CALDERWOOD & HARKNESS LLP Attorneys at Law
1735 Market Street, Suite 3100 Philadelphia, PA 19103
Telephone: (215) 864-7000 Facsimile: (215) 864-7001 www.calderwoodharkness.com
April 22, 2024
PRIVILEGED AND CONFIDENTIAL — ATTORNEY-CLIENT COMMUNICATION This memorandum is protected by the attorney-client privilege and the work product doctrine. It is intended solely for the use of the addressee and individuals identified on the distribution list. Any disclosure, distribution, or copying of this communication to any person other than the addressee is strictly prohibited.
MEMORANDUM
To: Marcus Whitfield, Vice President, Global Tax — Penterra Pharmaceuticals Corp. ("PPC")
From: Garrett Simmons, Calderwood & Harkness LLP
Re: Recommendations for Enhancing Operational Substance of Penterra Biopharma International DAC ("PBI") — Post-Settlement Action Plan
C&H Matter No.: 1018-00009
cc: Leonard Cross (Calderwood & Harkness LLP) Sylvia Hartwell (Calderwood & Harkness LLP) Leila Nazari (Calderwood & Harkness LLP) Deborah Staines (PPC General Counsel)
I. EXECUTIVE SUMMARY
This memorandum sets forth our actionable recommendations for enhancing the operational substance of Penterra Biopharma International DAC ("PBI"), PPC's Irish-domiciled subsidiary, in the wake of the successful resolution of the IRS Large Business & International Division ("LB&I") examination for Tax Years 2017–2020 (Exam Team LB&I-NE-TP-2022-00641). Following the execution of a Form 906 Closing Agreement with IRS Appeals on March 29, 2024, this memorandum is intended to serve as a prospective action plan to strengthen PPC's transfer pricing positions for Tax Year 2021 forward and to materially reduce the risk, cost, and burden of future IRS examinations.
As you are aware, the IRS examination resulted in proposed adjustments totaling $380.4 million across the four examination years. The matter was resolved at IRS Appeals at $47.6 million—representing approximately 12.51% of the total proposed adjustment amount. The settlement outcome was highly favorable to PPC: the total cash cost to the company was approximately $21.2 million (inclusive of tax of $10.0 million, interest of $2.84 million, and aggregate professional fees of approximately $8.3 million), compared to a potential total exposure of approximately $95.86 million had the IRS's proposed adjustments and penalties been sustained in full. Full penalty abatement was achieved in the settlement.
Notwithstanding this favorable result, the examination revealed specific vulnerabilities in PBI's operational profile that, if left unaddressed, could be exploited by the IRS in future audit cycles. One of the IRS's four primary positions was that PBI lacked sufficient economic substance to justify its role as IP owner and cost-sharing arrangement ("CSA") participant under Treasury Regulation § 1.482-7. The IRS's examination team argued that key functions related to Development, Enhancement, Maintenance, Protection, and Exploitation ("DEMPE") of PPC's pharmaceutical intellectual property remained predominantly in the United States, and that PBI's Dublin operations were, in substance, largely administrative.
While Calderwood & Harkness and our valuation experts at Whitmore Valuation Group LLC successfully rebutted this challenge through extensive factual evidence—including documentation of 42 PBI board meetings held in Dublin during the examination period, PBI's headcount of 185 employees, €47.2 million in cumulative regulatory expenditures, and PBI's independent pricing authority across 68 country markets—several areas of vulnerability were identified during the course of our defense. These vulnerabilities, though not fatal to PBI's position in the resolved examination, represent points of potential exposure that the IRS could more aggressively exploit in future cycles, particularly as PBI's profitability continues to grow.
The recommendations in this memorandum are organized into six categories, each designed to address a specific area of vulnerability:
1. Headcount and Personnel Enhancements — increasing scientific and technical personnel in Dublin to demonstrate PBI's direct participation in Development and Enhancement functions;
2. Board Governance Enhancements — increasing meeting frequency, improving documentation quality, and strengthening board independence;
3. DEMPE Function Documentation Framework — institutionalizing a formal, annually updated DEMPE allocation policy;
4. Operational Autonomy and Decision-Making — formalizing PBI's independent decision-making processes and risk management functions;
5. Financial Infrastructure and Banking — maintaining and expanding PBI's independent financial operations in Ireland; and
6. Contemporaneous Documentation Processes — establishing a culture of real-time documentation that will reduce the cost and burden of future examinations.
Each recommendation is designed to be practical, implementable within a defined timeline, and proportionate in cost to the risk it mitigates. The estimated annual incremental cost of the full set of recommendations is €3–5 million—a modest investment relative to PPC's fiscal year 2020 revenue of $6.82 billion, PBI's fiscal year 2020 revenue of €2.14 billion, and the potential audit exposure demonstrated by the recently resolved examination.
We are available to discuss these recommendations at your convenience and to assist with implementation planning in coordination with PPC's other advisors.
II. BACKGROUND: LESSONS FROM THE IRS EXAMINATION
A. Summary of the IRS Economic Substance Challenge
The IRS LB&I examination of PPC's Tax Years 2017–2020 was initiated in June 2022 and conducted by a dedicated transfer pricing examination team. Revenue Agent Patricia Dunleavy served as the lead case manager, and IRS Economist Dr. Alan Washburne provided the economic analysis supporting the IRS's proposed adjustments. The examination team asserted four primary positions, one of which was that PBI lacked sufficient economic substance to justify its status as the beneficial owner of intellectual property rights relating to PPC's three principal pharmaceutical products—Veritaxol, Imvara, and Cerulon—for non-Americas territories, and that PBI accordingly did not qualify as a legitimate cost-sharing participant under Treasury Regulation § 1.482-7.
