPC produces the documents described below. All documents produced herewith are organized by entity and tax year, as further detailed in the Production Index enclosed as Enclosure 4.

A. Forms 5471 for Penterra Biopharma International DAC (PBI)

PPC produces herewith complete copies of the Forms 5471 filed by PPC with respect to PBI for each of the four Tax Years Under Examination, specifically:

(i) Form 5471 for PBI — Tax Year 2017;

(ii) Form 5471 for PBI — Tax Year 2018;

(iii) Form 5471 for PBI — Tax Year 2019; and

(iv) Form 5471 for PBI — Tax Year 2020.

Each Form 5471 is produced together with all schedules and attachments as filed with PPC's corresponding consolidated federal income tax return (Form 1120) for the applicable tax year.

Background on PBI. PBI was incorporated on March 15, 2012, under Irish law as a Designated Activity Company. PBI functions as the principal intellectual property ("IP") holding company and commercial principal for PPC's non-Americas operations. In this capacity, PBI manages the commercialization of PPC's pharmaceutical products across the Europe, Middle East, and Africa ("EMEA") and Asia-Pacific ("APAC") territories. PBI also oversees and manages contract manufacturing and distribution arrangements with third-party and affiliated entities operating within those territories.

Ownership Structure. PBI is a wholly owned subsidiary of PHL. PHL, in turn, is 100% owned by PPC. As noted above, PHL is treated as a disregarded entity for U.S. federal tax purposes, having made a check-the-box election under Treasury Regulation § 301.7701-3. As a consequence of PHL's disregarded entity status, PPC is treated as the direct owner of PBI for purposes of the Form 5471 filing requirements. Accordingly, PPC filed as both a Category 4 filer and a Category 5 filer with respect to PBI, reflecting PPC's status as a United States person that is a United States shareholder (within the meaning of IRC § 951(b)) of a CFC (within the meaning of IRC § 957(a)).

PBI Financial Information. The Forms 5471 for PBI reflect financial data derived from PBI's Irish statutory financial statements, as translated into United States dollars in accordance with the applicable functional currency translation rules. By way of summary, PBI reported the following revenue and pre-tax income figures in its most recent year under examination: for the fiscal year ended December 31, 2020, PBI reported revenue of approximately €2.14 billion and pre-tax income of approximately €1.06 billion. PBI's workforce grew from 52 employees at the time of its incorporation in 2012 to 185 employees as of the end of TY 2020, reflecting the substantial expansion of PBI's operational activities over the period. PBI's managing director throughout the Tax Years Under Examination was Aidan Naughton.

Schedules Included. Each Form 5471 produced for PBI includes the following schedules, to the extent applicable for the relevant tax year:

• Schedule C (Income Statement) — reflecting PBI's income, expenses, and net income as derived from its statutory financial statements;

• Schedule F (Balance Sheet) — reflecting PBI's assets, liabilities, and equity as of the end of the relevant fiscal year;

• Schedule H (Current Earnings and Profits) — setting forth the computation of PBI's current earnings and profits for U.S. tax purposes;

• Schedule I (Summary of Shareholder's Income from CFC) — summarizing PPC's pro rata share of PBI's Subpart F income and, for TY 2018 through TY 2020, PBI's tested income for purposes of the global intangible low-taxed income ("GILTI") provisions under IRC § 951A (enacted as part of the Tax Cuts and Jobs Act ("TCJA"), effective for tax years beginning after December 31, 2017);

• Schedule J (Accumulated Earnings and Profits) — tracking PBI's accumulated earnings and profits, including previously taxed earnings and profits ("PTEP");

• Schedule M (Transactions Between Controlled Foreign Corporation and Shareholders or Other Related Persons) — detailing intercompany transactions between PBI and PPC or other related entities within the PPC group;

• Schedule O (Organization or Reorganization of Foreign Corporation, and Acquisitions and Dispositions of Its Stock) — reflecting any organizational changes, reorganizations, or stock transactions involving PBI during the relevant period; and

• Schedule P (Previously Taxed Earnings and Profits of U.S. Shareholder of Certain Foreign Corporations) — to the extent applicable, reflecting PPC's share of previously taxed earnings and profits.

Schedule M — Intercompany Transactions. The Schedule M disclosures are of particular significance to the examination, as they detail the principal categories of intercompany transactions between PBI and other members of the PPC consolidated group. Key intercompany transactions reflected on Schedule M for the Tax Years Under Examination include the following:

(1) Cost-Sharing Payments Under the Qualified Cost-Sharing Arrangement ("CSA"). PBI participated as a cost-sharing participant in PPC's qualified cost-sharing arrangement, which was structured in accordance with IRC § 482 and Treasury Regulation § 1.482-7. Under the CSA, PBI was obligated to bear a specified percentage of the group's intangible development costs ("Costs") in proportion to its reasonably anticipated benefit share. PBI's cost-sharing percentages and corresponding dollar amounts of cost-sharing payments for each Tax Year Under Examination were as follows:

The increasing cost-sharing percentages reflect PBI's growing share of reasonably anticipated benefits as non-Americas revenues expanded relative to total group revenues during the Tax Years Under Examination.

