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PRIVILEGED AND CONFIDENTIAL — ATTORNEY-CLIENT PRIVILEGE / ATTORNEY WORK PRODUCT — PREPARED IN ANTICIPATION OF LITIGATION

MEMORANDUM

October 10, 2022

FROM: Garrett Simmons, Calderwood & Harkness LLP, 1735 Market Street, Suite 3100, Philadelphia, PA 19103

TO: Leonard Cross, Sylvia Hartwell

CC: Leila Nazari

RE: Analysis of OECD Transfer Pricing Guidelines (2017 & 2022 Revisions) as Persuasive Authority in U.S. Tax Controversy — Penterra Pharmaceuticals Corp. IRS Examination Defense

MATTER NO.: 1018-00009

CLIENT: Penterra Pharmaceuticals Corp. (EIN: 22-3741856)

PRIVILEGE DESIGNATION: This memorandum is a privileged and confidential attorney work product prepared in anticipation of litigation. It is protected by the attorney-client privilege and the work product doctrine. This memorandum reflects the mental impressions, conclusions, opinions, and legal theories of attorneys at Calderwood & Harkness LLP and is prepared solely for the use of Penterra Pharmaceuticals Corp. in connection with the IRS examination described herein. Distribution, reproduction, or disclosure of this memorandum, in whole or in part, to any person or entity other than authorized personnel of Penterra Pharmaceuticals Corp. without the prior written consent of Calderwood & Harkness LLP may constitute a waiver of applicable privileges. If you have received this memorandum in error, please notify the sender immediately and destroy all copies.

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I. PURPOSE AND EXECUTIVE SUMMARY

A. Purpose. The purpose of this memorandum is to analyze the extent to which the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (the "OECD Guidelines" or the "Guidelines"), in their 2017 edition as updated by the February 2022 revisions, may serve as persuasive authority in the defense of Penterra Pharmaceuticals Corp. ("PPC" or the "Company") against the IRS examination currently being conducted under Exam Team LB&I-NE-TP-2022-00641 (the "Examination"). The Examination challenges PPC's transfer pricing positions for taxable years 2017 through 2020, with particular focus on (i) PPC's cost-sharing arrangement (the "CSA") with Penterra Biopharma International DAC ("PBI"), an Irish-resident subsidiary, (ii) the intercompany royalty rate applicable to legacy intellectual property licensed by PPC to PBI, and (iii) the platform contribution transaction ("PCT") payment made by PBI upon entry into the CSA.

This memorandum evaluates the legal status of the OECD Guidelines in U.S. tax proceedings, identifies the specific provisions of the Guidelines most relevant to PPC's defense, assesses the degree to which U.S. courts and the IRS have recognized the Guidelines as persuasive authority, and provides strategic recommendations for deploying the Guidelines at each stage of the controversy — from Information Document Request ("IDR") responses through formal Protest and IRS Appeals proceedings.

B. Context. The IRS opened the Examination in early 2022, and to date, the Exam Team has issued forty-seven IDRs seeking extensive documentation related to PPC's intercompany transactions with PBI. Based on preliminary discussions with the revenue agent assigned to the case and the trajectory of document requests, Calderwood & Harkness LLP ("C&H") anticipates that the IRS will propose significant adjustments in the form of a Notice of Proposed Adjustment ("NOPA"). The Examination focuses on three principal issues:

1. Royalty Rate for Legacy IP: Whether PPC's 4.5% royalty rate charged to PBI for the license of pre-CSA legacy intellectual property (including patents, know-how, and trade secrets related to PPC's established pharmaceutical product portfolio) reflects an arm's-length price, or whether the IRS's anticipated proposed rate of 11.0% is more appropriate.

2. CSA Cost-Sharing Ratios: Whether PBI's cost-sharing percentages under the CSA (ranging from 38.2% in TY 2017 to 42.7% in TY 2020) appropriately reflect PBI's share of reasonably anticipated benefits from the intangibles developed under the CSA, or whether the IRS's proposed increase of 8 to 12 percentage points (to 48.2%–53.7%) is warranted.

3. PCT Payment Valuation: Whether PBI's $312 million PCT payment for the buy-in to pre-existing oncology and immunology intellectual property represents an arm's-length valuation, or whether the IRS's anticipated valuation of approximately $852 million (based on a lower weighted average cost of capital ("WACC") and different revenue projections) is more accurate.

The aggregate proposed adjustments, if sustained, could result in additional U.S. federal income tax liability in excess of $480 million (inclusive of penalties and interest), representing a material exposure for the Company.

C. Key Conclusions

After a thorough review of the applicable law, case precedent, administrative guidance, and the OECD Guidelines themselves, this memorandum reaches the following key conclusions:

First, the OECD Transfer Pricing Guidelines do not constitute binding legal authority in U.S. tax proceedings. They are not enacted legislation, not promulgated as Treasury Regulations, and do not appear in any formal source of binding U.S. tax law. Where U.S. statutory provisions or Treasury Regulations address a transfer pricing issue, those provisions control, and the OECD Guidelines cannot override or modify them. This point has been consistently recognized by the U.S. Tax Court, the Court of Federal Claims, and the federal appellate courts.

Second, notwithstanding their non-binding status, the OECD Guidelines have been repeatedly recognized by U.S. courts and by the IRS itself as persuasive authority, particularly in interpreting the arm's-length standard under Internal Revenue Code ("IRC") § 482 and the associated Treasury Regulations. The Guidelines are especially persuasive where they (a) reflect principles already embedded in U.S. regulations, (b) address topics where U.S. guidance is less developed or ambiguous, or (c) are referenced by the IRS's own internal guidance and training materials. The United States, as an OECD member state, participated extensively in the development and negotiation of the Guidelines.

Third, the Guidelines' treatment of intangibles in Chapter VI — including the Development, Enhancement, Maintenance, Protection, and Exploitation ("DEMPE") framework introduced in the 2017 edition as a result of BEPS Actions 8–10 — provides substantial support for PPC's position that PBI is entitled to residual returns from the exploitation of intangibles in non-Americas territories. PBI's extensive operational substance, including 185 employees by 2020, cumulative regulatory expenditures of €47.2 million during 2017–2020, 42 board meetings held in Dublin, and independent pricing decisions across 68 country markets, establishes that PBI performed and controlled DEMPE functions consistent with the Guidelines' requirements.

Fourth, the Guidelines' treatment of cost contribution arrangements in Chapter VIII supports PPC's cost-sharing methodology, which allocates costs based on reasonably anticipated benefits measured by projected revenue splits. The OECD's requirement that any reallocation of cost-sharing ratios be grounded in evidence that the taxpayer's projections were unreasonable — rather than merely differing — provides a framework for challenging the IRS's proposed adjustments.

Fifth, the Guidelines' endorsement of the comparable uncontrolled transaction ("CUT") method for valuing intangible property licenses, combined with the comparability analysis performed by Whitmore Valuation Group ("WVG"), supports PPC's 4.5% royalty rate as arm's-length, falling virtually at the 4.4% median of the 14 comparable license agreements identified by Dr. Helena Vasquez and her team.

D. Companion Memoranda

This memorandum should be read in conjunction with the following companion research memoranda prepared by C&H in connection with PPC's Examination defense:

• IRC § 482 legal analysis memorandum (Nazari/Simmons, July 20, 2022)

• CSA regulatory analysis memorandum (Nazari, August 5, 2022)

• Royalty rate analysis memorandum (Simmons, August 12, 2022)

• Economic substance analysis memorandum (Nazari, August 18, 2022)

• TCJA impact analysis memorandum (Nazari, August 25, 2022)

• Altera/Harborview Corporation case analysis memorandum (Simmons/Nazari, September 15, 2022)

• IRC § 367(d) analysis memorandum (Nazari, September 28, 2022)

Together, these memoranda constitute C&H's comprehensive legal research framework for PPC's IRS controversy defense.

II. BACKGROUND — THE OECD TRANSFER PRICING GUIDELINES

A. Overview and Status of the OECD Guidelines

The Organisation for Economic Co-operation and Development ("OECD") first issued its Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations in 1995, building on earlier reports by the OECD's Committee on Fiscal Affairs dating back to the 1970s. The 1995 Guidelines were intended to provide a comprehensive framework for the application of the arm's-length principle to intercompany transactions among related enterprises operating across national borders, seeking to reduce the incidence of double taxation and to harmonize the approaches taken by tax administrations worldwide.

Since their original publication, the Guidelines have undergone several significant revisions. A major update was issued in 2010, which revised the guidance on transfer pricing methods (Chapters I–III) and the treatment of business restructurings (Chapter IX). The 2017 edition represented the most substantial revision to date, incorporating the outcomes of the OECD/G20 Base Erosion and Profit Shifting ("BEPS") project, specifically BEPS Actions 8 through 10, which focused on aligning transfer pricing outcomes with value creation. Most recently, the February 2022 revision provided updates that included new guidance on financial transactions (Chapter X) and certain minor clarifications to existing chapters.

The United States is a founding member of the OECD and has participated actively in the development and negotiation of each iteration of the Guidelines. Representatives from the U.S. Department of the Treasury and the Internal Revenue Service serve on the OECD's Committee on Fiscal Affairs and its working parties, and U.S. input has been instrumental in shaping the Guidelines' substantive provisions. This participation is relevant to the question of the Guidelines' persuasive authority, as it demonstrates that the U.S. government — including the agency responsible for enforcing U.S. transfer pricing rules — has endorsed the general principles articulated in the Guidelines as consistent with the arm's-length standard.

The Guidelines articulate the arm's-length principle as the international consensus standard for evaluating intercompany transactions, consistent with Article 9 of the OECD Model Tax Convention on Income and on Capital. They provide detailed guidance on (i) the general application of the arm's-length principle, including comparability analysis and functional analysis; (ii) the selection and application of approved transfer pricing methods; (iii) special considerations for particular categories of transactions and assets, including intangibles, services, and financial transactions; (iv) cost contribution arrangements; and (v) administrative approaches to dispute resolution, including the mutual agreement procedure ("MAP") and advance pricing arrangements ("APAs").

For purposes of PPC's Examination defense, the most relevant chapters of the Guidelines are:

• Chapter I: The Arm's-Length Principle

• Chapter II: Transfer Pricing Methods

• Chapter VI: Special Considerations for Intangibles

• Chapter VIII: Cost Contribution Arrangements

Each of these chapters is discussed in detail in subsequent sections of this memorandum.

B. The 2017 Edition — Key Revisions Relevant to PPC

The 2017 edition of the OECD Guidelines incorporated the final reports on BEPS Actions 8 through 10, which collectively addressed the transfer pricing aspects of the BEPS project. The overarching objective of these Actions was to ensure that transfer pricing outcomes are aligned with value creation — that is, that profits are allocated to the entities within a multinational group that actually perform the functions, bear the risks, and employ the assets that generate those profits. This objective was described by the OECD as ensuring that the arm's-length principle is applied in a manner that achieves its intended purpose.

The 2017 revisions to the Guidelines are particularly significant for PPC's defense in several respects:

Chapter VI — Intangibles. Chapter VI was substantially revised to incorporate the DEMPE framework. Under this framework, the mere legal ownership of an intangible asset is insufficient to entitle an entity to the returns generated by that asset. Instead, the entity (or entities) that perform the functions of developing, enhancing, maintaining, protecting, and exploiting the intangible — and that control the risks associated with those functions — are entitled to the intangible-related returns. The DEMPE framework represents a significant substantive development, as it explicitly rejects the notion that legal ownership alone determines transfer pricing outcomes for intangibles and instead requires a detailed functional analysis.

This framework is directly relevant to PBI's role within the PPC group. PBI was not a passive shell company holding bare legal rights to non-Americas pharmaceutical IP. Rather, PBI grew from 52 employees in 2012 to 185 employees by 2020, held 42 board meetings in Dublin during the examination period of 2017–2020, expended approximately €47.2 million cumulatively on regulatory submissions and compliance activities in its assigned territories, and made independent pricing and commercialization decisions across 68 country markets. The DEMPE framework provides a robust analytical structure for demonstrating that PBI's activities constituted genuine value-creating functions that entitled PBI to more than a mere routine return on its activities.