The core of the IRS's economic substance challenge focused on the assertion that key DEMPE functions—and particularly the Development and Enhancement functions—were predominantly performed in the United States at PPC's global headquarters located at 2200 Independence Boulevard, Princeton Junction, New Jersey 08550. The IRS contended that PBI's Dublin operations, housed at 4th Floor, Claremont House, Sandyford Business Park, Dublin D18 K7T4, Ireland, were largely administrative and commercial in nature, and did not rise to the level of substance necessary to support PBI's characterization as a meaningful participant in the development, enhancement, and management of PPC's intangible property portfolio.
IRS Attorney-Advisor Franklin Rosario and Senior Counsel Donna Hirabayashi from the IRS Office of Chief Counsel supported this position at the examination level, arguing specifically that PBI's control over intangible development activities was insufficient under the standards articulated in Treasury Regulation § 1.482-7(j)(3)(i) and related authority. Their position drew on the analysis of Dr. Washburne, who prepared an economic report asserting that the key value-driving activities for PPC's pharmaceutical portfolio—particularly clinical development, formulation science, and IP strategy—were directed, funded, and managed by U.S.-based PPC personnel, with PBI's Dublin operations serving an executing rather than a directing role.
The IRS's economic substance challenge, while only one of four proposed adjustment positions, represented a significant strategic risk because, if sustained, it would have had the potential to collapse the entire transfer pricing structure—not merely to adjust specific intercompany prices, but to deny PBI's entitlement to intangible-related returns altogether.
B. Strengths of PBI's Current Substance Profile
During the examination and the subsequent Appeals proceeding, Calderwood & Harkness and Whitmore Valuation Group assembled a comprehensive factual record demonstrating PBI's operational substance. This record proved instrumental in achieving the favorable settlement and included the following key elements:
Headcount growth. PBI's employee headcount grew organically from 52 employees at the time of PBI's incorporation on March 15, 2012, to 185 employees by the end of Tax Year 2020. This growth trajectory—representing a more than three-fold increase over eight years—demonstrated that PBI was not a shell entity but rather a growing, operationally active business with a substantial workforce.
Board meetings. During the four examination years (2017–2020), PBI's board of directors held 42 meetings in Dublin, consisting of quarterly regular meetings and special sessions convened as needed to address significant business matters. Each meeting was documented with minutes reflecting substantive discussion and decision-making by PBI's board. The meetings were not perfunctory exercises; minutes reflected genuine deliberation on commercial strategy, regulatory priorities, market entry and exit decisions, pricing, and IP-related matters.
Regulatory expenditures. PBI incurred €47.2 million in cumulative regulatory expenditures during 2017–2020, relating to market-access submissions, pricing and reimbursement dossiers, and regulatory filings across non-Americas territories. These expenditures represented PBI's direct investment in the exploitation and maintenance of PPC's pharmaceutical portfolio in PBI's assigned territories and were central to our demonstration that PBI performed meaningful DEMPE functions.
Independent pricing authority. PBI exercised independent pricing decisions across 68 country markets in its non-Americas territory, reflecting PBI's autonomous commercial role. Pricing was not dictated by PPC's U.S. headquarters but was determined by PBI's Dublin-based management team based on local market conditions, regulatory requirements, competitive dynamics, and reimbursement frameworks.
Dedicated office space. PBI occupied approximately 18,000 square feet of dedicated office space at Sandyford Business Park in Dublin, housing its management team, commercial operations, regulatory affairs, finance, and administrative functions.
Key management personnel. Aidan Naughton, PBI's Managing Director, exercised day-to-day control over PBI's commercial strategy, market-entry decisions, distribution partner selection, pricing, and regulatory strategy for non-Americas territories. Mr. Naughton reported to the PBI board of directors—not directly to PPC's U.S.-based CEO.
Independent banking. PBI maintained an independent banking relationship with Glenmore Bank Ireland plc, with autonomous treasury management and cash management functions operated out of Dublin.
Risk-bearing. PBI bore genuine market risk for its non-Americas territories, including demand risk, regulatory risk, pricing risk, currency risk, and reimbursement risk in each of the 68 country markets in which it operated.
These elements, taken together, formed a substantial evidentiary foundation that enabled Calderwood & Harkness to successfully defend PBI's operational substance. The IRS's economic substance position was ultimately not sustained at Appeals, and the settlement reflected an outcome largely attributable to the IRS's other adjustment positions rather than the economic substance challenge.
C. Areas of Vulnerability Identified During the Defense
Notwithstanding the strengths of PBI's substance profile, several specific areas of vulnerability emerged during the course of the examination and the Appeals proceeding. These vulnerabilities were identified through our analysis of the 47 Information Document Requests ("IDRs") issued by the IRS between June 2022 and September 2023, our preparation of responses to those IDRs, our review of the IRS's Revenue Agent Report ("RAR") and accompanying economic analysis, and our participation in the Appeals conference held on February 28, 2024, in Manhattan, presided over by Appeals Officer Noreen Castañeda.
The specific vulnerabilities identified are as follows:
(1) Limited technical and scientific headcount in Dublin. While PBI's total headcount of 185 employees was substantial, the vast majority of those employees were in commercial, regulatory, administrative, and finance roles. PBI did not maintain dedicated R&D or IP-development staff on-site in Dublin. This created an asymmetry that the IRS exploited: PBI's workforce, while large, was oriented toward Exploitation and Maintenance functions rather than Development and Enhancement functions. The IRS argued that this staffing profile was inconsistent with PBI's characterization as an IP owner and CSA participant that bore and controlled Development and Enhancement risk.