(2) Royalty Payments on Legacy intellectual Property. PBI made royalty payments to PPC on legacy IP — that is, intangible property that was developed prior to PBI's entry into the CSA and with respect to which PBI was granted a license to exploit in the EMEA and APAC territories. The royalty rate was established at 4.5% of non-Americas net sales, consistent with the arm's-length compensation determined under the contemporaneous transfer pricing analysis. The royalty payments for each tax year were as follows:

The declining royalty amounts reflect the gradual phasing out of legacy products as newer products, the costs of which are shared under the CSA, constitute an increasing share of PBI's product portfolio.

(3) Contract Manufacturing Payments. PBI made payments to Penterra Manufacturing Ireland Ltd. ("PMI"), an affiliated Irish entity, under a contract manufacturing arrangement structured on a cost-plus basis with a markup of 8%. These payments reflect PMI's provision of pharmaceutical manufacturing services for products commercialized by PBI in the EMEA and APAC markets.

Irish Tax Incentives. PPC notes that PBI claimed benefits under Ireland's Knowledge Development box ("KDB") regime, which provides for a reduced effective tax rate of 6.25% on qualifying IP income. PBI first availed itself of the KDB from fiscal year 2016 forward. Income not qualifying for the KDB was subject to the standard Irish trading income rate of 12.5%. The tax treatment of PBI's income under Irish law, and the interaction of Irish tax benefits with U.S. tax computations (including foreign tax credit and GILTI computations), is reflected in the relevant schedules to the Forms 5471 produced herewith.

B. Forms 5471 for Penterra Holdings Luxembourg S.à r.l. (PHL)

PPC produces herewith complete copies of the Forms 5471 filed by PPC with respect to PHL for each of the four Tax Years Under Examination, specifically:

(i) Form 5471 for PHL — Tax Year 2017;

(ii) Form 5471 for PHL — Tax Year 2018;

(iii) Form 5471 for PHL — Tax Year 2019; and

(iv) Form 5471 for PHL — Tax Year 2020.

Background on PHL. PHL is organized as a Luxembourg Société à responsabilité limitée, registered at 14, rue Aldringen, L-1118 Luxembourg, under RCS Number B 168452. PHL functions exclusively as an intermediate holding entity within the PPC group structure. PHL's sole material asset is its 100% equity interest in PBI. PHL is itself 100% owned by PPC.

Disregarded Entity Status. As previously noted, PHL made a check-the-box election under Treasury Regulation § 301.7701-3 to be treated as a disregarded entity (i.e., an entity disregarded as separate from its owner) for U.S. federal tax purposes. While Forms 5471 were filed for PHL as a matter of compliance and completeness, PHL's disregarded entity status means that its activities are generally reported through PPC and/or PBI for substantive U.S. federal tax purposes. PHL does not independently give rise to Subpart F income or GILTI tested income; rather, PPC, as the regarded owner of PHL's assets and activities, is treated as directly owning PBI for purposes of the CFC regime.

Schedules Included. The Forms 5471 produced for PHL include the following schedules, to the extent applicable:

• Schedule O (Organization or Reorganization of Foreign Corporation, and Acquisitions and Dispositions of Its Stock) — reflecting any organizational changes involving PHL; and

• Relevant ownership and organizational schedules as required to identify PHL's relationship within the PPC group structure.

Given PHL's limited function as a holding entity and its disregarded entity status, the Forms 5471 for PHL are substantially less voluminous than those filed for PBI.

C. Related International Informational Returns

In addition to the Forms 5471 described above, PPC produces the following related international informational returns and schedules filed in connection with PBI and PHL for the Tax Years Under Examination:

(a) Forms 8858 (Information Return of U.S. Persons with Respect to Foreign Disregarded Entities and Foreign Branches). PPC filed Forms 8858 with respect to PHL in its capacity as a foreign disregarded entity for each of TY 2017, TY 2018, TY 2019, and TY 2020. Complete copies of each Form 8858 are produced herewith.

(b) Schedule P (Previously Taxed Earnings and Profits of U.S. Shareholder of Certain Foreign Corporations). To the extent applicable, Schedule P was filed in connection with the Forms 5471 for PBI to track PPC's share of previously taxed earnings and profits of PBI, including amounts subject to inclusion under IRC §§ 951 and 951A, as well as amounts subject to the one-time transition tax under IRC § 965 (applicable to TY 2017). Copies of each applicable Schedule P are included with the corresponding Form 5471 production.