Chapter VIII — Cost Contribution Arrangements. Chapter VIII was revised to align cost contribution arrangement guidance with the BEPS principles of substance over form and value creation. The revised guidance emphasizes that participants' shares of contributions to a CCA should reflect their respective contributions of functions, assets, and risks — not merely their legal ownership of the intangibles being developed. This revision reinforces the principle that a participant's cost-sharing ratio should be determined by reference to its reasonably anticipated benefits from the arrangement, measured in a manner that reflects economic substance rather than purely contractual allocation.

Substance-Over-Form Emphasis. Throughout the 2017 revisions, the Guidelines place heightened emphasis on substance over form. Legal ownership of intellectual property, contractual allocation of risk, and formal documentation are given less weight where they are not supported by the actual conduct of the parties. This emphasis is directly relevant to PPC's defense, as PBI's substantial operational activities, decision-making authority, and functional capacity support the economic substance of the intercompany arrangements under both the OECD framework and U.S. transfer pricing principles.

C. The 2022 Revisions — Incremental Updates

The February 2022 revisions to the OECD Guidelines primarily introduced new Chapter X, which provides guidance on transfer pricing aspects of financial transactions, including intercompany loans, guarantees, captive insurance, and cash pooling arrangements. While Chapter X addresses important issues in the broader transfer pricing landscape, it does not materially affect the analysis relevant to PPC's Examination, which centers on intangibles, royalty rates, and cost contribution arrangements.

The 2022 revisions also included minor clarifications to certain existing chapters. Importantly, no material changes were made to Chapter VI or Chapter VIII — the two chapters most directly relevant to PPC's fact pattern. The guidance on DEMPE functions, legal versus economic ownership of intangibles, cost contribution arrangement principles, and valuation methodologies remained substantively unchanged from the 2017 edition.

To the extent the 2022 revisions provide additional guidance on risk assumption and control — including the requirement that an entity claiming entitlement to risk-related returns must exercise decision-making control over those risks and have the financial capacity to bear them — these provisions reinforce the analysis under the 2017 edition. PBI's demonstrated risk-bearing capacity, decision-making authority through its Managing Director Aidan Naughton and Dublin-based management team, and financial resources (including banking relationships with Glenmore Bank Ireland plc) are consistent with the Guidelines' requirements as articulated in both the 2017 and 2022 editions.

For purposes of this memorandum, references to the "OECD Guidelines" refer to the 2017 edition as updated by the 2022 revisions, unless otherwise specified.

III. LEGAL STATUS OF OECD GUIDELINES IN U.S. TAX CONTROVERSY

A. Not Binding Authority — Statutory and Regulatory Hierarchy

The starting point for any analysis of the OECD Guidelines' role in U.S. tax controversy is the recognition that the Guidelines are not binding legal authority in the United States. The hierarchy of authority in U.S. federal tax law is well established:

1. The Internal Revenue Code. The IRC, as enacted by Congress, represents the highest source of statutory authority in U.S. tax law. For transfer pricing purposes, the governing provision is IRC § 482, which authorizes the Secretary of the Treasury to distribute, apportion, or allocate gross income, deductions, credits, or allowances between or among two or more organizations, trades, or businesses owned or controlled by the same interests, where such distribution, apportionment, or allocation is necessary to prevent evasion of taxes or to clearly reflect income.

2. Treasury Regulations. The Treasury Regulations promulgated under IRC § 482 — particularly Treas. Reg. §§ 1.482-1 through 1.482-9 — provide detailed guidance on the application of the arm's-length standard, the selection of transfer pricing methods, and the specific rules applicable to particular categories of transactions (including intangible property transfers under Treas. Reg. § 1.482-4 and cost-sharing arrangements under Treas. Reg. § 1.482-7). Treasury Regulations issued under a specific statutory grant of authority (so-called "legislative regulations") carry the force and effect of law.

3. Revenue Rulings and Revenue Procedures. Published revenue rulings and revenue procedures represent the IRS's official position on the application of the law to specific factual situations. While not carrying the same weight as Treasury Regulations, they are treated as substantial authority for purposes of the substantial understatement penalty under IRC § 6662.

4. Judicial Decisions. Decisions of the U.S. Tax Court, U.S. Court of Federal Claims, U.S. District Courts, and the appellate courts constitute binding precedent within their respective jurisdictions and provide authoritative interpretations of the IRC and Treasury Regulations.

The OECD Guidelines occupy none of these positions within the hierarchy. They are not enacted legislation, not promulgated as Treasury Regulations, not published as revenue rulings or revenue procedures, and they do not appear in any formally recognized source of binding U.S. tax authority. They are, in essence, an international consensus document developed by a multilateral organization of which the United States is a member — influential, widely referenced, and substantively important, but not legally binding on U.S. taxpayers, the IRS, or U.S. courts.

U.S. courts have consistently recognized this limitation. Where the OECD Guidelines and U.S. regulations address the same issue, and where the two are in conflict, U.S. courts have uniformly applied the U.S. regulatory provisions. The OECD Guidelines cannot be relied upon to override, modify, or supplement a clear U.S. statutory or regulatory rule.

B. Persuasive Authority — Judicial and Administrative Recognition

Notwithstanding their non-binding status, the OECD Guidelines have been recognized by U.S. courts and by the IRS itself as persuasive authority in transfer pricing disputes. This recognition arises from several factors.

Judicial Recognition. U.S. courts adjudicating transfer pricing disputes have looked to the OECD Guidelines for interpretive guidance, particularly in circumstances where the arm's-length standard is at issue and where U.S. regulations do not directly address the specific factual pattern before the court. The Tax Court and the Federal Circuit, in particular, have acknowledged the Guidelines' persuasive value in the context of major transfer pricing cases. While courts are careful to note the distinction between persuasive and binding authority — and to affirm that U.S. regulations control where applicable — they have demonstrated a willingness to reference the Guidelines as evidence of the internationally recognized interpretation of the arm's-length principle.

The persuasive weight of the Guidelines is greatest in the following circumstances:

(a) Consistency with U.S. Regulations. Where the OECD Guidelines articulate principles that are already embedded in, or consistent with, U.S. regulations — such as the arm's-length standard itself, the requirement for a rigorous comparability analysis, or the preference for transaction-based methods — courts have found the Guidelines helpful as an interpretive tool that corroborates the meaning and application of U.S. regulatory provisions.

(b) Gaps in U.S. Guidance. Where U.S. regulations are silent or ambiguous on a particular issue, the Guidelines may serve as a useful reference point. For example, the DEMPE framework introduced in the 2017 revision of Chapter VI addresses the allocation of intangible-related returns in a manner that is more detailed and structured than the existing U.S. regulatory framework. While U.S. regulations address "control" and "significant functions" in the context of intangible property transactions, the DEMPE framework provides a more systematic analytical structure that courts may find helpful in evaluating the substance of an entity's activities.

(c) IRS Reliance. Where the IRS itself has referenced the OECD Guidelines in support of its positions — whether in litigation, in published guidance, or in internal training materials — the Guidelines' persuasive weight may be enhanced. The IRS cannot credibly argue that the Guidelines are irrelevant when the agency has previously relied on them to support its own transfer pricing positions. This dynamic creates an important strategic consideration for PPC's defense: to the extent the IRS Exam Team invokes OECD principles selectively, PPC can point to the full body of the Guidelines — including those provisions that favor PPC's positions — as equally authoritative.

Administrative Recognition. Beyond judicial proceedings, the IRS has demonstrated recognition of the OECD Guidelines' importance through multiple channels. The IRS Transfer Pricing Practice manuals, internal training materials, and published guidance frequently reference the Guidelines. IRS economists and revenue agents with transfer pricing specializations are trained on the OECD framework, and the IRS's participation in the development of the Guidelines through the U.S. government delegation to the OECD Committee on Fiscal Affairs represents an implicit endorsement of the Guidelines' substantive principles. The Large Business & International ("LB&I") division — which has jurisdiction over PPC's Examination — maintains specific transfer pricing practice areas that integrate OECD concepts into their analytical frameworks.

C. Weight in IRS Appeals vs. Litigation

The persuasive weight of the OECD Guidelines varies depending on the stage of the controversy. In a Tax Court proceeding, the Guidelines are subject to the court's independent legal analysis, and their weight depends on the degree to which they are consistent with U.S. law and helpful in interpreting applicable regulatory provisions. The court retains full discretion to accept, reject, or qualify the Guidelines' relevance.

In IRS Appeals proceedings, however, the dynamics are somewhat different. Appeals Officers are tasked with resolving disputes based on a consideration of the "hazards of litigation" — that is, the likelihood of the IRS prevailing if the case were to be litigated in court. In performing this assessment, the Appeals Officer considers not only binding legal authorities but also the range of arguments, evidence, and non-binding authorities that a court might consider. The OECD Guidelines are relevant to this assessment because they inform the hazards analysis: if a Tax Court would give weight to the Guidelines in evaluating PPC's transfer pricing positions, then an Appeals Officer should account for that likelihood in determining the appropriate settlement posture.

Moreover, Appeals Officers possess broader discretion to consider non-binding authorities, policy considerations, and international consensus positions than a court may exercise. The OECD Guidelines, as the internationally recognized standard for transfer pricing, carry particular weight in this context. Presenting the Guidelines to the assigned Appeals Officer — anticipated to be Noreen Castañeda, based on current LB&I Appeals assignments in the northeast region — as evidence that PPC's positions align with international consensus on arm's-length pricing can be a strategically valuable element of PPC's Appeals presentation.

A coordinated approach with Thornbury & Keogh (Ciarán Thornbury serving as lead partner for PBI's Irish tax matters) on Irish Revenue's application of the OECD Guidelines to PBI's transfer pricing positions will further strengthen this presentation. Demonstrating that PPC's intercompany pricing has been consistently treated by both U.S. and Irish tax authorities under OECD-aligned standards reduces the risk of double taxation and supports the arm's-length character of the arrangements from both jurisdictions' perspectives.

IV. CHAPTER VI — SPECIAL CONSIDERATIONS FOR INTANGIBLES: APPLICATION TO PPC

A. Definition and Identification of Intangibles

Chapter VI of the OECD Guidelines provides detailed guidance on the transfer pricing treatment of transactions involving intangible property. The chapter begins with a broad definition of "intangibles" for transfer pricing purposes, encompassing something that is not a physical asset or a financial asset, which is capable of being owned or controlled for use in commercial activities, and whose use or transfer would be compensated had it occurred in a transaction between independent parties in comparable circumstances. This definition includes, without limitation, patents, know-how, trade names, trademarks, customer relationships, contractual rights, government licenses and permits, goodwill and going concern value, and similar assets.

PPC's pharmaceutical intellectual property portfolio constitutes intangible property under both the OECD framework and the U.S. regulatory framework set forth in IRC § 482 and Treas. Reg. § 1.482-4. PPC's portfolio includes the following principal product families:

• Veritaxol — An oncology therapeutic that constitutes PPC's single largest revenue-generating product, with global net sales of approximately $3.12 billion in 2020. Veritaxol is protected by a portfolio of composition-of-matter and method-of-use patents, together with extensive know-how relating to its formulation, manufacturing processes, and clinical applications.

• Imvara — An immunology therapeutic with global net sales of approximately $1.87 billion in 2020. Imvara is protected by a combination of active pharmaceutical ingredient patents, formulation patents, and regulatory exclusivity.

• Cerulon — A rare disease therapeutic with global net sales of approximately $0.62 billion in 2020. Cerulon addresses a niche market with limited competition and carries orphan drug designations in multiple jurisdictions.

For transfer pricing purposes, it is essential to distinguish between two categories of intangibles within PPC's portfolio: (i) pre-CSA "legacy intangibles," which were developed by PPC prior to the establishment of the CSA and were subsequently licensed to PBI at a 4.5% royalty rate, and (ii) "CSA-developed intangibles," which represent the intellectual property developed jointly by PPC and PBI through the cost-sharing arrangement. Each category is subject to different transfer pricing analyses, as discussed below.