(2) Absence of a formal DEMPE documentation framework. PBI did not maintain an internal, institutionalized DEMPE allocation framework. While Calderwood & Harkness prepared a detailed DEMPE Functions Matrix for Tax Years 2017–2020 during the examination, this matrix was prepared retroactively in the context of the audit defense rather than maintained contemporaneously as part of PBI's internal governance and compliance program. The absence of a pre-existing DEMPE framework allowed the IRS to argue that PBI's DEMPE function performance was not a deliberate, managed aspect of PBI's operations.
(3) Insufficient detail in certain board meeting minutes. Although 42 board meetings were held during the examination period, and the minutes generally reflected substantive deliberation, some meeting minutes lacked sufficient granularity on IP-related strategic decisions. In particular, certain minutes did not clearly document PBI's board-level oversight of Enhancement activities, IP protection strategies, or the board's independent assessment of Development-related risks in connection with the CSA. This gap was identified by Appeals Officer Castañeda during the February 28, 2024, conference as an area where the evidentiary record could have been stronger.
(4) Reliance on U.S.-based PPC personnel for certain DEMPE functions. Certain Enhancement and Protection functions—including oversight of clinical development programs and patent prosecution activities—were performed by PPC U.S.-based personnel on behalf of PBI without clear, formalized intercompany service documentation. While there was no suggestion that these services were not provided at arm's-length prices, the absence of written intercompany service agreements for certain categories of services created ambiguity about the characterization of these arrangements and the direction of control.
(5) Limited contemporaneous documentation of PBI's risk management functions. The IRS challenged whether PBI genuinely bore and controlled market risk, development risk, and operational risk in its non-Americas territories. While we were able to demonstrate PBI's risk-bearing through financial data, commercial contracts, and testimony from Mr. Naughton and other PBI personnel, PBI did not maintain a formalized, contemporaneous risk management framework with written risk policies, periodic risk reports to the board, or documented risk-assessment processes. The absence of such a framework made it more difficult to demonstrate—on a contemporaneous, real-time basis—that PBI independently managed and controlled the risks it bore.
Each of the recommendations set forth below is designed to address one or more of these identified vulnerabilities.
III. RECOMMENDATION 1: HEADCOUNT AND PERSONNEL ENHANCEMENTS
A. Increase Scientific and Technical Headcount
We recommend that PBI hire 15 to 25 additional personnel in Dublin with scientific, clinical, and pharmaceutical-development expertise over the next 18 to 24 months, bringing PBI's total Dublin-based headcount to approximately 200 to 210 employees by the end of calendar year 2025. The primary objective of this hiring initiative is to address the IRS's specific challenge that Development and Enhancement functions were predominantly U.S.-centric by establishing a visible, credible, and operationally significant scientific and technical presence within PBI's Dublin operations.
The key roles to be filled include:
(i) Senior Director of IP Strategy. This role should be based in Dublin and should report directly to Managing Director Aidan Naughton. The Senior Director of IP Strategy would be responsible for overseeing PBI's intellectual property strategy for non-Americas territories, including patent lifecycle management, IP portfolio optimization, and coordination with PBI's in-house and external patent counsel on prosecution, maintenance, and enforcement activities. This individual should have a scientific or engineering background (preferably a Ph.D. in a relevant discipline or a J.D. with a technical undergraduate degree) and substantial experience in pharmaceutical IP management.
(ii) Clinical Development Leads. PBI should hire dedicated clinical development leads for each of PPC's three principal therapeutic areas: oncology (Veritaxol), immunology (Imvara), and rare disease (Cerulon). These individuals should be Dublin-based and should have authority over the design, oversight, and management of region-specific clinical trials (Phase IIIb, Phase IV, and post-marketing studies) conducted in non-Americas territories. These roles are essential to demonstrating that PBI exercises control over Enhancement activities—a function the IRS specifically challenged as being U.S.-directed.
(iii) Medical Science Liaisons (MSLs). PBI should hire additional medical science liaisons for the EMEA and APAC regions, based in Dublin or in key regional hubs reporting to Dublin. MSLs serve as the scientific interface between PBI and healthcare professionals in non-Americas territories and play a critical role in the dissemination of scientific data, the identification of clinical research opportunities, and the maintenance and enhancement of product value in local markets.
(iv) In-House IP/Patent Counsel. PBI should hire at least one in-house patent counsel based in Dublin, with expertise in European patent law and pharmaceutical IP. This individual would work under the Senior Director of IP Strategy and would be responsible for coordinating PBI's patent prosecution, maintenance, and enforcement activities across non-Americas territories, reducing PBI's dependence on PPC's U.S.-based legal team for these functions.
The rationale for this hiring initiative is straightforward: having Dublin-based personnel with genuine technical and scientific expertise and documented, binding decision-making authority over Development and Enhancement activities for non-Americas territories directly addresses the IRS's principal economic substance challenge. The IRS's argument that DEMPE functions were U.S.-centric was strengthened by the fact that PBI's existing headcount was overwhelmingly commercial and administrative in nature. Adding scientific and technical personnel to PBI's Dublin operations fundamentally changes the character of PBI's workforce and creates a much stronger factual foundation for the assertion that PBI controls and performs DEMPE functions within its territory.
We recognize that not all of these hires can or should be made simultaneously. A phased approach, beginning with the Senior Director of IP Strategy and clinical development leads in Q2–Q3 2024 and expanding to MSLs and in-house IP counsel through 2025, is both practical and sufficient to demonstrate meaningful progress.