(c) Schedule I — Subpart F Income and GILTI Computations. The relevant portions of Schedule I to each Form 5471 for PBI reflect PPC's computation of PBI's Subpart F income inclusions under IRC § 952 for all four Tax Years Under Examination, as well as PBI's tested income and tested loss for purposes of the GILTI provisions under IRC § 951A for TY 2018, TY 2019, and TY 2020. The GILTI provisions were enacted as part of the TCJA, Public Law 115-97, and are effective for taxable years of foreign corporations beginning after December 31, 2017, and for taxable years of United States shareholders in which or with which such taxable years of foreign corporations end. These computations are integral to the overall international tax position reflected in PPC's consolidated returns for the years at issue.

PPC notes that it was not a participant in the IRS Compliance Assurance Process ("CAP") for any of the Tax Years Under Examination. Accordingly, the Forms 5471 and related returns produced herewith were filed as part of PPC's regularly prepared consolidated federal income tax returns without the benefit of pre-filing review by the IRS.

D. Production Index

Enclosed as Enclosure 4 is a comprehensive Production Index listing all documents produced in response to IDR No. 40. Each document in the production has been Bates-stamped for ease of reference. The documents bear Bates numbers PPC-IDR40-000001 through PPC-IDR40-001247, representing a total production of 1,247 pages. The Production Index identifies each document by Bates number range, document type, entity name, tax year, and a brief description of the document contents.

PPC notes that the Forms 5471 and related returns produced herein were originally prepared by Crestfield & Associates LLP, PPC's independent auditor and tax return preparer, under the direction of Martin Ogilvy, CPA (engagement partner) and Susan Lam, CPA (transfer pricing partner). Crestfield & Associates LLP prepared these returns as part of PPC's consolidated federal income tax return filings for the Tax Years Under Examination. The documents produced are true and complete copies of the returns as filed with the Internal Revenue Service.

III. NOTES AND QUALIFICATIONS

PPC provides the following notes and qualifications with respect to this production:

Completeness. All Forms 5471, Forms 8858, and related international informational returns and schedules produced herewith are true and complete copies of the returns as originally filed with PPC's consolidated federal income tax returns (Forms 1120) for TY 2017, TY 2018, TY 2019, and TY 2020. PPC has verified the completeness of the production against its internal records and the records maintained by Crestfield & Associates LLP.

Redactions. No redactions have been applied to the documents produced in response to IDR No. 40. The Forms 5471 and related returns are produced in their entirety as filed.

Reservation of Rights Regarding Privilege. Nothing in this production constitutes or is intended to constitute a waiver of attorney-client privilege, the work-product doctrine, the tax practitioner privilege under IRC § 7525, or any other applicable privilege, protection, or immunity. PPC expressly reserves all such rights and privileges. Without limiting the generality of the foregoing, PPC notes that Whitmore Valuation Group LLC has been engaged by C&H in connection with this examination under a Kovel arrangement, pursuant to a Kovel letter dated June 20, 2022, bearing reference number 1018-00009-KV. The engagement of Whitmore Valuation Group LLC is protected by the attorney-client privilege and the work-product doctrine, and nothing in this production should be construed as a waiver of the protections afforded by that arrangement. See United States v. Kovel, 296 F.2d 918 (2d Cir. 1961).

Transfer Pricing Positions. PPC continues to maintain that its transfer pricing positions as reflected in the Forms 5471 and related returns produced herewith, and in the contemporaneous transfer pricing documentation previously produced in response to IDR No. 4, are fully compliant with the arm's-length standard set forth in IRC § 482, the regulations governing the pricing of transfers of intangible property under Treasury Regulation § 1.482-4, and the regulations governing qualified cost-sharing arrangements under Treasury Regulation § 1.482-7. The production of these documents should not be construed as an acknowledgment of the validity of any proposed adjustment, nor as a concession on any issue currently under examination.

Without Prejudice. The production of these documents is made without prejudice to any position PPC may take regarding the propriety of the IRS's proposed adjustments, the scope of the examination, or any pending or future administrative or judicial proceedings, including but not limited to any protest, Appeals conference, petition to the United States Tax Court, or claim for refund.

IV. AVAILABILITY FOR QUESTIONS

C&H and PPC remain fully available to discuss any questions that may arise from the documents produced in response to IDR No. 40. Should Revenue Agent Dunleavy or Supervisory Revenue Agent Gerald Meskill require any further clarification regarding the Forms 5471, the related international informational returns, or the intercompany transactions reflected therein, we would be pleased to arrange a conference call or an in-person meeting at a mutually convenient time.