B. DEMPE Framework — Functions, Assets, and Risks

The DEMPE framework, articulated in Chapter VI paragraphs 6.32 through 6.71, represents the centerpiece of the 2017 revision's treatment of intangibles. Under this framework, the entities within a multinational group that are entitled to intangible-related returns are those that perform and control the following functions with respect to the intangible at issue:

• Development: Activities relating to the creation, design, research, and development of the intangible, including laboratory research, clinical trials, product engineering, software development, and similar activities.

• Enhancement: Activities relating to the improvement, updating, and adaptation of the intangible, including product modifications, new indications or applications, formulation improvements, and geographic or market-specific adaptations.

• Maintenance: Activities relating to the preservation and protection of the intangible's value, including quality control, regulatory compliance, pharmacovigilance, and ongoing technical support.

• Protection: Activities relating to the legal and commercial protection of the intangible, including patent prosecution and enforcement, trademark protection, trade secret safeguards, and IP litigation management.

• Exploitation: Activities relating to the commercialization and monetization of the intangible, including marketing, sales, distribution, pricing, market access, and customer relationship management.

The application of the DEMPE framework to PBI's activities during the examination period of 2017–2020 yields the following analysis:

Development. PBI co-funded research and development through its CSA cost-sharing payments, bearing 38.2% to 42.7% of annual R&D costs that ranged from $487.3 million to $598.4 million during the examination period. Beyond mere financial contributions, PBI employed regulatory and medical-affairs personnel in Dublin who contributed to non-Americas clinical and regulatory development activities, including the preparation and filing of regulatory submissions with the European Medicines Agency ("EMA"), national competent authorities, and regulatory bodies in Asia-Pacific and other regions.

Enhancement. PBI conducted market-specific adaptations, label extensions, and post-marketing studies across its assigned 68 country markets. These activities included adapting product labeling and packaging to meet local regulatory requirements, pursuing supplemental indications for approved products, conducting Phase IV post-marketing surveillance studies, and developing region-specific marketing and medical education materials. These enhancement activities added value to the intangibles by expanding their commercial applicability and extending their product lifecycle in non-Americas territories.

Maintenance. PBI managed ongoing regulatory compliance and pharmacovigilance for non-Americas territories, including the submission and maintenance of marketing authorizations, management of adverse event reporting systems, compliance with evolving regulatory requirements (such as the EU Falsified Medicines Directive and serialization requirements), and quality oversight of third-party contract manufacturers. PBI's cumulative regulatory expenditure during the 2017–2020 period totaled approximately €47.2 million, reflecting a substantial and ongoing commitment of resources to the maintenance function.

Protection. PBI oversaw intellectual property protection activities in non-Americas jurisdictions, including coordination with local patent counsel on patent prosecution and enforcement, management of supplementary protection certificate ("SPC") filings in European jurisdictions, monitoring of potential generic entrants, and initiation of IP enforcement actions where warranted. PBI's Dublin-based legal and IP team worked in coordination with PPC's global IP function but exercised independent judgment on non-Americas IP protection matters.

Exploitation. PBI served as the principal for the commercial exploitation of PPC's pharmaceutical products outside the Americas. PBI made independent pricing decisions for its assigned markets, selected and managed distribution partners, negotiated with national health authorities and government payer systems on reimbursement and market access, developed go-to-market strategies, and bore the commercial risk of market acceptance and competitive dynamics. PBI's commercial activities spanned 68 country markets across Europe, Asia-Pacific, the Middle East, and Africa.

The OECD DEMPE framework supports the position that PBI is entitled to residual returns — that is, returns above and beyond a routine or benchmark return — from the non-Americas exploitation of both CSA-developed and legacy intangibles. PBI's performance of substantive DEMPE functions across all five categories, combined with its demonstrated control over the risks associated with those functions (through management decision-making, financial capacity, and operational oversight), establishes that PBI is not a mere contract service provider or passive IP holding company but rather a principal entity performing value-creating activities.

This analysis directly rebuts the IRS's anticipated economic substance challenge, which is expected to assert that the key DEMPE functions remained within the United States — specifically, within PPC's U.S.-based research and development, regulatory, and commercial organizations. While PPC's U.S. operations undeniably perform significant DEMPE functions with respect to Americas-territory exploitation, the evidence demonstrates that PBI independently performed the corresponding functions for non-Americas territories, supported by its growing headcount (from 52 employees in 2012 to 185 by 2020), its Dublin-based management and governance structure, and its direct engagement with regulators, distributors, and customers in its assigned markets.

C. Legal Ownership vs. Economic Ownership

Chapter VI paragraphs 6.36 through 6.46 address the critical distinction between legal ownership and economic ownership of intangibles. The Guidelines make clear that the legal owner of an intangible is not, by that fact alone, entitled to the returns generated by the intangible. Where the legal owner does not perform or control the DEMPE functions that generate value from the intangible, other entities that do perform those functions may be entitled to a share of the intangible-related returns.

It is important to acknowledge that this principle cuts both ways. If PBI were a mere shell entity — holding legal rights to non-Americas intellectual property but lacking the personnel, infrastructure, expertise, and decision-making authority to perform DEMPE functions — the fact of legal ownership alone would not be sufficient under the OECD framework (or under U.S. transfer pricing principles) to justify PBI's entitlement to residual returns. The IRS's economic substance challenge, at its core, amounts to an assertion that PBI is such a shell entity, and that the true DEMPE functions were performed by PPC's U.S. operations.

However, the factual record overwhelmingly refutes this characterization. PBI's substantial operational presence — 185 employees by 2020 (including experienced pharmaceutical industry professionals in regulatory affairs, medical affairs, commercial operations, and finance), 42 board meetings held in Dublin during 2017–2020, approximately 18,000 square feet of office space in Dublin, banking relationships with Glenmore Bank Ireland plc, and independent management under Managing Director Aidan Naughton — establishes that PBI is far more than a passive holder of intellectual property rights.

The OECD Guidelines' emphasis on substance over form thus supports PPC's defense. PBI's legal ownership of non-Americas IP rights is backed by genuine economic substance in the form of DEMPE function performance, risk control, and operational infrastructure. The Guidelines' analytical framework, properly applied, confirms that PBI's legal and economic ownership are aligned, and that PBI's transfer pricing arrangements appropriately reflect its contributions to value creation.

D. Chapter VI and the CUT Method — Royalty Rate

Chapter VI of the Guidelines endorses the comparable uncontrolled price ("CUP") method — known as the comparable uncontrolled transaction ("CUT") method in U.S. transfer pricing nomenclature — as an appropriate method for determining arm's-length compensation for licenses of intangible property, provided that sufficiently reliable comparable transactions can be identified. The CUT/CUP method involves comparing the controlled transaction (here, PPC's license of legacy IP to PBI) with comparable transactions between unrelated parties, adjusting for material differences in comparability factors.

Whitmore Valuation Group, PPC's retained transfer pricing and valuation firm, conducted a comprehensive CUT analysis under the direction of Dr. Helena Vasquez, the lead economist assigned to PPC's engagement. WVG's analysis identified 14 comparable uncontrolled pharmaceutical license agreements between unrelated parties, sourced from publicly available databases including the Vireo Health IT database, SEC filings, and other commercial licensing databases. After applying rigorous comparability screens — including industry similarity (pharmaceutical/biopharmaceutical), transaction type (outbound license of patents and know-how), stage of development (approved products with commercial revenue), exclusivity (exclusive territorial licenses), and geographic scope (multi-country international licenses) — WVG determined that the interquartile range of royalty rates in the comparable agreements was 3.1% to 6.8% of net sales, with a median of 4.4%.

PPC's 4.5% royalty rate on the legacy IP license to PBI falls squarely within this interquartile range and is virtually at the median. Under the OECD Guidelines' comparability framework, a controlled transaction that falls within the arm's-length range should be considered consistent with the arm's-length principle. The Guidelines do not require that the controlled transaction be at the exact median; any point within the interquartile range is generally considered acceptable unless there are specific reasons to select a particular point within the range.

The IRS's proposed royalty rate of 11.0% significantly exceeds the upper end of WVG's identified interquartile range. The IRS's rate appears to be based on a set of CUTs that may not be sufficiently comparable to PPC's transaction. The OECD Guidelines' detailed comparability factors — including the nature of the intangible (specific therapeutic area and stage of lifecycle), the exclusivity and scope of the license, the geographic territory, the risk allocation between licensor and licensee, and the relative contributions of each party — provide a framework for challenging the reliability of the IRS's proposed comparables and supporting the reliability of WVG's analysis.

The OECD's emphasis on comparability factors is particularly important here, as the pharmaceutical industry presents unique comparability challenges. License agreements for blockbuster oncology drugs are not comparable to license agreements for early-stage compounds, and agreements involving full development and commercialization risk are not comparable to agreements involving only co-promotion rights. The Guidelines' requirement for a rigorous, multi-factor comparability analysis supports PPC's position that WVG's carefully screened set of 14 comparables — all involving approved pharmaceutical products under exclusive territorial licenses — is more reliable than the IRS's proposed comparables.

E. Chapter VI and PCT / Buy-In Valuation

Chapter VI also addresses the valuation of transfers of intangible property, including the determination of arm's-length pricing for buy-in transactions (known as platform contribution transactions, or "PCTs," in U.S. regulatory terminology). The Guidelines recognize both the comparable uncontrolled price method and the income approach (Discounted cash flow or "DCF") as appropriate valuation methodologies, depending on the availability of reliable comparables and the specific facts of the transaction.

PPC's PCT payment of $312 million represented PBI's buy-in to pre-existing oncology and immunology intellectual property upon PBI's entry into the CSA. WVG's income-method analysis, employing a DCF methodology with a 9.8% weighted average cost of capital, placed the arm's-length range for the PCT at $278 million to $361 million. The $312 million payment falls within this range, supporting PPC's position that the PCT reflected arm's-length pricing.

The IRS's valuation of the PCT at approximately $852 million reflects two principal disagreements: (i) the IRS applied a lower WACC of 7.2%, which significantly increases the present value of projected future cash flows, and (ii) the IRS used more aggressive revenue growth assumptions than those employed by PPC/WVG.

The OECD Guidelines' guidance on discount rates is relevant to this dispute. The Guidelines recognize that the discount rate used in a DCF valuation should reflect the risk profile of the expected cash flows being discounted. Pharmaceutical industry cash flows are subject to significant risks, including regulatory approval risk, patent expiration and generic competition risk, market acceptance risk, pricing and reimbursement risk, and competitive pipeline risk. A WACC of 9.8% — as employed by WVG — is consistent with risk premiums observed in the pharmaceutical industry and reflects the inherent uncertainty associated with projecting pharmaceutical revenue streams over a multi-year horizon. The IRS's lower WACC of 7.2% may not adequately account for these industry-specific risks, and the OECD Guidelines' emphasis on appropriate risk-adjusted discount rates supports PPC's position.

Furthermore, Chapter VI paragraph 6.153 and subsequent provisions address the treatment of information available at the time of the transaction versus information that becomes available after the fact. The Guidelines generally provide that the valuation of intangible transfers should be based on the most reliable information available as of the date of the transaction. While the Guidelines acknowledge that ex post outcomes may inform the reliability of ex ante projections in certain circumstances, they do not endorse wholesale hindsight-based adjustments. This principle supports PPC's use of contemporaneous revenue projections in the PCT valuation, as opposed to the IRS's apparent reliance on later-available information to support its higher valuation.

V. CHAPTER VIII — COST CONTRIBUTION ARRANGEMENTS: APPLICATION TO PPC

A. Overview of Chapter VIII Framework

Chapter VIII of the OECD Guidelines provides guidance on cost contribution arrangements — collaborative arrangements under which two or more enterprises agree to share the costs and risks of developing, producing, or obtaining assets, services, or rights, with each participant expected to benefit from the arrangement. The OECD's terminology of "cost contribution arrangements" ("CCAs") is analogous to what U.S. regulations term "qualified cost-sharing arrangements" ("QCSAs") under Treas. Reg. § 1.482-7.

Chapter VIII establishes several key principles governing the arm's-length character of CCAs:

(1) Each participant's contribution to the CCA should be consistent with what an independent enterprise would agree to contribute under comparable circumstances, having regard to the proportionate share of expected benefits.