B. Enhance Key-Person Decision-Making Authority
In addition to hiring new personnel, it is critical to ensure that Aidan Naughton and other senior Dublin-based staff have clearly documented, binding authority over key operational decisions for non-Americas markets. This authority should encompass, at a minimum:
(i) Product lifecycle decisions for non-Americas markets, including decisions regarding product launch timing, withdrawal, reformulation, and line extensions;
(ii) R&D prioritization for region-specific formulations, indications, or delivery systems, including the authority to initiate, modify, or terminate Enhancement-related projects for non-Americas markets;
(iii) Regulatory strategy, including the authority to determine the sequencing, prioritization, and approach for regulatory submissions in non-Americas territories, in coordination with—but not subordinate to—PPC's U.S.-based regulatory affairs teams.
We recommend that the PBI board of directors adopt formal delegation-of-authority resolutions that explicitly delineate these authorities and delegate them to Mr. Naughton and other named senior Dublin-based officers. These resolutions should be maintained as part of PBI's corporate governance records and should be available for production in any future examination. The resolutions should make clear that PBI's Dublin management exercises these authorities independently, and that any coordination with PPC's U.S.-based teams is conducted on a collaborative, arm's-length basis rather than a directive, top-down basis.
C. Reduce Dependence on PPC U.S.-Based Secondees
We recommend that PPC and PBI conduct a thorough audit of current arrangements in which PPC U.S.-based employees provide services to PBI, whether on a formal secondment basis or on an ad hoc, informal basis. Where possible, functions currently performed by U.S.-based personnel should be transferred to Dublin-based PBI employees—particularly functions that relate to Development, Enhancement, or Protection activities.
Where shared services are genuinely necessary and economically efficient—for example, centralized clinical data management or global safety/pharmacovigilance functions—these arrangements should be formalized through written intercompany service agreements at arm's-length charges, consistent with Treasury Regulation § 1.482-9. The agreements should clearly specify the nature and scope of services, the direction of control, the service recipient's role in overseeing and directing the services, and the arm's-length compensation methodology.
The objective of this recommendation is not to eliminate all intercompany services—shared services are a normal and expected feature of multinational pharmaceutical groups—but rather to ensure that (a) services are properly documented, (b) the direction of control is clearly delineated, (c) arm's-length pricing is established and maintained, and (d) PBI is not perceived as a passive recipient of U.S.-directed services but rather as an active principal that engages PPC's U.S. teams as service providers where appropriate.
IV. RECOMMENDATION 2: BOARD GOVERNANCE ENHANCEMENTS
A. Increase Board Meeting Frequency and Structure
During Tax Years 2017–2020, PBI's board of directors held a total of 42 meetings in Dublin, averaging approximately 10.5 meetings per year. This meeting frequency included quarterly regular meetings and ad hoc special sessions convened to address specific business matters. While this frequency was sufficient to support our defense during the recently concluded examination, we recommend increasing PBI board meetings to a monthly cadence, targeting approximately 12 regular meetings per year plus special sessions as needed. We project that this would result in approximately 14 to 16 total meetings per year—a meaningful increase over the 2017–2020 average.
In addition to increasing frequency, we recommend enhancing the structure and content of each meeting. Specifically, each regular board meeting should include the following standing agenda items:
• IP Strategy Update: A report from the Senior Director of IP Strategy (once hired) on the status of PBI's intangible property portfolio for non-Americas territories, including patent prosecution and maintenance activities, IP enforcement actions, and strategic IP decisions;
• DEMPE Function Report: A standing report summarizing PBI's DEMPE function activities since the prior meeting, organized by function (Development, Enhancement, Maintenance, Protection, Exploitation) and by product (Veritaxol, Imvara, Cerulon, pipeline products);
• Commercial Performance and Key Decisions: A report on commercial performance across PBI's 68+ country markets, including material pricing decisions, distribution partner developments, market-entry or market-exit decisions, and marketing strategy updates;
• Risk Management Report: A quarterly (or more frequent) risk management report summarizing PBI's assessment and management of market risk, regulatory risk, currency risk, supply-chain risk, and other operational risks for non-Americas territories;
• Financial Report: A report on PBI's financial performance, treasury management, cash flow, and capital allocation decisions.
The inclusion of these standing agenda items ensures that each board meeting creates a contemporaneous record of PBI's active engagement in DEMPE functions, independent decision-making, and risk management—precisely the categories of evidence that the IRS will seek to challenge in any future examination.
B. Enhance Board Minutes Documentation
The quality and detail of board meeting minutes were a recurring area of focus during the examination and the Appeals proceeding. While PBI's minutes were generally adequate, certain meetings' minutes lacked the level of granularity that would have been optimal for audit defense purposes. We recommend implementing a standardized minute-taking protocol that ensures each set of minutes captures the following elements:
(i) Specific IP-related decisions and the rationale underlying those decisions, including the business, commercial, scientific, and strategic considerations discussed by the board;
(ii) Risk assessments and mitigation strategies discussed by the board, including the board's evaluation of specific market risks, regulatory risks, and competitive risks in non-Americas territories;
(iii) Market-entry and pricing decisions, including the supporting analysis and data considered by the board in reaching those decisions;
(iv) Capital expenditure approvals, with documentation of the business case, projected returns, and strategic rationale for each approved expenditure;
(v) Regulatory strategy discussions, including the board's consideration of regulatory submissions, approvals, and market-access strategies across non-Americas territories.
To ensure professional, consistent, and contemporaneous minute preparation, we recommend that PBI retain external corporate secretary services from a reputable Dublin-based provider. The external corporate secretary would be responsible for attending all board meetings, preparing draft minutes promptly following each meeting, and maintaining PBI's corporate governance records in accordance with Irish company law requirements and best practices. The use of an external corporate secretary also provides an element of independence and professionalism that further reinforces PBI's governance bona fides.