Please direct any questions or correspondence regarding this production to the undersigned at:

Garrett Simmons Calderwood & Harkness LLP 1735 Market Street, Suite 3100 Philadelphia, PA 19103 Direct Telephone: (215) 564-8847

Email: g.simmons@calderwoodharkness.com

We appreciate your continued professionalism throughout this examination process and trust that the enclosed production satisfactorily addresses IDR No. 40. We look forward to working cooperatively with the examination team as this matter proceeds.

Respectfully submitted,

CALDERWOOD & HARKNESS LLP

By: ________

Garrett Simmons Lead Associate, Tax Department Calderwood & Harkness LLP 1735 Market Street, Suite 3100 Philadelphia, PA 19103

cc: (via email)

Leonard Cross, Responsible Partner, Calderwood & Harkness LLP Sylvia Hartwell, Billing Partner, Calderwood & Harkness LLP Leila Nazari, Working Associate, Calderwood & Harkness LLP Marcus Whitfield, Vice President, Global Tax, Penterra Pharmaceuticals Corp. Deborah Staines, General Counsel, Penterra Pharmaceuticals Corp. Supervisory Revenue Agent Gerald Meskill, IRS Large Business & International Division

Enclosures:

Enclosure 1: Forms 5471 for Penterra Biopharma International DAC (PBI) — Tax Years 2017, 2018, 2019, and 2020, together with all schedules (including Schedules C, F, H, I, J, M, O, and P, as applicable)

Enclosure 2: Forms 5471 for Penterra Holdings Luxembourg S.à r.l. (PHL) — Tax Years 2017, 2018, 2019, and 2020, together with all applicable schedules

Enclosure 3: Forms 8858 for Penterra Holdings Luxembourg S.à r.l. (PHL) — Tax Years 2017, 2018, 2019, and 2020

Enclosure 4: Production Index with Bates Numbers (PPC-IDR40-000001 through PPC-IDR40-001247) and Document Descriptions

Tax Year	Cost-Sharing Percentage	Cost-Sharing Payment (USD)
2017	38.2%	$186,150,000
2018	39.6%	$207,420,000
2019	41.1%	$230,650,000
2020	42.7%	$255,520,000
Tax Year	Royalty Payment (USD)
2017	$36,660,000
2018	$34,300,000
2019	$31,130,000
2020	$28,080,000