(2) Contributions by each participant should be proportionate to the participant's share of reasonably anticipated benefits from the arrangement, measured on a consistent and economically rational basis.

(3) Each participant must have a reasonable expectation of benefit from the arrangement — entities without such an expectation should not be participants but should instead be compensated through a service fee or similar mechanism.

(4) The arrangement should be documented, and the terms of the arrangement should be consistent with arm's-length dealing.

These principles form the analytical framework for evaluating the arm's-length character of PPC's CSA with PBI.

B. Proportionality of Contributions

Chapter VIII paragraphs 8.10 through 8.20 articulate the fundamental proportionality requirement: each participant's share of costs should be proportional to its share of reasonably anticipated benefits from the arrangement. The Guidelines recognize that the measurement of "reasonably anticipated benefits" requires the selection of an appropriate allocation key, which typically involves projected revenues, units sold, operating profits, or other economically reasonable metrics.

PBI's cost-sharing percentages under the CSA were calculated based on projected revenue splits, reflecting PBI's anticipated share of non-Americas revenues relative to total global revenues from the products developed under the CSA. PBI's cost-sharing percentage was 38.2% in TY 2017, increasing to 42.7% in TY 2020, reflecting the growth of PBI's commercial operations and the increasing proportion of global revenues attributable to non-Americas markets. This methodology — using projected revenue splits as the allocation key for reasonably anticipated benefits — is consistent with the OECD's recommended approach and is one of the methodologies explicitly contemplated by Chapter VIII.

The IRS proposes to increase PBI's cost-sharing percentage by 8 to 12 percentage points, to a range of 48.2% to 53.7%. The IRS's position appears to be grounded in an assertion that PPC understated U.S.-source value contributions in its benefit projections, thereby overallocating benefits to PBI's territory and underallocating costs to PBI. However, the OECD framework imposes an important constraint on such reallocation: the IRS must demonstrate that PPC's projections were unreasonable at the time they were made, not merely that different assumptions would produce different results. The Guidelines do not permit the IRS to substitute its own preferred assumptions for those of the taxpayer where the taxpayer's projections were within the range of reasonable estimates.

This is a critical point for PPC's defense. PPC's revenue projections were prepared contemporaneously with the CSA, relied on market data and industry forecasts prepared by PPC's internal business planning function and validated by external market intelligence, and were reviewed by Crestfield & Associates (Susan Lam, transfer pricing partner) as part of the contemporaneous transfer pricing documentation process. If the IRS's proposed reallocation is based solely on alternative assumptions that differ from, but are not demonstrably more reasonable than, PPC's assumptions, the OECD framework counsels against the adjustment.

C. Balancing Payments / Buy-In (PCT)

Chapter VIII paragraphs 8.21 through 8.31 address entry payments, exit payments, and balancing payments in the context of CCAs. When a participant enters a CCA and thereby obtains access to intangibles or other results that were developed through prior contributions by other participants, the entering participant should make a payment (a "buy-in" or "balancing payment") that compensates the other participants for the value of the pre-existing contributions. This payment should reflect the arm's-length value of the rights or interests acquired.

PBI's $312 million PCT payment represented its buy-in to pre-existing oncology and immunology intellectual property that had been developed by PPC prior to the establishment of the CSA. This payment was intended to compensate PPC for the value of the intangibles to which PBI would gain access and from which PBI would derive future benefits through its exploitation of the intangibles in non-Americas territories.

As discussed in Section IV.E above, WVG's DCF analysis supports the conclusion that the $312 million PCT payment falls within the arm's-length range of $278 million to $361 million. The OECD's guidance on the valuation of balancing payments is consistent with the income method (DCF) approach used by both PPC/WVG and the IRS. The dispute between the parties centers on the specific inputs to the DCF model — principally the discount rate and revenue assumptions — rather than on the methodology itself. The OECD Guidelines do not prescribe a specific WACC or specific revenue growth rate, recognizing that these inputs are matters of economic judgment that must be assessed in light of the specific facts and circumstances of each transaction. As discussed, the Guidelines' emphasis on appropriate risk-adjusted discount rates and reliance on contemporaneous information supports PPC's position.

D. Participant Eligibility and Substance

Chapter VIII paragraphs 8.5 through 8.9 establish criteria for participant eligibility in a CCA. A participant must exercise control over the specific risks it assumes through its participation in the arrangement and must have the functional capability to exercise such control. This requirement is consistent with the broader risk analysis framework set forth in Chapter I of the Guidelines, which provides that an entity's entitlement to risk-related returns depends on its demonstrated ability to control and manage the relevant risks.

PBI's qualification as a genuine participant in the CSA is supported by the same evidence of functional substance discussed in the DEMPE analysis in Section IV.B above. PBI's headcount growth, board governance, regulatory expenditures, and commercial decision-making authority demonstrate that PBI exercised genuine control over the risks associated with its participation in the CSA — including development risk (the risk that R&D investments would not yield commercially viable products), regulatory risk (the risk that regulatory approvals would not be obtained or maintained in non-Americas jurisdictions), and market risk (the risk that commercial exploitation would not generate the anticipated revenues).

The cross-reference to Chapter I's general guidance on risk control is particularly important here. Under Chapter I paragraphs 1.56 through 1.72, the Guidelines require that an entity claiming to bear risk must (i) have decision-making capability and actually make decisions with respect to the risk, (ii) have the financial capacity to assume the risk, and (iii) exercise control functions (i.e., perform the activities necessary to manage the risk). PBI's Dublin-based management team, under the direction of Managing Director Aidan Naughton, made key commercial decisions regarding pricing, market entry timing, distribution partner selection, and regulatory strategy for non-Americas territories. PBI maintained financial resources through its banking relationships with Glenmore Bank Ireland plc and other financial institutions sufficient to fund its cost-sharing obligations and operational expenditures. And PBI employed personnel with the expertise and experience necessary to manage the development, regulatory, and commercial risks associated with its CSA participation.

E. Consistency with U.S. Regulatory Framework

It is important to note that Treas. Reg. § 1.482-7, which governs qualified cost-sharing arrangements under U.S. law, is broadly consistent with the principles articulated in Chapter VIII of the OECD Guidelines. Both frameworks require that cost allocations be proportional to reasonably anticipated benefits, that buy-in payments reflect arm's-length values, and that participants demonstrate genuine functional substance and risk control.

However, there are certain technical differences between the two frameworks. Most notably, Treas. Reg. § 1.482-7 enumerates specific PCT valuation methods — including the income method, the acquisition price method, the market capitalization method, and the residual profit split method — and provides detailed rules for the application of each. The OECD Guidelines, by contrast, provide broader principles that are consistent with these methods at the conceptual level but do not prescribe the same degree of technical specificity.

Where U.S. regulations provide specific rules that address a particular transfer pricing issue, those rules control, and the OECD Guidelines cannot be relied upon to override them. However, where U.S. regulations are silent or ambiguous — for example, on the specific comparability factors relevant to a particular industry or transaction type, or on the appropriate risk premium for pharmaceutical industry cash flows — Chapter VIII provides interpretive guidance that may assist a court or an Appeals Officer in evaluating the reasonableness of the parties' positions.

The OECD's emphasis on substance-over-form and benefit-proportional cost allocation reinforces the positions articulated in PPC's contemporaneous transfer pricing documentation, prepared by Crestfield & Associates under the direction of Susan Lam. The contemporaneous documentation demonstrates that PPC's cost-sharing ratios were established based on a rigorous analysis of reasonably anticipated benefits, using projected revenue splits as the allocation key, and that PBI's functional substance and risk control were documented and supported by the operational evidence described throughout this memorandum.

VI. CHAPTER I — THE ARM'S-LENGTH PRINCIPLE: FOUNDATIONAL SUPPORT

A. Universality of the Arm's-Length Standard

Chapter I of the OECD Guidelines, at paragraphs 1.6 through 1.14, articulates the arm's-length principle as the international consensus standard for evaluating intercompany transactions among related enterprises. The principle derives from Article 9 of the OECD Model Tax Convention on Income and on Capital, which provides that where conditions are made or imposed between associated enterprises in their commercial or financial relations which differ from those which would be made between independent enterprises, then any profits which would, but for those conditions, have accrued to one of the enterprises, but by reason of those conditions have not so accrued, may be included in the profits of that enterprise and taxed accordingly.

The arm's-length principle as articulated in the OECD Guidelines is substantively identical to the arm's-length standard embodied in IRC § 482 and Treas. Reg. § 1.482-1(b). The U.S. regulations provide that a controlled transaction meets the arm's-length standard if the results of the transaction are consistent with the results that would have been realized if uncontrolled taxpayers had engaged in the same transaction under the same circumstances. This fundamental consistency between the U.S. and OECD standards means that the Guidelines' detailed interpretive guidance on what constitutes arm's-length pricing — including the analytical tools, comparability factors, and methodological approaches — is highly relevant as persuasive authority in U.S. transfer pricing proceedings.

The significance of this consistency cannot be overstated. Because the underlying standard is the same, the OECD's extensive body of guidance on the application of that standard — developed through decades of multinational negotiation and refinement by the world's leading tax policy experts, including U.S. representatives — provides a rich interpretive resource that is directly applicable to the analysis of arm's-length pricing under U.S. law.

B. Comparability Analysis and Best Method Rule

Chapter I paragraphs 1.33 through 1.72 set forth a detailed framework for comparability analysis, which the Guidelines identify as the foundation of the arm's-length principle. The comparability analysis requires a comprehensive evaluation of the following factors:

• Functional analysis: Identification of the functions performed, assets employed, and risks assumed by each party to the controlled transaction.

• Contractual terms: Examination of the terms of the controlled transaction, including rights, obligations, risk allocation, and payment terms.

• Risk analysis: Assessment of the economically significant risks borne by each party, including the party's ability to control and manage those risks.

• Economic circumstances: Evaluation of the economic conditions of the market(s) in which the parties operate, including competitive conditions, regulatory environment, and market maturity.

• Business strategies: Consideration of the business strategies pursued by the parties, including market penetration strategies, product lifecycle positioning, and risk management approaches.

This comparability framework is broadly consistent with the U.S. best method rule under Treas. Reg. § 1.482-1(c) and the comparability requirements of Treas. Reg. § 1.482-1(d). The best method rule provides that the arm's-length result of a controlled transaction must be determined under the method that, given the facts and circumstances, provides the most reliable measure of an arm's-length result. Reliability is assessed by reference to comparability factors that are substantially similar to those identified in the OECD framework.

PPC and WVG have conducted thorough comparability analyses that are consistent with both the OECD framework and U.S. regulatory requirements. WVG's analyses include: (i) a functional analysis of PPC and PBI documenting the functions performed, assets employed, and risks assumed by each entity; (ii) identification of 14 CUT agreements for the royalty rate analysis, screened for comparability based on industry, transaction type, product development stage, exclusivity, geographic scope, and other relevant factors; and (iii) identification of 22 CPM/TNMM comparables for profit-level testing of PBI's operating margins. These analyses reflect the rigorous comparability standards articulated in both the OECD Guidelines and the U.S. regulations.

C. Selection and Application of Transfer Pricing Methods

Chapter II of the Guidelines addresses the selection and application of transfer pricing methods. The Guidelines recognize five principal methods, which are organized into two categories:

Traditional transaction methods:

• Comparable uncontrolled price ("CUP") method (equivalent to U.S. CUT method for intangibles)

• Resale price method

• Cost-plus method

Transactional profit methods:

• Transactional net margin method ("TNMM") (equivalent to U.S. comparable profits method, "CPM")

• Transactional profit split method

The Guidelines express a preference for traditional transaction methods where reliable comparables are available, but acknowledge that transactional profit methods may be more appropriate in certain circumstances, particularly where the controlled transaction involves unique intangibles or complex integrated activities.