C. Board Composition
We recommend that PBI consider adding one or two independent non-executive directors to its board. These independent directors should have pharmaceutical industry expertise and knowledge of the Irish and European business environment. The addition of independent directors serves several purposes: it demonstrates arm's-length governance independence from PPC's U.S.-based board of directors; it provides PBI's board with additional industry-specific expertise and judgment; and it reinforces the perception—and the reality—that PBI's board exercises genuine, independent oversight of PBI's operations.
Independent directors should be individuals who are not current or former employees of PPC or any PPC affiliate, who do not have material financial relationships with PPC other than their PBI board service, and who bring credible pharmaceutical industry credentials. The search for appropriate independent director candidates should be initiated in Q3–Q4 2024, with appointments targeted for early 2025.
D. Location of Meetings
All PBI board meetings must continue to be held physically in Dublin, Ireland. This is a non-negotiable requirement. The physical location of board meetings is a foundational element of PBI's substance profile and was a central point of evidence in the recently resolved examination.
Where PPC U.S.-based executives—such as Catherine Falk (CEO) or Rajesh Iyer (CFO)—attend PBI board meetings, the minutes should clearly document their attendance as PPC representatives attending a PBI meeting, rather than as PPC executives directing PBI's operations. The minutes should reflect that these individuals provided information, perspective, or updates to the PBI board, and that PBI's board exercised independent judgment in making decisions. The distinction between a PPC executive attending a PBI board meeting to provide input and a PPC executive attending to direct PBI's actions is critical and must be scrupulously maintained in the documentary record.
In the event that extraordinary circumstances require a PBI board member or attendee to participate remotely, such participation should be the exception rather than the rule, should be documented as remote participation in the minutes, and should not alter the fact that the meeting is convened and chaired from Dublin.
V. RECOMMENDATION 3: DEMPE FUNCTION DOCUMENTATION FRAMEWORK
A. Establish a Formal DEMPE Allocation Framework
The most significant structural gap identified during the examination was PBI's lack of a formalized, internally maintained DEMPE allocation framework. During the course of the audit defense, Calderwood & Harkness prepared a detailed DEMPE Functions Matrix covering Tax Years 2017–2020, mapping each DEMPE function to the specific entity (PPC or PBI) performing that function for each key product. This matrix was an essential component of our defense and was instrumental in demonstrating PBI's role in DEMPE activities.
However, this matrix was prepared retroactively in the context of the examination—it was not a pre-existing, internally maintained governance document. The IRS noted this fact, and Appeals Officer Castañeda commented during the February 28, 2024, conference that contemporaneous DEMPE documentation would have strengthened PBI's position.
We recommend that PBI develop and implement a written DEMPE allocation policy that serves as a standing governance document within PBI's internal compliance and corporate governance framework. This policy should:
• Map each Development, Enhancement, Maintenance, Protection, and Exploitation function to the specific entity (PPC or PBI) performing that function, for each key product (Veritaxol, Imvara, and Cerulon) and for pipeline products as they enter development;
• Identify the specific personnel, departments, and operational units responsible for performing each function;
• Describe the decision-making processes and governance structures through which each function is directed and controlled;
• Be updated and re-approved annually by the PBI board of directors, with the update process constituting a substantive agenda item at a designated board meeting each year;
• Be maintained as a living document by PBI's internal management, not solely prepared or maintained by external advisors.
The institutionalization of this framework serves a dual purpose. First, it creates a contemporaneous evidentiary record that can be produced in any future examination, demonstrating that PBI's DEMPE function allocation is a deliberate, managed, and board-approved aspect of PBI's operations. Second, the annual update process forces PBI's management and board to engage in a structured, periodic assessment of DEMPE function allocation, ensuring that the framework remains current and aligned with PBI's evolving operations.
B. Development and Enhancement Functions
Particular attention should be devoted to PBI's role in Development and Enhancement functions, as these were the primary focus of the IRS's economic substance challenge. The IRS's argument was that PBI did not meaningfully participate in or control the Development and Enhancement of PPC's pharmaceutical portfolio, and that these functions were directed from the United States.
To address this vulnerability, PBI should demonstrably participate in and exercise control over Enhancement activities for non-Americas markets. Specific Enhancement activities that PBI should own and control include:
(i) Region-specific clinical trials. PBI should initiate, fund, and oversee Phase IIIb, Phase IV, and post-marketing clinical studies conducted in non-Americas territories. These studies—which are typically designed to generate additional clinical data supporting regulatory submissions, label extensions, or market-access applications in specific jurisdictions—are a natural Enhancement function for a regional IP holder. PBI's clinical development leads (to be hired under Recommendation 1) should have authority over the design, site selection, execution, and interpretation of these studies.
(ii) Formulation adaptations. PBI should control decisions regarding formulation adaptations required to meet non-Americas regulatory requirements, including dosage form modifications, excipient changes, and packaging adaptations. While the underlying formulation science may be performed by PPC's U.S.-based R&D teams, PBI should be the entity that identifies the need for adaptations, commissions the work (through intercompany service agreements at arm's-length charges), and makes the business decision to pursue or decline specific formulation changes.
(iii) Label extensions and supplemental indications. Where PBI identifies opportunities to pursue supplemental indications or label extensions specifically for non-Americas markets, PBI should be the entity that initiates and controls these projects. This includes the decision to invest in the necessary clinical and regulatory work, the allocation of resources, and the oversight of execution.