CALDERWOOD & HARKNESS LLP Attorneys at Law
1735 Market Street, Suite 3100 Philadelphia, PA 19103 Telephone: (215) 564-8800 Facsimile: (215) 564-8801
600 Lexington Avenue New York, NY 10022 Telephone: (212) 848-1000
July 18, 2023
VIA HAND DELIVERY AND ELECTRONIC TRANSMISSION
Revenue Agent Patricia Dunleavy Large Business & International Division Internal Revenue Service IRS Exam Team ID LB&I-NE-TP-2022-00641 600 Arch Street, Room 6106 Philadelphia, PA 19106
Re: Penterra Pharmaceuticals Corp. (EIN: 22-3741856) — Response to Information Document Request No. 40 Tax Years Under Examination: 2017, 2018, 2019, 2020 Calderwood & Harkness LLP Matter No.: 1018-00009
Dear Revenue Agent Dunleavy:
This firm, Calderwood & Harkness LLP ("C&H"), serves as authorized representative of Penterra Pharmaceuticals Corp. ("PPC" or the "Company") in connection with the examination referenced above. Our authority to act on behalf of PPC is established pursuant to IRS Form 2848, Power of Attorney and Declaration of Representative, filed with the Internal Revenue Service on June 8, 2022, which designates the following individuals as authorized representatives: Leonard Cross (Responsible Partner), Sylvia Hartwell (Billing Partner), Garrett Simmons (Lead Associate), and Leila Nazari (Working Associate), all of the Tax Department of Calderwood & Harkness LLP. I write on behalf of the firm in my capacity as Lead Associate assigned to this matter.
This letter constitutes PPC's formal response to Information Document Request No. 40 ("IDR No. 40"), which was received by counsel on or about July 5, 2023, and which requests the production of Forms 5471 and related international informational returns filed by PPC for the tax years under examination. PPC is a Delaware corporation, publicly traded on the Nasdaq Stock Market under the ticker symbol "PPCA," with its principal executive offices located at 2200 Independence Boulevard, Princeton Junction, New Jersey 08550. PPC files its consolidated federal income tax returns on a calendar-year basis, with a fiscal year ending December 31.
Set forth below is a description of the scope of IDR No. 40, the documents produced in response thereto, and certain notes and qualifications applicable to this production.
I. SCOPE OF IDR NO. 40
IDR No. 40 requests that PPC produce all Forms 5471 (Information Return of U.S. Persons with Respect to Certain Foreign Corporations) filed by PPC with its consolidated federal income tax returns (Forms 1120) for the tax years ended December 31, 2017, December 31, 2018, December 31, 2019, and December 31, 2020 (collectively, the "Tax Years Under Examination" or "TY 2017," "TY 2018," "TY 2019," and "TY 2020," respectively).
Specifically, the IDR requests production of Forms 5471 for each controlled foreign corporation ("CFC") in which PPC held a direct or indirect ownership interest during the Tax Years Under Examination. Based on PPC's corporate structure as it existed during the relevant period, the CFCs for which Forms 5471 were filed are as follows:
(a) Penterra Biopharma International DAC ("PBI") — a Designated Activity Company organized and existing under the laws of Ireland, with its registered office located at 4th Floor, Claremont House, Sandyford Business Park, Dublin D18 K7T4, Ireland. PBI's Irish Tax Reference Number is 3218764T. PBI is classified as a controlled foreign corporation within the meaning of Internal Revenue Code ("IRC") § 957(a) for each of the Tax Years Under Examination.
(b) Penterra Holdings Luxembourg S.à r.l. ("PHL") — a Société à responsabilité limitée organized and existing under the laws of the Grand Duchy of Luxembourg, with its registered office located at 14, rue Aldringen, L-1118 Luxembourg. PHL's Luxembourg Registre de Commerce et des Sociétés ("RCS") number is B 168452. As described in further detail below, PHL made an election to be treated as a disregarded entity for U.S. federal tax purposes pursuant to Treasury Regulation § 301.7701-3; however, Forms 5471 were filed with respect to PHL as a matter of compliance and completeness.
In addition to the Forms 5471 for PBI and PHL, IDR No. 40 requests production of any related international informational returns or schedules filed by PPC in connection with these entities for the Tax Years Under Examination. PPC has interpreted this request to encompass Forms 8858, Schedules P, and any other ancillary schedules or attachments filed contemporaneously with the Forms 5471 for PBI and PHL.
II. DOCUMENTS PRODUCED
In response to IDR No. 40, PPC produces the documents described below. All documents produced herewith are organized by entity and tax year, as further detailed in the Production Index enclosed as Enclosure 4.
A. Forms 5471 for Penterra Biopharma International DAC (PBI)
PPC produces herewith complete copies of the Forms 5471 filed by PPC with respect to PBI for each of the four Tax Years Under Examination, specifically:
(i) Form 5471 for PBI — Tax Year 2017;
(ii) Form 5471 for PBI — Tax Year 2018;
(iii) Form 5471 for PBI — Tax Year 2019; and
(iv) Form 5471 for PBI — Tax Year 2020.
Each Form 5471 is produced together with all schedules and attachments as filed with PPC's corresponding consolidated federal income tax return (Form 1120) for the applicable tax year.
Background on PBI. PBI was incorporated on March 15, 2012, under Irish law as a Designated Activity Company. PBI functions as the principal intellectual property ("IP") holding company and commercial principal for PPC's non-Americas operations. In this capacity, PBI manages the commercialization of PPC's pharmaceutical products across the Europe, Middle East, and Africa ("EMEA") and Asia-Pacific ("APAC") territories. PBI also oversees and manages contract manufacturing and distribution arrangements with third-party and affiliated entities operating within those territories.