PPC's transfer pricing methodology is fully consistent with both the OECD's method selection hierarchy and the U.S. best method rule. PPC employs the CUT method for the legacy IP

PRIVILEGED AND CONFIDENTIAL — ATTORNEY-CLIENT PRIVILEGE / ATTORNEY WORK PRODUCT — PREPARED IN ANTICIPATION OF LITIGATION
MEMORANDUM
October 10, 2022
FROM: Garrett Simmons, Calderwood & Harkness LLP, 1735 Market Street, Suite 3100, Philadelphia, PA 19103
TO: Leonard Cross, Sylvia Hartwell
CC: Leila Nazari
RE: Analysis of OECD Transfer Pricing Guidelines (2017 & 2022 Revisions) as Persuasive Authority in U.S. Tax Controversy — Penterra Pharmaceuticals Corp. IRS Examination Defense
MATTER NO.: 1018-00009
CLIENT: Penterra Pharmaceuticals Corp. (EIN: 22-3741856)
PRIVILEGE DESIGNATION: This memorandum is a privileged and confidential attorney work product prepared in anticipation of litigation. It is protected by the attorney-client privilege and the work product doctrine. This memorandum reflects the mental impressions, conclusions, opinions, and legal theories of attorneys at Calderwood & Harkness LLP and is prepared solely for the use of Penterra Pharmaceuticals Corp. in connection with the IRS examination described herein. Distribution, reproduction, or disclosure of this memorandum, in whole or in part, to any person or entity other than authorized personnel of Penterra Pharmaceuticals Corp. without the prior written consent of Calderwood & Harkness LLP may constitute a waiver of applicable privileges. If you have received this memorandum in error, please notify the sender immediately and destroy all copies.
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I. PURPOSE AND EXECUTIVE SUMMARY
A. Purpose. The purpose of this memorandum is to analyze the extent to which the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (the "OECD Guidelines" or the "Guidelines"), in their 2017 edition as updated by the February 2022 revisions, may serve as persuasive authority in the defense of Penterra Pharmaceuticals Corp. ("PPC" or the "Company") against the IRS examination currently being conducted under Exam Team LB&I-NE-TP-2022-00641 (the "Examination"). The Examination challenges PPC's transfer pricing positions for taxable years 2017 through 2020, with particular focus on (i) PPC's cost-sharing arrangement (the "CSA") with Penterra Biopharma International DAC ("PBI"), an Irish-resident subsidiary, (ii) the intercompany royalty rate applicable to legacy intellectual property licensed by PPC to PBI, and (iii) the platform contribution transaction ("PCT") payment made by PBI upon entry into the CSA.
This memorandum evaluates the legal status of the OECD Guidelines in U.S. tax proceedings, identifies the specific provisions of the Guidelines most relevant to PPC's defense, assesses the degree to which U.S. courts and the IRS have recognized the Guidelines as persuasive authority, and provides strategic recommendations for deploying the Guidelines at each stage of the controversy — from Information Document Request ("IDR") responses through formal Protest and IRS Appeals proceedings.
B. Context. The IRS opened the Examination in early 2022, and to date, the Exam Team has issued forty-seven IDRs seeking extensive documentation related to PPC's intercompany transactions with PBI. Based on preliminary discussions with the revenue agent assigned to the case and the trajectory of document requests, Calderwood & Harkness LLP ("C&H") anticipates that the IRS will propose significant adjustments in the form of a Notice of Proposed Adjustment ("NOPA"). The Examination focuses on three principal issues:
1. Royalty Rate for Legacy IP: Whether PPC's 4.5% royalty rate charged to PBI for the license of pre-CSA legacy intellectual property (including patents, know-how, and trade secrets related to PPC's established pharmaceutical product portfolio) reflects an arm's-length price, or whether the IRS's anticipated proposed rate of 11.0% is more appropriate.
2. CSA Cost-Sharing Ratios: Whether PBI's cost-sharing percentages under the CSA (ranging from 38.2% in TY 2017 to 42.7% in TY 2020) appropriately reflect PBI's share of reasonably anticipated benefits from the intangibles developed under the CSA, or whether the IRS's proposed increase of 8 to 12 percentage points (to 48.2%–53.7%) is warranted.
3. PCT Payment Valuation: Whether PBI's $312 million PCT payment for the buy-in to pre-existing oncology and immunology intellectual property represents an arm's-length valuation, or whether the IRS's anticipated valuation of approximately $852 million (based on a lower weighted average cost of capital ("WACC") and different revenue projections) is more accurate.
The aggregate proposed adjustments, if sustained, could result in additional U.S. federal income tax liability in excess of $480 million (inclusive of penalties and interest), representing a material exposure for the Company.
C. Key Conclusions
After a thorough review of the applicable law, case precedent, administrative guidance, and the OECD Guidelines themselves, this memorandum reaches the following key conclusions:
First, the OECD Transfer Pricing Guidelines do not constitute binding legal authority in U.S. tax proceedings. They are not enacted legislation, not promulgated as Treasury Regulations, and do not appear in any formal source of binding U.S. tax law. Where U.S. statutory provisions or Treasury Regulations address a transfer pricing issue, those provisions control, and the OECD Guidelines cannot override or modify them. This point has been consistently recognized by the U.S. Tax Court, the Court of Federal Claims, and the federal appellate courts.
Second, notwithstanding their non-binding status, the OECD Guidelines have been repeatedly recognized by U.S. courts and by the IRS itself as persuasive authority, particularly in interpreting the arm's-length standard under Internal Revenue Code ("IRC") § 482 and the associated Treasury Regulations. The Guidelines are especially persuasive where they (a) reflect principles already embedded in U.S. regulations, (b) address topics where U.S. guidance is less developed or ambiguous, or (c) are referenced by the IRS's own internal guidance and training materials. The United States, as an OECD member state, participated extensively in the development and negotiation of the Guidelines.
Third, the Guidelines' treatment of intangibles in Chapter VI — including the Development, Enhancement, Maintenance, Protection, and Exploitation ("DEMPE") framework introduced in the 2017 edition as a result of BEPS Actions 8–10 — provides substantial support for PPC's position that PBI is entitled to residual returns from the exploitation of intangibles in non-Americas territories. PBI's extensive operational substance, including 185 employees by 2020, cumulative regulatory expenditures of €47.2 million during 2017–2020, 42 board meetings held in Dublin, and independent pricing decisions across 68 country markets, establishes that PBI performed and controlled DEMPE functions consistent with the Guidelines' requirements.
Fourth, the Guidelines' treatment of cost contribution arrangements in Chapter VIII supports PPC's cost-sharing methodology, which allocates costs based on reasonably anticipated benefits measured by projected revenue splits. The OECD's requirement that any reallocation of cost-sharing ratios be grounded in evidence that the taxpayer's projections were unreasonable — rather than merely differing — provides a framework for challenging the IRS's proposed adjustments.
Fifth, the Guidelines' endorsement of the comparable uncontrolled transaction ("CUT") method for valuing intangible property licenses, combined with the comparability analysis performed by Whitmore Valuation Group ("WVG"), supports PPC's 4.5% royalty rate as arm's-length, falling virtually at the 4.4% median of the 14 comparable license agreements identified by Dr. Helena Vasquez and her team.
D. Companion Memoranda
This memorandum should be read in conjunction with the following companion research memoranda prepared by C&H in connection with PPC's Examination defense:
• IRC § 482 legal analysis memorandum (Nazari/Simmons, July 20, 2022)
• CSA regulatory analysis memorandum (Nazari, August 5, 2022)
• Royalty rate analysis memorandum (Simmons, August 12, 2022)
• Economic substance analysis memorandum (Nazari, August 18, 2022)
• TCJA impact analysis memorandum (Nazari, August 25, 2022)
• Altera/Harborview Corporation case analysis memorandum (Simmons/Nazari, September 15, 2022)
• IRC § 367(d) analysis memorandum (Nazari, September 28, 2022)
Together, these memoranda constitute C&H's comprehensive legal research framework for PPC's IRS controversy defense.
II. BACKGROUND — THE OECD TRANSFER PRICING GUIDELINES
A. Overview and Status of the OECD Guidelines
The Organisation for Economic Co-operation and Development ("OECD") first issued its Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations in 1995, building on earlier reports by the OECD's Committee on Fiscal Affairs dating back to the 1970s. The 1995 Guidelines were intended to provide a comprehensive framework for the application of the arm's-length principle to intercompany transactions among related enterprises operating across national borders, seeking to reduce the incidence of double taxation and to harmonize the approaches taken by tax administrations worldwide.
Since their original publication, the Guidelines have undergone several significant revisions. A major update was issued in 2010, which revised the guidance on transfer pricing methods (Chapters I–III) and the treatment of business restructurings (Chapter IX). The 2017 edition represented the most substantial revision to date, incorporating the outcomes of the OECD/G20 Base Erosion and Profit Shifting ("BEPS") project, specifically BEPS Actions 8 through 10, which focused on aligning transfer pricing outcomes with value creation. Most recently, the February 2022 revision provided updates that included new guidance on financial transactions (Chapter X) and certain minor clarifications to existing chapters.
The United States is a founding member of the OECD and has participated actively in the development and negotiation of each iteration of the Guidelines. Representatives from the U.S. Department of the Treasury and the Internal Revenue Service serve on the OECD's Committee on Fiscal Affairs and its working parties, and U.S. input has been instrumental in shaping the Guidelines' substantive provisions. This participation is relevant to the question of the Guidelines' persuasive authority, as it demonstrates that the U.S. government — including the agency responsible for enforcing U.S. transfer pricing rules — has endorsed the general principles articulated in the Guidelines as consistent with the arm's-length standard.
The Guidelines articulate the arm's-length principle as the international consensus standard for evaluating intercompany transactions, consistent with Article 9 of the OECD Model Tax Convention on Income and on Capital. They provide detailed guidance on (i) the general application of the arm's-length principle, including comparability analysis and functional analysis; (ii) the selection and application of approved transfer pricing methods; (iii) special considerations for particular categories of transactions and assets, including intangibles, services, and financial transactions; (iv) cost contribution arrangements; and (v) administrative approaches to dispute resolution, including the mutual agreement procedure ("MAP") and advance pricing arrangements ("APAs").
For purposes of PPC's Examination defense, the most relevant chapters of the Guidelines are:
• Chapter I: The Arm's-Length Principle
• Chapter II: Transfer Pricing Methods
• Chapter VI: Special Considerations for Intangibles
• Chapter VIII: Cost Contribution Arrangements
Each of these chapters is discussed in detail in subsequent sections of this memorandum.
B. The 2017 Edition — Key Revisions Relevant to PPC
The 2017 edition of the OECD Guidelines incorporated the final reports on BEPS Actions 8 through 10, which collectively addressed the transfer pricing aspects of the BEPS project. The overarching objective of these Actions was to ensure that transfer pricing outcomes are aligned with value creation — that is, that profits are allocated to the entities within a multinational group that actually perform the functions, bear the risks, and employ the assets that generate those profits. This objective was described by the OECD as ensuring that the arm's-length principle is applied in a manner that achieves its intended purpose.
The 2017 revisions to the Guidelines are particularly significant for PPC's defense in several respects:
Chapter VI — Intangibles. Chapter VI was substantially revised to incorporate the DEMPE framework. Under this framework, the mere legal ownership of an intangible asset is insufficient to entitle an entity to the returns generated by that asset. Instead, the entity (or entities) that perform the functions of developing, enhancing, maintaining, protecting, and exploiting the intangible — and that control the risks associated with those functions — are entitled to the intangible-related returns. The DEMPE framework represents a significant substantive development, as it explicitly rejects the notion that legal ownership alone determines transfer pricing outcomes for intangibles and instead requires a detailed functional analysis.
This framework is directly relevant to PBI's role within the PPC group. PBI was not a passive shell company holding bare legal rights to non-Americas pharmaceutical IP. Rather, PBI grew from 52 employees in 2012 to 185 employees by 2020, held 42 board meetings in Dublin during the examination period of 2017–2020, expended approximately €47.2 million cumulatively on regulatory submissions and compliance activities in its assigned territories, and made independent pricing and commercialization decisions across 68 country markets. The DEMPE framework provides a robust analytical structure for demonstrating that PBI's activities constituted genuine value-creating functions that entitled PBI to more than a mere routine return on its activities.
Chapter VIII — Cost Contribution Arrangements. Chapter VIII was revised to align cost contribution arrangement guidance with the BEPS principles of substance over form and value creation. The revised guidance emphasizes that participants' shares of contributions to a CCA should reflect their respective contributions of functions, assets, and risks — not merely their legal ownership of the intangibles being developed. This revision reinforces the principle that a participant's cost-sharing ratio should be determined by reference to its reasonably anticipated benefits from the arrangement, measured in a manner that reflects economic substance rather than purely contractual allocation.