To support PBI's participation in Enhancement activities, a portion of PBI's cost-sharing payments should be explicitly allocated to Ireland-directed Enhancement activities, with documentation showing PBI's control and decision-making authority over these projects. This documentation should include project charters, budget approvals, progress reports, and board-level oversight records.
C. Maintenance and Protection Functions
PBI should expand its in-house patent and IP protection capabilities in Dublin. Currently, certain Protection functions—including patent prosecution, IP monitoring, and enforcement activities—are coordinated by PPC's U.S.-based legal team. While this arrangement is not inherently problematic from a transfer pricing perspective, PBI's lack of dedicated in-house IP protection resources in Dublin weakened its claim to be performing Protection functions independently.
We recommend the following actions:
• Hire in-house IP/patent counsel in Dublin (as described in Recommendation 1), with responsibility for coordinating PBI's IP protection activities for non-Americas territories;
• Engage local Irish and European IP counsel to handle patent prosecution, opposition, and enforcement proceedings in PBI's name in non-Americas territories;
• Establish a Dublin-based IP monitoring function that tracks competitor patent filings, potential infringements, and market developments that could affect PBI's IP portfolio;
• Document PBI's independent decisions on IP enforcement actions (including decisions to initiate, settle, or abandon enforcement proceedings), patent filings, trademark registrations, and other IP protection activities in non-Americas territories;
• Ensure that all IP protection expenditures in non-Americas territories are funded by PBI and recorded on PBI's financial statements.
The objective is to create a clear, documented record showing that PBI independently manages the Protection of its intangible property portfolio in its assigned territories—a record that was less fully developed during the 2017–2020 examination period.
D. Exploitation Functions
PBI's Exploitation activities were an area of relative strength during the examination, and the recommendations here are primarily aimed at continuing and expanding existing practices rather than creating new functions.
PBI should continue and expand its documentation of independent commercial Exploitation activities across its 68+ country markets. Key Exploitation activities to be documented include:
• Pricing decisions in each country market, including the analytical framework used (reference pricing, health technology assessments, competitive analysis, cost-effectiveness models), the internal PBI decision-makers involved, and the outcomes of pricing negotiations with payers, government authorities, and distribution partners;
• Distribution partner negotiations, including partner selection criteria, contract terms, performance expectations, and termination decisions;
• Marketing strategy development and execution, including brand positioning, promotional campaigns, key opinion leader engagement, and digital marketing initiatives;
• Market-entry assessments, including the analysis of regulatory pathways, market size, competitive landscape, reimbursement environment, and projected returns for new market entries.
PBI's cumulative regulatory expenditure of €47.2 million for Tax Years 2017–2020 was a significant indicator of Exploitation activity. Going forward, this level of expenditure should be maintained or increased, with clear documentation linking each category of regulatory expenditure to PBI-directed regulatory submissions in specific jurisdictions. Regulatory expenditure records should be maintained at a level of granularity that allows for country-by-country or submission-by-submission identification of costs and related PBI decision-making.
VI. RECOMMENDATION 4: OPERATIONAL AUTONOMY AND DECISION-MAKING
A. Formalize Independent Decision-Making Processes
The IRS's economic substance challenge was fundamentally an assertion that PBI did not operate autonomously—that PBI's operations were directed by PPC's U.S. headquarters rather than controlled by PBI's Dublin management. To counter this narrative in future examinations, PBI should implement written policies and procedures requiring that key commercial decisions for non-Americas territories originate from and are approved by PBI's Dublin-based management, not directed or dictated by PPC's U.S. headquarters.
The categories of decisions that should be subject to a formal PBI-originated decision-making requirement include:
(i) Pricing in each country market. Pricing decisions should be made by PBI's Dublin-based commercial team, with support from market-specific analytics, and approved by PBI's Managing Director or his designee. Any input from PPC's global pricing function should be documented as advisory, not directive.
(ii) Distribution partner selection and termination. Decisions regarding the selection, appointment, evaluation, and termination of distribution partners in non-Americas territories should be made by PBI's Dublin management, with documentation showing the evaluation criteria, the decision-making process, and the individuals who made and approved the decision.
(iii) Marketing and promotional strategies. PBI's marketing strategy for each non-Americas market should be developed by PBI's Dublin-based commercial and marketing teams. Where PPC provides global brand guidelines or marketing materials, PBI should have documented authority to adapt, modify, or override these materials to suit local market conditions.
(iv) Market entry and exit decisions. Decisions regarding whether to enter or exit specific country markets should be made by PBI's Dublin management based on PBI's own analysis of market opportunity, regulatory feasibility, competitive dynamics, and projected returns. These decisions should be documented through formal business cases, management committee approvals, and board reporting.
(v) Supply chain management. PBI's relationship with Penterra Manufacturing Ireland Ltd. ("PMI"), located at Unit 7, Ringaskiddy Industrial Estate, Co. Cork T12 PX29, Ireland, should be managed by PBI as principal. Supply chain decisions—including order volumes, inventory management, quality oversight, and logistics—should originate from PBI's Dublin operations.
These policies should be adopted by PBI's board of directors, communicated to all relevant PBI personnel, and incorporated into PBI's standard operating procedures. The existence of written policies creates a strong evidentiary foundation for demonstrating PBI's independent decision-making in any future examination.
B. Document PBI's Risk Management and Control
One of the IRS's arguments in the recently resolved examination was that PBI did not genuinely bear and control the risks associated with its non-Americas territories. This argument was based, in part, on the absence of a formalized risk management framework within PBI's governance structure.