Ownership Structure. PBI is a wholly owned subsidiary of PHL. PHL, in turn, is 100% owned by PPC. As noted above, PHL is treated as a disregarded entity for U.S. federal tax purposes, having made a check-the-box election under Treasury Regulation § 301.7701-3. As a consequence of PHL's disregarded entity status, PPC is treated as the direct owner of PBI for purposes of the Form 5471 filing requirements. Accordingly, PPC filed as both a Category 4 filer and a Category 5 filer with respect to PBI, reflecting PPC's status as a United States person that is a United States shareholder (within the meaning of IRC § 951(b)) of a CFC (within the meaning of IRC § 957(a)).
PBI Financial Information. The Forms 5471 for PBI reflect financial data derived from PBI's Irish statutory financial statements, as translated into United States dollars in accordance with the applicable functional currency translation rules. By way of summary, PBI reported the following revenue and pre-tax income figures in its most recent year under examination: for the fiscal year ended December 31, 2020, PBI reported revenue of approximately €2.14 billion and pre-tax income of approximately €1.06 billion. PBI's workforce grew from 52 employees at the time of its incorporation in 2012 to 185 employees as of the end of TY 2020, reflecting the substantial expansion of PBI's operational activities over the period. PBI's managing director throughout the Tax Years Under Examination was Aidan Naughton.
Schedules Included. Each Form 5471 produced for PBI includes the following schedules, to the extent applicable for the relevant tax year:
• Schedule C (Income Statement) — reflecting PBI's income, expenses, and net income as derived from its statutory financial statements;
• Schedule F (Balance Sheet) — reflecting PBI's assets, liabilities, and equity as of the end of the relevant fiscal year;
• Schedule H (Current Earnings and Profits) — setting forth the computation of PBI's current earnings and profits for U.S. tax purposes;
• Schedule I (Summary of Shareholder's Income from CFC) — summarizing PPC's pro rata share of PBI's Subpart F income and, for TY 2018 through TY 2020, PBI's tested income for purposes of the global intangible low-taxed income ("GILTI") provisions under IRC § 951A (enacted as part of the Tax Cuts and Jobs Act ("TCJA"), effective for tax years beginning after December 31, 2017);
• Schedule J (Accumulated Earnings and Profits) — tracking PBI's accumulated earnings and profits, including previously taxed earnings and profits ("PTEP");
• Schedule M (Transactions Between Controlled Foreign Corporation and Shareholders or Other Related Persons) — detailing intercompany transactions between PBI and PPC or other related entities within the PPC group;
• Schedule O (Organization or Reorganization of Foreign Corporation, and Acquisitions and Dispositions of Its Stock) — reflecting any organizational changes, reorganizations, or stock transactions involving PBI during the relevant period; and
• Schedule P (Previously Taxed Earnings and Profits of U.S. Shareholder of Certain Foreign Corporations) — to the extent applicable, reflecting PPC's share of previously taxed earnings and profits.
Schedule M — Intercompany Transactions. The Schedule M disclosures are of particular significance to the examination, as they detail the principal categories of intercompany transactions between PBI and other members of the PPC consolidated group. Key intercompany transactions reflected on Schedule M for the Tax Years Under Examination include the following:
(1) Cost-Sharing Payments Under the Qualified Cost-Sharing Arrangement ("CSA"). PBI participated as a cost-sharing participant in PPC's qualified cost-sharing arrangement, which was structured in accordance with IRC § 482 and Treasury Regulation § 1.482-7. Under the CSA, PBI was obligated to bear a specified percentage of the group's intangible development costs ("Costs") in proportion to its reasonably anticipated benefit share. PBI's cost-sharing percentages and corresponding dollar amounts of cost-sharing payments for each Tax Year Under Examination were as follows:
The increasing cost-sharing percentages reflect PBI's growing share of reasonably anticipated benefits as non-Americas revenues expanded relative to total group revenues during the Tax Years Under Examination.
(2) Royalty Payments on Legacy intellectual Property. PBI made royalty payments to PPC on legacy IP — that is, intangible property that was developed prior to PBI's entry into the CSA and with respect to which PBI was granted a license to exploit in the EMEA and APAC territories. The royalty rate was established at 4.5% of non-Americas net sales, consistent with the arm's-length compensation determined under the contemporaneous transfer pricing analysis. The royalty payments for each tax year were as follows:
The declining royalty amounts reflect the gradual phasing out of legacy products as newer products, the costs of which are shared under the CSA, constitute an increasing share of PBI's product portfolio.
(3) Contract Manufacturing Payments. PBI made payments to Penterra Manufacturing Ireland Ltd. ("PMI"), an affiliated Irish entity, under a contract manufacturing arrangement structured on a cost-plus basis with a markup of 8%. These payments reflect PMI's provision of pharmaceutical manufacturing services for products commercialized by PBI in the EMEA and APAC markets.