Substance-Over-Form Emphasis. Throughout the 2017 revisions, the Guidelines place heightened emphasis on substance over form. Legal ownership of intellectual property, contractual allocation of risk, and formal documentation are given less weight where they are not supported by the actual conduct of the parties. This emphasis is directly relevant to PPC's defense, as PBI's substantial operational activities, decision-making authority, and functional capacity support the economic substance of the intercompany arrangements under both the OECD framework and U.S. transfer pricing principles.
C. The 2022 Revisions — Incremental Updates
The February 2022 revisions to the OECD Guidelines primarily introduced new Chapter X, which provides guidance on transfer pricing aspects of financial transactions, including intercompany loans, guarantees, captive insurance, and cash pooling arrangements. While Chapter X addresses important issues in the broader transfer pricing landscape, it does not materially affect the analysis relevant to PPC's Examination, which centers on intangibles, royalty rates, and cost contribution arrangements.
The 2022 revisions also included minor clarifications to certain existing chapters. Importantly, no material changes were made to Chapter VI or Chapter VIII — the two chapters most directly relevant to PPC's fact pattern. The guidance on DEMPE functions, legal versus economic ownership of intangibles, cost contribution arrangement principles, and valuation methodologies remained substantively unchanged from the 2017 edition.
To the extent the 2022 revisions provide additional guidance on risk assumption and control — including the requirement that an entity claiming entitlement to risk-related returns must exercise decision-making control over those risks and have the financial capacity to bear them — these provisions reinforce the analysis under the 2017 edition. PBI's demonstrated risk-bearing capacity, decision-making authority through its Managing Director Aidan Naughton and Dublin-based management team, and financial resources (including banking relationships with Glenmore Bank Ireland plc) are consistent with the Guidelines' requirements as articulated in both the 2017 and 2022 editions.
For purposes of this memorandum, references to the "OECD Guidelines" refer to the 2017 edition as updated by the 2022 revisions, unless otherwise specified.
III. LEGAL STATUS OF OECD GUIDELINES IN U.S. TAX CONTROVERSY
A. Not Binding Authority — Statutory and Regulatory Hierarchy
The starting point for any analysis of the OECD Guidelines' role in U.S. tax controversy is the recognition that the Guidelines are not binding legal authority in the United States. The hierarchy of authority in U.S. federal tax law is well established:
1. The Internal Revenue Code. The IRC, as enacted by Congress, represents the highest source of statutory authority in U.S. tax law. For transfer pricing purposes, the governing provision is IRC § 482, which authorizes the Secretary of the Treasury to distribute, apportion, or allocate gross income, deductions, credits, or allowances between or among two or more organizations, trades, or businesses owned or controlled by the same interests, where such distribution, apportionment, or allocation is necessary to prevent evasion of taxes or to clearly reflect income.
2. Treasury Regulations. The Treasury Regulations promulgated under IRC § 482 — particularly Treas. Reg. §§ 1.482-1 through 1.482-9 — provide detailed guidance on the application of the arm's-length standard, the selection of transfer pricing methods, and the specific rules applicable to particular categories of transactions (including intangible property transfers under Treas. Reg. § 1.482-4 and cost-sharing arrangements under Treas. Reg. § 1.482-7). Treasury Regulations issued under a specific statutory grant of authority (so-called "legislative regulations") carry the force and effect of law.
3. Revenue Rulings and Revenue Procedures. Published revenue rulings and revenue procedures represent the IRS's official position on the application of the law to specific factual situations. While not carrying the same weight as Treasury Regulations, they are treated as substantial authority for purposes of the substantial understatement penalty under IRC § 6662.
4. Judicial Decisions. Decisions of the U.S. Tax Court, U.S. Court of Federal Claims, U.S. District Courts, and the appellate courts constitute binding precedent within their respective jurisdictions and provide authoritative interpretations of the IRC and Treasury Regulations.
The OECD Guidelines occupy none of these positions within the hierarchy. They are not enacted legislation, not promulgated as Treasury Regulations, not published as revenue rulings or revenue procedures, and they do not appear in any formally recognized source of binding U.S. tax authority. They are, in essence, an international consensus document developed by a multilateral organization of which the United States is a member — influential, widely referenced, and substantively important, but not legally binding on U.S. taxpayers, the IRS, or U.S. courts.
U.S. courts have consistently recognized this limitation. Where the OECD Guidelines and U.S. regulations address the same issue, and where the two are in conflict, U.S. courts have uniformly applied the U.S. regulatory provisions. The OECD Guidelines cannot be relied upon to override, modify, or supplement a clear U.S. statutory or regulatory rule.
B. Persuasive Authority — Judicial and Administrative Recognition
Notwithstanding their non-binding status, the OECD Guidelines have been recognized by U.S. courts and by the IRS itself as persuasive authority in transfer pricing disputes. This recognition arises from several factors.
Judicial Recognition. U.S. courts adjudicating transfer pricing disputes have looked to the OECD Guidelines for interpretive guidance, particularly in circumstances where the arm's-length standard is at issue and where U.S. regulations do not directly address the specific factual pattern before the court. The Tax Court and the Federal Circuit, in particular, have acknowledged the Guidelines' persuasive value in the context of major transfer pricing cases. While courts are careful to note the distinction between persuasive and binding authority — and to affirm that U.S. regulations control where applicable — they have demonstrated a willingness to reference the Guidelines as evidence of the internationally recognized interpretation of the arm's-length principle.
The persuasive weight of the Guidelines is greatest in the following circumstances:
(a) Consistency with U.S. Regulations. Where the OECD Guidelines articulate principles that are already embedded in, or consistent with, U.S. regulations — such as the arm's-length standard itself, the requirement for a rigorous comparability analysis, or the preference for transaction-based methods — courts have found the Guidelines helpful as an interpretive tool that corroborates the meaning and application of U.S. regulatory provisions.
(b) Gaps in U.S. Guidance. Where U.S. regulations are silent or ambiguous on a particular issue, the Guidelines may serve as a useful reference point. For example, the DEMPE framework introduced in the 2017 revision of Chapter VI addresses the allocation of intangible-related returns in a manner that is more detailed and structured than the existing U.S. regulatory framework. While U.S. regulations address "control" and "significant functions" in the context of intangible property transactions, the DEMPE framework provides a more systematic analytical structure that courts may find helpful in evaluating the substance of an entity's activities.
(c) IRS Reliance. Where the IRS itself has referenced the OECD Guidelines in support of its positions — whether in litigation, in published guidance, or in internal training materials — the Guidelines' persuasive weight may be enhanced. The IRS cannot credibly argue that the Guidelines are irrelevant when the agency has previously relied on them to support its own transfer pricing positions. This dynamic creates an important strategic consideration for PPC's defense: to the extent the IRS Exam Team invokes OECD principles selectively, PPC can point to the full body of the Guidelines — including those provisions that favor PPC's positions — as equally authoritative.
Administrative Recognition. Beyond judicial proceedings, the IRS has demonstrated recognition of the OECD Guidelines' importance through multiple channels. The IRS Transfer Pricing Practice manuals, internal training materials, and published guidance frequently reference the Guidelines. IRS economists and revenue agents with transfer pricing specializations are trained on the OECD framework, and the IRS's participation in the development of the Guidelines through the U.S. government delegation to the OECD Committee on Fiscal Affairs represents an implicit endorsement of the Guidelines' substantive principles. The Large Business & International ("LB&I") division — which has jurisdiction over PPC's Examination — maintains specific transfer pricing practice areas that integrate OECD concepts into their analytical frameworks.
C. Weight in IRS Appeals vs. Litigation
The persuasive weight of the OECD Guidelines varies depending on the stage of the controversy. In a Tax Court proceeding, the Guidelines are subject to the court's independent legal analysis, and their weight depends on the degree to which they are consistent with U.S. law and helpful in interpreting applicable regulatory provisions. The court retains full discretion to accept, reject, or qualify the Guidelines' relevance.
In IRS Appeals proceedings, however, the dynamics are somewhat different. Appeals Officers are tasked with resolving disputes based on a consideration of the "hazards of litigation" — that is, the likelihood of the IRS prevailing if the case were to be litigated in court. In performing this assessment, the Appeals Officer considers not only binding legal authorities but also the range of arguments, evidence, and non-binding authorities that a court might consider. The OECD Guidelines are relevant to this assessment because they inform the hazards analysis: if a Tax Court would give weight to the Guidelines in evaluating PPC's transfer pricing positions, then an Appeals Officer should account for that likelihood in determining the appropriate settlement posture.
Moreover, Appeals Officers possess broader discretion to consider non-binding authorities, policy considerations, and international consensus positions than a court may exercise. The OECD Guidelines, as the internationally recognized standard for transfer pricing, carry particular weight in this context. Presenting the Guidelines to the assigned Appeals Officer — anticipated to be Noreen Castañeda, based on current LB&I Appeals assignments in the northeast region — as evidence that PPC's positions align with international consensus on arm's-length pricing can be a strategically valuable element of PPC's Appeals presentation.
A coordinated approach with Thornbury & Keogh (Ciarán Thornbury serving as lead partner for PBI's Irish tax matters) on Irish Revenue's application of the OECD Guidelines to PBI's transfer pricing positions will further strengthen this presentation. Demonstrating that PPC's intercompany pricing has been consistently treated by both U.S. and Irish tax authorities under OECD-aligned standards reduces the risk of double taxation and supports the arm's-length character of the arrangements from both jurisdictions' perspectives.
IV. CHAPTER VI — SPECIAL CONSIDERATIONS FOR INTANGIBLES: APPLICATION TO PPC
A. Definition and Identification of Intangibles
Chapter VI of the OECD Guidelines provides detailed guidance on the transfer pricing treatment of transactions involving intangible property. The chapter begins with a broad definition of "intangibles" for transfer pricing purposes, encompassing something that is not a physical asset or a financial asset, which is capable of being owned or controlled for use in commercial activities, and whose use or transfer would be compensated had it occurred in a transaction between independent parties in comparable circumstances. This definition includes, without limitation, patents, know-how, trade names, trademarks, customer relationships, contractual rights, government licenses and permits, goodwill and going concern value, and similar assets.
PPC's pharmaceutical intellectual property portfolio constitutes intangible property under both the OECD framework and the U.S. regulatory framework set forth in IRC § 482 and Treas. Reg. § 1.482-4. PPC's portfolio includes the following principal product families:
• Veritaxol — An oncology therapeutic that constitutes PPC's single largest revenue-generating product, with global net sales of approximately $3.12 billion in 2020. Veritaxol is protected by a portfolio of composition-of-matter and method-of-use patents, together with extensive know-how relating to its formulation, manufacturing processes, and clinical applications.
• Imvara — An immunology therapeutic with global net sales of approximately $1.87 billion in 2020. Imvara is protected by a combination of active pharmaceutical ingredient patents, formulation patents, and regulatory exclusivity.
• Cerulon — A rare disease therapeutic with global net sales of approximately $0.62 billion in 2020. Cerulon addresses a niche market with limited competition and carries orphan drug designations in multiple jurisdictions.
For transfer pricing purposes, it is essential to distinguish between two categories of intangibles within PPC's portfolio: (i) pre-CSA "legacy intangibles," which were developed by PPC prior to the establishment of the CSA and were subsequently licensed to PBI at a 4.5% royalty rate, and (ii) "CSA-developed intangibles," which represent the intellectual property developed jointly by PPC and PBI through the cost-sharing arrangement. Each category is subject to different transfer pricing analyses, as discussed below.
B. DEMPE Framework — Functions, Assets, and Risks
The DEMPE framework, articulated in Chapter VI paragraphs 6.32 through 6.71, represents the centerpiece of the 2017 revision's treatment of intangibles. Under this framework, the entities within a multinational group that are entitled to intangible-related returns are those that perform and control the following functions with respect to the intangible at issue:
• Development: Activities relating to the creation, design, research, and development of the intangible, including laboratory research, clinical trials, product engineering, software development, and similar activities.
• Enhancement: Activities relating to the improvement, updating, and adaptation of the intangible, including product modifications, new indications or applications, formulation improvements, and geographic or market-specific adaptations.
• Maintenance: Activities relating to the preservation and protection of the intangible's value, including quality control, regulatory compliance, pharmacovigilance, and ongoing technical support.