We recommend that PBI formalize its risk management function through the following measures:
• Written Risk Management Policies. PBI should adopt written policies describing its approach to identifying, assessing, monitoring, and mitigating the principal risks faced in its non-Americas territories. These policies should cover market risk (demand fluctuations, competitive dynamics), regulatory risk (changes in regulatory requirements, loss of marketing authorizations), currency risk (exposure to non-USD currency fluctuations across 68+ country markets), supply-chain risk (dependency on PMI, logistics disruptions), pricing and reimbursement risk (changes in government pricing policies, health technology assessment outcomes), and development risk (risk of failure in Enhancement activities such as region-specific clinical trials).
• Quarterly Risk Reports. PBI's management should prepare quarterly risk reports for presentation to the PBI board of directors. These reports should identify the principal risks facing PBI, assess the likelihood and potential impact of each risk, describe the mitigation strategies in place, and highlight any changes in the risk profile since the prior report. The quarterly risk reports should be maintained as part of PBI's board records.
• Documented Risk-Assessment Processes. For significant business decisions—such as market entry, new product launches, pricing changes, distribution partner changes, and capital investments—PBI should document the risk assessment conducted in connection with the decision, including the risks identified, the analysis performed, and the risk mitigation measures adopted. This documentation creates a contemporaneous record showing that PBI's management independently evaluated and managed risk, rather than simply executing decisions made elsewhere.
This recommendation directly addresses the IRS's argument that risk was not genuinely borne by PBI. A formalized risk management framework, maintained contemporaneously and reported to the board, provides compelling evidence that PBI is a real, risk-bearing enterprise with independent control over the risks it assumes.
C. Intercompany Service Agreements
We recommend a comprehensive review of all intercompany service arrangements between PPC and PBI, with the objective of ensuring that every material service flow is documented through a written intercompany service agreement at arm's-length pricing.
The review should cover:
• Services provided by PPC U.S.-based personnel to PBI (e.g., clinical development support, regulatory advice, IT services, pharmacovigilance, financial reporting support);
• Services provided by PBI to PPC or other PPC affiliates (e.g., commercial services, regulatory services, market intelligence);
• Shared services arrangements, including any global shared service centers or centers of excellence that serve both PPC and PBI.
Each intercompany service agreement should clearly specify the nature and scope of services, the service provider and service recipient, the direction of control (i.e., whether the service recipient directs and controls the services or whether the service provider has discretion), the arm's-length compensation methodology (consistent with Treasury Regulation § 1.482-9, including the services cost method, comparable uncontrolled services price method, or cost of services plus method, as appropriate), and the mechanism for periodic review and adjustment of service charges.
Any services currently provided on an informal, undocumented basis should be formalized through written agreements. The formalization process should be completed by Q4 2024.
VII. RECOMMENDATION 5: FINANCIAL INFRASTRUCTURE AND BANKING
A. Maintain and Expand Independent Irish Banking Operations
PBI's independent banking relationship with Glenmore Bank Ireland plc was an important element of our substance defense during the examination. This relationship should be continued and strengthened. Specifically, PBI should maintain independent treasury management, cash pooling, and investment functions operated out of its Dublin offices, with Dublin-based finance personnel exercising authority over day-to-day cash management decisions.
We recommend that PBI document its autonomous cash management decisions, dividend policies, and capital allocation processes with greater formality. This includes:
• Maintaining a written treasury management policy approved by the PBI board, describing PBI's approach to cash management, investment of surplus funds, foreign exchange risk management, and intercompany lending;
• Documenting all significant treasury decisions (e.g., dividend declarations, intercompany loan originations, investment decisions) through board resolutions or management committee approvals;
• Ensuring that PBI's banking activities are conducted independently and not directed by PPC's U.S.-based treasury function. Where PPC's global treasury provides advisory services or coordinates group-wide banking relationships, these activities should be documented as advisory services rather than directive management.
B. Capital Expenditure Program
PBI's capital investment in regulatory submissions (€47.2 million cumulative during 2017–2020) was an important indicator of operational substance. Going forward, PBI should maintain or increase its capital expenditure levels in Ireland, expanding the scope of investment beyond regulatory submissions to include:
• IT infrastructure investments, including data management systems, business intelligence platforms, and cybersecurity infrastructure for PBI's Dublin operations;
• Laboratory or testing facilities, if feasible and operationally justified. Even a modest analytical testing laboratory in Dublin—used for quality control, stability testing, or clinical sample analysis—would significantly enhance PBI's substance profile by demonstrating a physical scientific capability on-site;
• Additional office space, if headcount growth under Recommendation 1 warrants expansion beyond PBI's current approximately 18,000 square feet at Sandyford Business Park. Any office space expansion should be documented through formal lease agreements, budgetary approvals, and board-level authorization.
Capital expenditure decisions should be documented through formal capital expenditure request processes, including business cases, projected returns on investment, board approvals, and post-implementation reviews.
C. Relationship with PMI
PBI's relationship with Penterra Manufacturing Ireland Ltd. ("PMI") is a significant element of PBI's operational substance in Ireland. PMI operates under a contract manufacturing agreement with PBI, currently structured as a cost-plus arrangement with an 8% markup, and employs approximately 620 persons at its Ringaskiddy facility.
We recommend that PPC and PBI review and update the PBI-PMI contract manufacturing agreement to ensure that:
• The agreement reflects current market terms and is supportable at arm's length through benchmarking analysis. The cost-plus 8% markup should be tested against comparable contract manufacturing arrangements to confirm that it falls within an arm's-length range;
• The agreement clearly documents PBI's role as principal and PMI's role as contract manufacturer. The agreement should specify that PBI directs and controls the manufacturing activities, including production volumes, quality standards, manufacturing specifications, and delivery schedules;
• PBI's oversight and management of the manufacturing relationship is documented contemporaneously, including through regular production meetings, quality reviews, and supply chain management activities directed by PBI's Dublin operations.