Irish Tax Incentives. PPC notes that PBI claimed benefits under Ireland's Knowledge Development box ("KDB") regime, which provides for a reduced effective tax rate of 6.25% on qualifying IP income. PBI first availed itself of the KDB from fiscal year 2016 forward. Income not qualifying for the KDB was subject to the standard Irish trading income rate of 12.5%. The tax treatment of PBI's income under Irish law, and the interaction of Irish tax benefits with U.S. tax computations (including foreign tax credit and GILTI computations), is reflected in the relevant schedules to the Forms 5471 produced herewith.
B. Forms 5471 for Penterra Holdings Luxembourg S.à r.l. (PHL)
PPC produces herewith complete copies of the Forms 5471 filed by PPC with respect to PHL for each of the four Tax Years Under Examination, specifically:
(i) Form 5471 for PHL — Tax Year 2017;
(ii) Form 5471 for PHL — Tax Year 2018;
(iii) Form 5471 for PHL — Tax Year 2019; and
(iv) Form 5471 for PHL — Tax Year 2020.
Background on PHL. PHL is organized as a Luxembourg Société à responsabilité limitée, registered at 14, rue Aldringen, L-1118 Luxembourg, under RCS Number B 168452. PHL functions exclusively as an intermediate holding entity within the PPC group structure. PHL's sole material asset is its 100% equity interest in PBI. PHL is itself 100% owned by PPC.
Disregarded Entity Status. As previously noted, PHL made a check-the-box election under Treasury Regulation § 301.7701-3 to be treated as a disregarded entity (i.e., an entity disregarded as separate from its owner) for U.S. federal tax purposes. While Forms 5471 were filed for PHL as a matter of compliance and completeness, PHL's disregarded entity status means that its activities are generally reported through PPC and/or PBI for substantive U.S. federal tax purposes. PHL does not independently give rise to Subpart F income or GILTI tested income; rather, PPC, as the regarded owner of PHL's assets and activities, is treated as directly owning PBI for purposes of the CFC regime.
Schedules Included. The Forms 5471 produced for PHL include the following schedules, to the extent applicable:
• Schedule O (Organization or Reorganization of Foreign Corporation, and Acquisitions and Dispositions of Its Stock) — reflecting any organizational changes involving PHL; and
• Relevant ownership and organizational schedules as required to identify PHL's relationship within the PPC group structure.
Given PHL's limited function as a holding entity and its disregarded entity status, the Forms 5471 for PHL are substantially less voluminous than those filed for PBI.
C. Related International Informational Returns
In addition to the Forms 5471 described above, PPC produces the following related international informational returns and schedules filed in connection with PBI and PHL for the Tax Years Under Examination:
(a) Forms 8858 (Information Return of U.S. Persons with Respect to Foreign Disregarded Entities and Foreign Branches). PPC filed Forms 8858 with respect to PHL in its capacity as a foreign disregarded entity for each of TY 2017, TY 2018, TY 2019, and TY 2020. Complete copies of each Form 8858 are produced herewith.
(b) Schedule P (Previously Taxed Earnings and Profits of U.S. Shareholder of Certain Foreign Corporations). To the extent applicable, Schedule P was filed in connection with the Forms 5471 for PBI to track PPC's share of previously taxed earnings and profits of PBI, including amounts subject to inclusion under IRC §§ 951 and 951A, as well as amounts subject to the one-time transition tax under IRC § 965 (applicable to TY 2017). Copies of each applicable Schedule P are included with the corresponding Form 5471 production.
(c) Schedule I — Subpart F Income and GILTI Computations. The relevant portions of Schedule I to each Form 5471 for PBI reflect PPC's computation of PBI's Subpart F income inclusions under IRC § 952 for all four Tax Years Under Examination, as well as PBI's tested income and tested loss for purposes of the GILTI provisions under IRC § 951A for TY 2018, TY 2019, and TY 2020. The GILTI provisions were enacted as part of the TCJA, Public Law 115-97, and are effective for taxable years of foreign corporations beginning after December 31, 2017, and for taxable years of United States shareholders in which or with which such taxable years of foreign corporations end. These computations are integral to the overall international tax position reflected in PPC's consolidated returns for the years at issue.
PPC notes that it was not a participant in the IRS Compliance Assurance Process ("CAP") for any of the Tax Years Under Examination. Accordingly, the Forms 5471 and related returns produced herewith were filed as part of PPC's regularly prepared consolidated federal income tax returns without the benefit of pre-filing review by the IRS.
D. Production Index
Enclosed as Enclosure 4 is a comprehensive Production Index listing all documents produced in response to IDR No. 40. Each document in the production has been Bates-stamped for ease of reference. The documents bear Bates numbers PPC-IDR40-000001 through PPC-IDR40-001247, representing a total production of 1,247 pages. The Production Index identifies each document by Bates number range, document type, entity name, tax year, and a brief description of the document contents.
PPC notes that the Forms 5471 and related returns produced herein were originally prepared by Crestfield & Associates LLP, PPC's independent auditor and tax return preparer, under the direction of Martin Ogilvy, CPA (engagement partner) and Susan Lam, CPA (transfer pricing partner). Crestfield & Associates LLP prepared these returns as part of PPC's consolidated federal income tax return filings for the Tax Years Under Examination. The documents produced are true and complete copies of the returns as filed with the Internal Revenue Service.