• Protection: Activities relating to the legal and commercial protection of the intangible, including patent prosecution and enforcement, trademark protection, trade secret safeguards, and IP litigation management.
• Exploitation: Activities relating to the commercialization and monetization of the intangible, including marketing, sales, distribution, pricing, market access, and customer relationship management.
The application of the DEMPE framework to PBI's activities during the examination period of 2017–2020 yields the following analysis:
Development. PBI co-funded research and development through its CSA cost-sharing payments, bearing 38.2% to 42.7% of annual R&D costs that ranged from $487.3 million to $598.4 million during the examination period. Beyond mere financial contributions, PBI employed regulatory and medical-affairs personnel in Dublin who contributed to non-Americas clinical and regulatory development activities, including the preparation and filing of regulatory submissions with the European Medicines Agency ("EMA"), national competent authorities, and regulatory bodies in Asia-Pacific and other regions.
Enhancement. PBI conducted market-specific adaptations, label extensions, and post-marketing studies across its assigned 68 country markets. These activities included adapting product labeling and packaging to meet local regulatory requirements, pursuing supplemental indications for approved products, conducting Phase IV post-marketing surveillance studies, and developing region-specific marketing and medical education materials. These enhancement activities added value to the intangibles by expanding their commercial applicability and extending their product lifecycle in non-Americas territories.
Maintenance. PBI managed ongoing regulatory compliance and pharmacovigilance for non-Americas territories, including the submission and maintenance of marketing authorizations, management of adverse event reporting systems, compliance with evolving regulatory requirements (such as the EU Falsified Medicines Directive and serialization requirements), and quality oversight of third-party contract manufacturers. PBI's cumulative regulatory expenditure during the 2017–2020 period totaled approximately €47.2 million, reflecting a substantial and ongoing commitment of resources to the maintenance function.
Protection. PBI oversaw intellectual property protection activities in non-Americas jurisdictions, including coordination with local patent counsel on patent prosecution and enforcement, management of supplementary protection certificate ("SPC") filings in European jurisdictions, monitoring of potential generic entrants, and initiation of IP enforcement actions where warranted. PBI's Dublin-based legal and IP team worked in coordination with PPC's global IP function but exercised independent judgment on non-Americas IP protection matters.
Exploitation. PBI served as the principal for the commercial exploitation of PPC's pharmaceutical products outside the Americas. PBI made independent pricing decisions for its assigned markets, selected and managed distribution partners, negotiated with national health authorities and government payer systems on reimbursement and market access, developed go-to-market strategies, and bore the commercial risk of market acceptance and competitive dynamics. PBI's commercial activities spanned 68 country markets across Europe, Asia-Pacific, the Middle East, and Africa.
The OECD DEMPE framework supports the position that PBI is entitled to residual returns — that is, returns above and beyond a routine or benchmark return — from the non-Americas exploitation of both CSA-developed and legacy intangibles. PBI's performance of substantive DEMPE functions across all five categories, combined with its demonstrated control over the risks associated with those functions (through management decision-making, financial capacity, and operational oversight), establishes that PBI is not a mere contract service provider or passive IP holding company but rather a principal entity performing value-creating activities.
This analysis directly rebuts the IRS's anticipated economic substance challenge, which is expected to assert that the key DEMPE functions remained within the United States — specifically, within PPC's U.S.-based research and development, regulatory, and commercial organizations. While PPC's U.S. operations undeniably perform significant DEMPE functions with respect to Americas-territory exploitation, the evidence demonstrates that PBI independently performed the corresponding functions for non-Americas territories, supported by its growing headcount (from 52 employees in 2012 to 185 by 2020), its Dublin-based management and governance structure, and its direct engagement with regulators, distributors, and customers in its assigned markets.
C. Legal Ownership vs. Economic Ownership
Chapter VI paragraphs 6.36 through 6.46 address the critical distinction between legal ownership and economic ownership of intangibles. The Guidelines make clear that the legal owner of an intangible is not, by that fact alone, entitled to the returns generated by the intangible. Where the legal owner does not perform or control the DEMPE functions that generate value from the intangible, other entities that do perform those functions may be entitled to a share of the intangible-related returns.
It is important to acknowledge that this principle cuts both ways. If PBI were a mere shell entity — holding legal rights to non-Americas intellectual property but lacking the personnel, infrastructure, expertise, and decision-making authority to perform DEMPE functions — the fact of legal ownership alone would not be sufficient under the OECD framework (or under U.S. transfer pricing principles) to justify PBI's entitlement to residual returns. The IRS's economic substance challenge, at its core, amounts to an assertion that PBI is such a shell entity, and that the true DEMPE functions were performed by PPC's U.S. operations.
However, the factual record overwhelmingly refutes this characterization. PBI's substantial operational presence — 185 employees by 2020 (including experienced pharmaceutical industry professionals in regulatory affairs, medical affairs, commercial operations, and finance), 42 board meetings held in Dublin during 2017–2020, approximately 18,000 square feet of office space in Dublin, banking relationships with Glenmore Bank Ireland plc, and independent management under Managing Director Aidan Naughton — establishes that PBI is far more than a passive holder of intellectual property rights.
The OECD Guidelines' emphasis on substance over form thus supports PPC's defense. PBI's legal ownership of non-Americas IP rights is backed by genuine economic substance in the form of DEMPE function performance, risk control, and operational infrastructure. The Guidelines' analytical framework, properly applied, confirms that PBI's legal and economic ownership are aligned, and that PBI's transfer pricing arrangements appropriately reflect its contributions to value creation.
D. Chapter VI and the CUT Method — Royalty Rate
Chapter VI of the Guidelines endorses the comparable uncontrolled price ("CUP") method — known as the comparable uncontrolled transaction ("CUT") method in U.S. transfer pricing nomenclature — as an appropriate method for determining arm's-length compensation for licenses of intangible property, provided that sufficiently reliable comparable transactions can be identified. The CUT/CUP method involves comparing the controlled transaction (here, PPC's license of legacy IP to PBI) with comparable transactions between unrelated parties, adjusting for material differences in comparability factors.
Whitmore Valuation Group, PPC's retained transfer pricing and valuation firm, conducted a comprehensive CUT analysis under the direction of Dr. Helena Vasquez, the lead economist assigned to PPC's engagement. WVG's analysis identified 14 comparable uncontrolled pharmaceutical license agreements between unrelated parties, sourced from publicly available databases including the Vireo Health IT database, SEC filings, and other commercial licensing databases. After applying rigorous comparability screens — including industry similarity (pharmaceutical/biopharmaceutical), transaction type (outbound license of patents and know-how), stage of development (approved products with commercial revenue), exclusivity (exclusive territorial licenses), and geographic scope (multi-country international licenses) — WVG determined that the interquartile range of royalty rates in the comparable agreements was 3.1% to 6.8% of net sales, with a median of 4.4%.
PPC's 4.5% royalty rate on the legacy IP license to PBI falls squarely within this interquartile range and is virtually at the median. Under the OECD Guidelines' comparability framework, a controlled transaction that falls within the arm's-length range should be considered consistent with the arm's-length principle. The Guidelines do not require that the controlled transaction be at the exact median; any point within the interquartile range is generally considered acceptable unless there are specific reasons to select a particular point within the range.
The IRS's proposed royalty rate of 11.0% significantly exceeds the upper end of WVG's identified interquartile range. The IRS's rate appears to be based on a set of CUTs that may not be sufficiently comparable to PPC's transaction. The OECD Guidelines' detailed comparability factors — including the nature of the intangible (specific therapeutic area and stage of lifecycle), the exclusivity and scope of the license, the geographic territory, the risk allocation between licensor and licensee, and the relative contributions of each party — provide a framework for challenging the reliability of the IRS's proposed comparables and supporting the reliability of WVG's analysis.
The OECD's emphasis on comparability factors is particularly important here, as the pharmaceutical industry presents unique comparability challenges. License agreements for blockbuster oncology drugs are not comparable to license agreements for early-stage compounds, and agreements involving full development and commercialization risk are not comparable to agreements involving only co-promotion rights. The Guidelines' requirement for a rigorous, multi-factor comparability analysis supports PPC's position that WVG's carefully screened set of 14 comparables — all involving approved pharmaceutical products under exclusive territorial licenses — is more reliable than the IRS's proposed comparables.
E. Chapter VI and PCT / Buy-In Valuation
Chapter VI also addresses the valuation of transfers of intangible property, including the determination of arm's-length pricing for buy-in transactions (known as platform contribution transactions, or "PCTs," in U.S. regulatory terminology). The Guidelines recognize both the comparable uncontrolled price method and the income approach (Discounted cash flow or "DCF") as appropriate valuation methodologies, depending on the availability of reliable comparables and the specific facts of the transaction.
PPC's PCT payment of $312 million represented PBI's buy-in to pre-existing oncology and immunology intellectual property upon PBI's entry into the CSA. WVG's income-method analysis, employing a DCF methodology with a 9.8% weighted average cost of capital, placed the arm's-length range for the PCT at $278 million to $361 million. The $312 million payment falls within this range, supporting PPC's position that the PCT reflected arm's-length pricing.
The IRS's valuation of the PCT at approximately $852 million reflects two principal disagreements: (i) the IRS applied a lower WACC of 7.2%, which significantly increases the present value of projected future cash flows, and (ii) the IRS used more aggressive revenue growth assumptions than those employed by PPC/WVG.
The OECD Guidelines' guidance on discount rates is relevant to this dispute. The Guidelines recognize that the discount rate used in a DCF valuation should reflect the risk profile of the expected cash flows being discounted. Pharmaceutical industry cash flows are subject to significant risks, including regulatory approval risk, patent expiration and generic competition risk, market acceptance risk, pricing and reimbursement risk, and competitive pipeline risk. A WACC of 9.8% — as employed by WVG — is consistent with risk premiums observed in the pharmaceutical industry and reflects the inherent uncertainty associated with projecting pharmaceutical revenue streams over a multi-year horizon. The IRS's lower WACC of 7.2% may not adequately account for these industry-specific risks, and the OECD Guidelines' emphasis on appropriate risk-adjusted discount rates supports PPC's position.
Furthermore, Chapter VI paragraph 6.153 and subsequent provisions address the treatment of information available at the time of the transaction versus information that becomes available after the fact. The Guidelines generally provide that the valuation of intangible transfers should be based on the most reliable information available as of the date of the transaction. While the Guidelines acknowledge that ex post outcomes may inform the reliability of ex ante projections in certain circumstances, they do not endorse wholesale hindsight-based adjustments. This principle supports PPC's use of contemporaneous revenue projections in the PCT valuation, as opposed to the IRS's apparent reliance on later-available information to support its higher valuation.
V. CHAPTER VIII — COST CONTRIBUTION ARRANGEMENTS: APPLICATION TO PPC
A. Overview of Chapter VIII Framework
Chapter VIII of the OECD Guidelines provides guidance on cost contribution arrangements — collaborative arrangements under which two or more enterprises agree to share the costs and risks of developing, producing, or obtaining assets, services, or rights, with each participant expected to benefit from the arrangement. The OECD's terminology of "cost contribution arrangements" ("CCAs") is analogous to what U.S. regulations term "qualified cost-sharing arrangements" ("QCSAs") under Treas. Reg. § 1.482-7.
Chapter VIII establishes several key principles governing the arm's-length character of CCAs:
(1) Each participant's contribution to the CCA should be consistent with what an independent enterprise would agree to contribute under comparable circumstances, having regard to the proportionate share of expected benefits.
(2) Contributions by each participant should be proportionate to the participant's share of reasonably anticipated benefits from the arrangement, measured on a consistent and economically rational basis.
(3) Each participant must have a reasonable expectation of benefit from the arrangement — entities without such an expectation should not be participants but should instead be compensated through a service fee or similar mechanism.
(4) The arrangement should be documented, and the terms of the arrangement should be consistent with arm's-length dealing.