The PBI-PMI relationship, properly documented, is a powerful indicator of PBI's operational substance in Ireland—PBI not only markets and distributes pharmaceutical products in non-Americas territories but also exercises control over the manufacturing of those products through a related Irish entity with over 600 employees.
VIII. RECOMMENDATION 6: CONTEMPORANEOUS DOCUMENTATION PROCESSES
A. Annual Transfer Pricing Documentation
PBI's transfer pricing documentation for the examination years was originally prepared by Crestfield & Associates LLP (Susan Lam, Transfer Pricing Partner). While the documentation was generally adequate, certain elements were not prepared contemporaneously with the filing of PPC's U.S. federal income tax returns—a deficiency that created risk under the contemporaneous documentation requirements of Internal Revenue Code § 6662(e)(3)(B) and that complicated our penalty protection arguments during the examination.
We recommend that, going forward, PBI's transfer pricing documentation be prepared concurrently with—or in advance of—the filing of PPC's annual U.S. federal income tax returns. This timing is essential to satisfy the contemporaneous documentation requirement and to establish penalty protection under IRC § 6662(e)(3)(B) and the associated Treasury Regulations.
The annual transfer pricing documentation package should include, at a minimum:
• A detailed functional analysis, updated annually, describing the functions performed, risks assumed, and assets employed by PPC and PBI in connection with each controlled transaction;
• Benchmarking studies, refreshed at least every three years (with annual updates of financial data for comparable companies), supporting the arm's-length nature of intercompany pricing;
• A narrative section demonstrating PBI's operational substance and DEMPE function performance, incorporating the annual DEMPE allocation framework described in Recommendation 3;
• An analysis of each material controlled transaction, including the CSA cost-sharing payments, the legacy IP license royalty, intercompany service charges, and the PMI contract manufacturing arrangement;
• Documentation of the selection and application of the best method under Treasury Regulation § 1.482-1(c), with a discussion of why the selected method provides the most reliable measure of an arm's-length result.
We recommend coordinating with Crestfield & Associates to implement these enhancements and to establish a documentation preparation timeline that ensures completion prior to the filing date of PPC's U.S. federal income tax return for each applicable year.
B. Cost-Sharing Arrangement Compliance
PBI's cost-sharing arrangement with PPC (effective July 1, 2012) is the central intercompany agreement governing PBI's participation in the development and enhancement of PPC's pharmaceutical IP portfolio. Maintaining rigorous compliance with the CSA's terms and with the requirements of Treasury Regulation § 1.482-7 is essential to PBI's transfer pricing defense.
We recommend implementing annual compliance reviews of the CSA, covering the following areas:
(i) Reasonably anticipated benefit shares. The allocation of cost-sharing payments between PPC and PBI is based on reasonably anticipated benefit ("RAB") shares, which should be recalculated annually using current revenue projections for Veritaxol, Imvara, Cerulon, and any pipeline products entering the development portfolio. The annual RAB recalculation should be documented and approved by the appropriate management personnel at both PPC and PBI, and any material changes in RAB shares should be reported to the PBI board.
(ii) Cost pool definition. The CSA cost pool—consisting of qualified R&D costs, which totaled $487.3 million in Tax Year 2017 and grew to $598.4 million in Tax Year 2020—should be properly defined and documented in each year. The annual compliance review should verify that all costs included in the cost pool meet the definition of intangible development costs under Treasury Regulation § 1.482-7(d) and that no costs are improperly included or excluded.
(iii) Amendments and adjustments. Any amendments or adjustments to cost-sharing percentages, cost pool composition, or other material CSA terms should be documented contemporaneously through formal amendment agreements, signed by authorized representatives of both PPC and PBI. Retroactive or undocumented changes to CSA terms create significant audit risk and should be avoided.
The annual CSA compliance review should be conducted by PBI's finance and tax functions, in coordination with Crestfield & Associates and with Calderwood & Harkness as necessary, and the results should be reported to PBI's management and board.
C. Royalty Rate Documentation
In addition to the CSA, PBI makes royalty payments to PPC under a legacy IP license agreement at a rate of 4.5% of non-Americas net sales for pre-CSA intangible property. During the examination, Whitmore Valuation Group prepared a comparable uncontrolled transaction ("CUT") analysis supporting the arm's-length nature of this royalty rate, identifying 14 comparable pharmaceutical license agreements with an interquartile range of 3.1% to 6.8% and a median of 4.4%. The 4.5% royalty rate fell comfortably within this arm's-length range.
We recommend that this CUT benchmarking analysis be refreshed periodically—at least every two to three years—to ensure continued arm's-length support. This is particularly important as the legacy compound portfolio matures and net sales continue to decline (from $814.6 million in Tax Year 2017 to $624.1 million in Tax Year 2020). As the economic characteristics of the legacy IP license evolve, the comparable set and the arm's-length range may shift, and periodic updates ensure that PBI's royalty rate remains defensible.
The refreshed CUT analysis should be prepared by Whitmore Valuation Group or another qualified valuation firm and should be maintained as part of PBI's transfer pricing documentation file.
D. Real-Time Documentation Culture
Perhaps the most important—and most challenging—recommendation in the contemporaneous documentation category is the establishment of a real-time documentation culture within PBI's Dublin operations. During the recently resolved examination, a significant portion of the defense effort involved the retroactive compilation, organization, and presentation of evidence demonstrating PBI's operational substance. While this effort was ultimately successful, it was time-consuming, expensive, and inherently less persuasive than contemporaneous documentation would have been.