III. NOTES AND QUALIFICATIONS
PPC provides the following notes and qualifications with respect to this production:
Completeness. All Forms 5471, Forms 8858, and related international informational returns and schedules produced herewith are true and complete copies of the returns as originally filed with PPC's consolidated federal income tax returns (Forms 1120) for TY 2017, TY 2018, TY 2019, and TY 2020. PPC has verified the completeness of the production against its internal records and the records maintained by Crestfield & Associates LLP.
Redactions. No redactions have been applied to the documents produced in response to IDR No. 40. The Forms 5471 and related returns are produced in their entirety as filed.
Reservation of Rights Regarding Privilege. Nothing in this production constitutes or is intended to constitute a waiver of attorney-client privilege, the work-product doctrine, the tax practitioner privilege under IRC § 7525, or any other applicable privilege, protection, or immunity. PPC expressly reserves all such rights and privileges. Without limiting the generality of the foregoing, PPC notes that Whitmore Valuation Group LLC has been engaged by C&H in connection with this examination under a Kovel arrangement, pursuant to a Kovel letter dated June 20, 2022, bearing reference number 1018-00009-KV. The engagement of Whitmore Valuation Group LLC is protected by the attorney-client privilege and the work-product doctrine, and nothing in this production should be construed as a waiver of the protections afforded by that arrangement. See United States v. Kovel, 296 F.2d 918 (2d Cir. 1961).
Transfer Pricing Positions. PPC continues to maintain that its transfer pricing positions as reflected in the Forms 5471 and related returns produced herewith, and in the contemporaneous transfer pricing documentation previously produced in response to IDR No. 4, are fully compliant with the arm's-length standard set forth in IRC § 482, the regulations governing the pricing of transfers of intangible property under Treasury Regulation § 1.482-4, and the regulations governing qualified cost-sharing arrangements under Treasury Regulation § 1.482-7. The production of these documents should not be construed as an acknowledgment of the validity of any proposed adjustment, nor as a concession on any issue currently under examination.
Without Prejudice. The production of these documents is made without prejudice to any position PPC may take regarding the propriety of the IRS's proposed adjustments, the scope of the examination, or any pending or future administrative or judicial proceedings, including but not limited to any protest, Appeals conference, petition to the United States Tax Court, or claim for refund.
IV. AVAILABILITY FOR QUESTIONS
C&H and PPC remain fully available to discuss any questions that may arise from the documents produced in response to IDR No. 40. Should Revenue Agent Dunleavy or Supervisory Revenue Agent Gerald Meskill require any further clarification regarding the Forms 5471, the related international informational returns, or the intercompany transactions reflected therein, we would be pleased to arrange a conference call or an in-person meeting at a mutually convenient time.
Please direct any questions or correspondence regarding this production to the undersigned at:
Garrett Simmons Calderwood & Harkness LLP 1735 Market Street, Suite 3100 Philadelphia, PA 19103 Direct Telephone: (215) 564-8847
Email: g.simmons@calderwoodharkness.com
We appreciate your continued professionalism throughout this examination process and trust that the enclosed production satisfactorily addresses IDR No. 40. We look forward to working cooperatively with the examination team as this matter proceeds.
Respectfully submitted,
CALDERWOOD & HARKNESS LLP
By: ________
Garrett Simmons Lead Associate, Tax Department Calderwood & Harkness LLP 1735 Market Street, Suite 3100 Philadelphia, PA 19103
cc: (via email)
Leonard Cross, Responsible Partner, Calderwood & Harkness LLP Sylvia Hartwell, Billing Partner, Calderwood & Harkness LLP Leila Nazari, Working Associate, Calderwood & Harkness LLP Marcus Whitfield, Vice President, Global Tax, Penterra Pharmaceuticals Corp. Deborah Staines, General Counsel, Penterra Pharmaceuticals Corp. Supervisory Revenue Agent Gerald Meskill, IRS Large Business & International Division
Enclosures:
Enclosure 1: Forms 5471 for Penterra Biopharma International DAC (PBI) — Tax Years 2017, 2018, 2019, and 2020, together with all schedules (including Schedules C, F, H, I, J, M, O, and P, as applicable)
Enclosure 2: Forms 5471 for Penterra Holdings Luxembourg S.à r.l. (PHL) — Tax Years 2017, 2018, 2019, and 2020, together with all applicable schedules
Enclosure 3: Forms 8858 for Penterra Holdings Luxembourg S.à r.l. (PHL) — Tax Years 2017, 2018, 2019, and 2020
Enclosure 4: Production Index with Bates Numbers (PPC-IDR40-000001 through PPC-IDR40-001247) and Document Descriptions
Tax Year | Cost-Sharing Percentage | Cost-Sharing Payment (USD)
2017 | 38.2% | $186,150,000
2018 | 39.6% | $207,420,000
2019 | 41.1% | $230,650,000
2020 | 42.7% | $255,520,000
Tax Year | Royalty Payment (USD)
2017 | $36,660,000
2018 | $34,300,000
2019 | $31,130,000
2020 | $28,080,000

CALDERWOOD & HARKNESS LLP Attorneys at Law

VIA HAND DELIVERY AND ELECTRONIC TRANSMISSION

I. SCOPE OF IDR NO. 40

II. DOCUMENTS PRODUCED

III. NOTES AND QUALIFICATIONS

IV. AVAILABILITY FOR QUESTIONS

CALDERWOOD & HARKNESS LLP

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