These principles form the analytical framework for evaluating the arm's-length character of PPC's CSA with PBI.
B. Proportionality of Contributions
Chapter VIII paragraphs 8.10 through 8.20 articulate the fundamental proportionality requirement: each participant's share of costs should be proportional to its share of reasonably anticipated benefits from the arrangement. The Guidelines recognize that the measurement of "reasonably anticipated benefits" requires the selection of an appropriate allocation key, which typically involves projected revenues, units sold, operating profits, or other economically reasonable metrics.
PBI's cost-sharing percentages under the CSA were calculated based on projected revenue splits, reflecting PBI's anticipated share of non-Americas revenues relative to total global revenues from the products developed under the CSA. PBI's cost-sharing percentage was 38.2% in TY 2017, increasing to 42.7% in TY 2020, reflecting the growth of PBI's commercial operations and the increasing proportion of global revenues attributable to non-Americas markets. This methodology — using projected revenue splits as the allocation key for reasonably anticipated benefits — is consistent with the OECD's recommended approach and is one of the methodologies explicitly contemplated by Chapter VIII.
The IRS proposes to increase PBI's cost-sharing percentage by 8 to 12 percentage points, to a range of 48.2% to 53.7%. The IRS's position appears to be grounded in an assertion that PPC understated U.S.-source value contributions in its benefit projections, thereby overallocating benefits to PBI's territory and underallocating costs to PBI. However, the OECD framework imposes an important constraint on such reallocation: the IRS must demonstrate that PPC's projections were unreasonable at the time they were made, not merely that different assumptions would produce different results. The Guidelines do not permit the IRS to substitute its own preferred assumptions for those of the taxpayer where the taxpayer's projections were within the range of reasonable estimates.
This is a critical point for PPC's defense. PPC's revenue projections were prepared contemporaneously with the CSA, relied on market data and industry forecasts prepared by PPC's internal business planning function and validated by external market intelligence, and were reviewed by Crestfield & Associates (Susan Lam, transfer pricing partner) as part of the contemporaneous transfer pricing documentation process. If the IRS's proposed reallocation is based solely on alternative assumptions that differ from, but are not demonstrably more reasonable than, PPC's assumptions, the OECD framework counsels against the adjustment.
C. Balancing Payments / Buy-In (PCT)
Chapter VIII paragraphs 8.21 through 8.31 address entry payments, exit payments, and balancing payments in the context of CCAs. When a participant enters a CCA and thereby obtains access to intangibles or other results that were developed through prior contributions by other participants, the entering participant should make a payment (a "buy-in" or "balancing payment") that compensates the other participants for the value of the pre-existing contributions. This payment should reflect the arm's-length value of the rights or interests acquired.
PBI's $312 million PCT payment represented its buy-in to pre-existing oncology and immunology intellectual property that had been developed by PPC prior to the establishment of the CSA. This payment was intended to compensate PPC for the value of the intangibles to which PBI would gain access and from which PBI would derive future benefits through its exploitation of the intangibles in non-Americas territories.
As discussed in Section IV.E above, WVG's DCF analysis supports the conclusion that the $312 million PCT payment falls within the arm's-length range of $278 million to $361 million. The OECD's guidance on the valuation of balancing payments is consistent with the income method (DCF) approach used by both PPC/WVG and the IRS. The dispute between the parties centers on the specific inputs to the DCF model — principally the discount rate and revenue assumptions — rather than on the methodology itself. The OECD Guidelines do not prescribe a specific WACC or specific revenue growth rate, recognizing that these inputs are matters of economic judgment that must be assessed in light of the specific facts and circumstances of each transaction. As discussed, the Guidelines' emphasis on appropriate risk-adjusted discount rates and reliance on contemporaneous information supports PPC's position.
D. Participant Eligibility and Substance
Chapter VIII paragraphs 8.5 through 8.9 establish criteria for participant eligibility in a CCA. A participant must exercise control over the specific risks it assumes through its participation in the arrangement and must have the functional capability to exercise such control. This requirement is consistent with the broader risk analysis framework set forth in Chapter I of the Guidelines, which provides that an entity's entitlement to risk-related returns depends on its demonstrated ability to control and manage the relevant risks.
PBI's qualification as a genuine participant in the CSA is supported by the same evidence of functional substance discussed in the DEMPE analysis in Section IV.B above. PBI's headcount growth, board governance, regulatory expenditures, and commercial decision-making authority demonstrate that PBI exercised genuine control over the risks associated with its participation in the CSA — including development risk (the risk that R&D investments would not yield commercially viable products), regulatory risk (the risk that regulatory approvals would not be obtained or maintained in non-Americas jurisdictions), and market risk (the risk that commercial exploitation would not generate the anticipated revenues).
The cross-reference to Chapter I's general guidance on risk control is particularly important here. Under Chapter I paragraphs 1.56 through 1.72, the Guidelines require that an entity claiming to bear risk must (i) have decision-making capability and actually make decisions with respect to the risk, (ii) have the financial capacity to assume the risk, and (iii) exercise control functions (i.e., perform the activities necessary to manage the risk). PBI's Dublin-based management team, under the direction of Managing Director Aidan Naughton, made key commercial decisions regarding pricing, market entry timing, distribution partner selection, and regulatory strategy for non-Americas territories. PBI maintained financial resources through its banking relationships with Glenmore Bank Ireland plc and other financial institutions sufficient to fund its cost-sharing obligations and operational expenditures. And PBI employed personnel with the expertise and experience necessary to manage the development, regulatory, and commercial risks associated with its CSA participation.
E. Consistency with U.S. Regulatory Framework
It is important to note that Treas. Reg. § 1.482-7, which governs qualified cost-sharing arrangements under U.S. law, is broadly consistent with the principles articulated in Chapter VIII of the OECD Guidelines. Both frameworks require that cost allocations be proportional to reasonably anticipated benefits, that buy-in payments reflect arm's-length values, and that participants demonstrate genuine functional substance and risk control.
However, there are certain technical differences between the two frameworks. Most notably, Treas. Reg. § 1.482-7 enumerates specific PCT valuation methods — including the income method, the acquisition price method, the market capitalization method, and the residual profit split method — and provides detailed rules for the application of each. The OECD Guidelines, by contrast, provide broader principles that are consistent with these methods at the conceptual level but do not prescribe the same degree of technical specificity.
Where U.S. regulations provide specific rules that address a particular transfer pricing issue, those rules control, and the OECD Guidelines cannot be relied upon to override them. However, where U.S. regulations are silent or ambiguous — for example, on the specific comparability factors relevant to a particular industry or transaction type, or on the appropriate risk premium for pharmaceutical industry cash flows — Chapter VIII provides interpretive guidance that may assist a court or an Appeals Officer in evaluating the reasonableness of the parties' positions.
The OECD's emphasis on substance-over-form and benefit-proportional cost allocation reinforces the positions articulated in PPC's contemporaneous transfer pricing documentation, prepared by Crestfield & Associates under the direction of Susan Lam. The contemporaneous documentation demonstrates that PPC's cost-sharing ratios were established based on a rigorous analysis of reasonably anticipated benefits, using projected revenue splits as the allocation key, and that PBI's functional substance and risk control were documented and supported by the operational evidence described throughout this memorandum.
VI. CHAPTER I — THE ARM'S-LENGTH PRINCIPLE: FOUNDATIONAL SUPPORT
A. Universality of the Arm's-Length Standard
Chapter I of the OECD Guidelines, at paragraphs 1.6 through 1.14, articulates the arm's-length principle as the international consensus standard for evaluating intercompany transactions among related enterprises. The principle derives from Article 9 of the OECD Model Tax Convention on Income and on Capital, which provides that where conditions are made or imposed between associated enterprises in their commercial or financial relations which differ from those which would be made between independent enterprises, then any profits which would, but for those conditions, have accrued to one of the enterprises, but by reason of those conditions have not so accrued, may be included in the profits of that enterprise and taxed accordingly.
The arm's-length principle as articulated in the OECD Guidelines is substantively identical to the arm's-length standard embodied in IRC § 482 and Treas. Reg. § 1.482-1(b). The U.S. regulations provide that a controlled transaction meets the arm's-length standard if the results of the transaction are consistent with the results that would have been realized if uncontrolled taxpayers had engaged in the same transaction under the same circumstances. This fundamental consistency between the U.S. and OECD standards means that the Guidelines' detailed interpretive guidance on what constitutes arm's-length pricing — including the analytical tools, comparability factors, and methodological approaches — is highly relevant as persuasive authority in U.S. transfer pricing proceedings.
The significance of this consistency cannot be overstated. Because the underlying standard is the same, the OECD's extensive body of guidance on the application of that standard — developed through decades of multinational negotiation and refinement by the world's leading tax policy experts, including U.S. representatives — provides a rich interpretive resource that is directly applicable to the analysis of arm's-length pricing under U.S. law.
B. Comparability Analysis and Best Method Rule
Chapter I paragraphs 1.33 through 1.72 set forth a detailed framework for comparability analysis, which the Guidelines identify as the foundation of the arm's-length principle. The comparability analysis requires a comprehensive evaluation of the following factors:
• Functional analysis: Identification of the functions performed, assets employed, and risks assumed by each party to the controlled transaction.
• Contractual terms: Examination of the terms of the controlled transaction, including rights, obligations, risk allocation, and payment terms.
• Risk analysis: Assessment of the economically significant risks borne by each party, including the party's ability to control and manage those risks.
• Economic circumstances: Evaluation of the economic conditions of the market(s) in which the parties operate, including competitive conditions, regulatory environment, and market maturity.
• Business strategies: Consideration of the business strategies pursued by the parties, including market penetration strategies, product lifecycle positioning, and risk management approaches.
This comparability framework is broadly consistent with the U.S. best method rule under Treas. Reg. § 1.482-1(c) and the comparability requirements of Treas. Reg. § 1.482-1(d). The best method rule provides that the arm's-length result of a controlled transaction must be determined under the method that, given the facts and circumstances, provides the most reliable measure of an arm's-length result. Reliability is assessed by reference to comparability factors that are substantially similar to those identified in the OECD framework.
PPC and WVG have conducted thorough comparability analyses that are consistent with both the OECD framework and U.S. regulatory requirements. WVG's analyses include: (i) a functional analysis of PPC and PBI documenting the functions performed, assets employed, and risks assumed by each entity; (ii) identification of 14 CUT agreements for the royalty rate analysis, screened for comparability based on industry, transaction type, product development stage, exclusivity, geographic scope, and other relevant factors; and (iii) identification of 22 CPM/TNMM comparables for profit-level testing of PBI's operating margins. These analyses reflect the rigorous comparability standards articulated in both the OECD Guidelines and the U.S. regulations.
C. Selection and Application of Transfer Pricing Methods
Chapter II of the Guidelines addresses the selection and application of transfer pricing methods. The Guidelines recognize five principal methods, which are organized into two categories:
Traditional transaction methods:
• Comparable uncontrolled price ("CUP") method (equivalent to U.S. CUT method for intangibles)
• Resale price method
• Cost-plus method
Transactional profit methods:
• Transactional net margin method ("TNMM") (equivalent to U.S. comparable profits method, "CPM")
• Transactional profit split method
The Guidelines express a preference for traditional transaction methods where reliable comparables are available, but acknowledge that transactional profit methods may be more appropriate in certain circumstances, particularly where the controlled transaction involves unique intangibles or complex integrated activities.
PPC's transfer pricing methodology is fully consistent with both the OECD's method selection hierarchy and the U.S. best method rule. PPC employs the CUT method for the legacy IP

PRIVILEGED AND CONFIDENTIAL — ATTORNEY-CLIENT PRIVILEGE / ATTORNEY WORK PRODUCT — PREPARED IN ANTICIPATION OF LITIGATION

MEMORANDUM

MATTER NO.: 1018-00009

I. PURPOSE AND EXECUTIVE SUMMARY

III. LEGAL STATUS OF OECD GUIDELINES IN U.S. TAX CONTROVERSY

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