1032-00006 · Halcyon Semiconductor Inc · APA Application

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MEMORANDUM

PRIVILEGED AND CONFIDENTIAL — ATTORNEY WORK PRODUCT

This memorandum constitutes attorney work product prepared in anticipation of litigation and/or for the purpose of providing legal advice. It is protected by the attorney-client privilege, the work product doctrine, and all other applicable privileges. This document is not to be disclosed to any person or entity outside of Calderwood & Harkness LLP without the express written authorization of the responsible partner. Inadvertent disclosure does not constitute a waiver of any applicable privilege.

CALDERWOOD & HARKNESS LLP 599 Lexington Avenue, 38th Floor New York, New York 10022

Matter Number: 1032-00006 Billing Code: HSAG-TP-2025

Date: May 20, 2025

To: Leonard Cross, Partner, Tax Sylvia Hartwell, Partner, Tax

From: Leila Nazari, Senior Associate, Tax Robert Jansen, Associate, Tax

Re: Summary of Pre-Filing Conference with IRS APMA — May 19, 2025

Subject Matter: Bilateral Advance Pricing Agreement — Halcyon Semiconductor AG / Halcyon Semiconductor Inc.

I. Purpose of Memorandum

This memorandum summarizes the pre-filing conference held on May 19, 2025, with the Internal Revenue Service Advance Pricing and Mutual Agreement Program ("APMA") within the Large Business & International ("LB&I") Division, pursuant to Section 3 of Revenue Procedure 2015-41, 2015-35 I.R.B. 263. The conference was conducted in accordance with the anonymous pre-filing conference procedures set forth in that revenue procedure, and accordingly neither Halcyon Semiconductor AG ("HSAG") nor its wholly owned United States subsidiary, Halcyon Semiconductor Inc. ("HSI"), was identified by name at any point during the meeting. All references to the taxpayer and its affiliated entities were made in general terms consistent with the anonymous pre-filing memorandum previously submitted.

The anonymous pre-filing memorandum had been submitted to IRS APMA on April 14, 2025, describing a German-parented multinational semiconductor group with a US distribution subsidiary and setting forth the proposed covered transactions, transfer pricing methods, and APA term. That memorandum was the principal document referenced by the APMA team during the conference.

The primary purposes of the pre-filing conference were as follows:

(a) to gauge IRS receptivity to the proposed bilateral APA request, including the scope of the covered transactions and the proposed APA term;

(b) to discuss the proposed transfer pricing methods for each category of intercompany transaction and identify any preliminary analytical concerns or deficiencies that the IRS may wish to see addressed in the formal application;

(c) to confirm procedural requirements, including application contents, user fee, and filing logistics, for the formal APA application; and

(d) to identify any preliminary substantive or procedural concerns before the formal application filing, which is currently targeted for July 7, 2025.

This memorandum is intended to serve as the firm's contemporaneous record of the conference and to guide the preparation of the formal APA application. It also assigns and tracks action items arising from the conference for all relevant parties, including Calderwood & Harkness LLP, the client (HSAG/HSI), German tax counsel (Kettner Pflüger Rechtsanwälte), and the economic advisory firm (Meridian Economics GmbH).

II. Conference Logistics

A. Date, Time, and Format

The pre-filing conference was held on May 19, 2025, commencing at 10:00 a.m. Eastern Time and concluding at approximately 12:15 p.m. Eastern Time. The total duration of the substantive meeting was approximately two hours and fifteen minutes.

The conference was conducted in person at the IRS APMA offices in Washington, D.C. Leonard Cross (Partner, Tax) and Leila Nazari (Senior Associate, Tax) attended in person on behalf of Calderwood & Harkness LLP. Robert Jansen (Associate, Tax) participated remotely via a secure videoconference connection from the firm's New York office. All participants confirmed at the outset of the meeting that the videoconference link was secure and that no unauthorized individuals were present in the room or on the line.

B. Attendees. The following individuals participated in the conference:

Calderwood & Harkness LLP:

• Leonard Cross, Partner, Tax — responsible partner for the engagement and principal presenter at the conference

• Leila Nazari, Senior Associate, Tax — lead associate for the engagement, co-presenter and note-taker

• Robert Jansen, Associate, Tax — participating remotely via secure videoconference; assisted with note-taking and document references

IRS APMA:

• Two APMA team members participated on behalf of the IRS. As is customary at the pre-filing stage, these individuals have not yet been formally assigned to the case; formal team assignment will occur upon the filing of the APA application. Based on introductions made during the conference, one participant was a team leader and the other was an economist. Their names were exchanged informally during introductions but will be confirmed and documented upon formal case assignment following the filing of the application.

Client Personnel:

• No client personnel attended the conference. Specifically, neither Priya Raghavan (Vice President, Tax — HSI) nor Dr. Erwin Fassbinder (Head of Transfer Pricing — HSAG) participated in or observed the conference. This is consistent with the anonymous pre-filing conference protocol under Rev. Proc. 2015-41, Section 3, which contemplates that taxpayer representatives (i.e., outside counsel and advisors) attend without identifying the taxpayer.

C. Materials Referenced

The principal document referenced during the conference was the anonymous pre-filing memorandum submitted to IRS APMA on April 14, 2025. That memorandum described the taxpayer group as a publicly traded German semiconductor manufacturer with a wholly owned US distribution subsidiary, and set forth the three categories of intercompany transactions, the proposed transfer pricing methods, and the proposed APA term. The APMA team confirmed at the outset of the meeting that both the team leader and the economist had reviewed the pre-filing memorandum in advance.

No taxpayer-identifying documents were exchanged during the conference. No financial statements, intercompany agreements, or other documents bearing the name of HSAG, HSI, or any affiliated entity were presented or referenced. Calderwood & Harkness's presentation was made entirely with reference to the anonymous pre-filing memorandum and oral descriptions consistent therewith.

III. Summary of Discussion Points

A. Overview of Taxpayer and Transactions Presented

Calderwood & Harkness opened the substantive discussion by providing the APMA team with an overview of the taxpayer group and the intercompany transactions proposed to be covered by the bilateral APA. The presentation followed the structure of the pre-filing memorandum and elaborated on key points as follows.

Taxpayer Group Description. C&H described the applicant as a publicly traded German semiconductor manufacturer (organized as an Aktiengesellschaft under German law) with advanced-node fabrication operations encompassing 7nm, 5nm, and 3nm process technologies. The parent entity's principal fabrication facilities are located in Germany. The semiconductor products manufactured by the parent serve three primary end markets: automotive semiconductors, industrial Internet of Things ("IoT") applications, and data-center infrastructure. The parent's consolidated revenue was described as approximately €8.7 billion for fiscal year 2024, reflecting the parent's position as a significant player in the global semiconductor industry.

US Subsidiary Description. The US subsidiary was characterized as a wholly owned Delaware C-corporation functioning as the exclusive US distributor, marketing entity, and design-support provider for the parent's semiconductor products within the North American market. The subsidiary is headquartered in Austin, Texas, and maintains a design center in San Jose, California, as well as regional sales offices in multiple locations across the United States. The US subsidiary's third-party revenue for fiscal year 2024 was described as approximately $4.1 billion, reflecting its role as the parent group's primary channel to the North American customer base. C&H emphasized that the US subsidiary does not engage in independent manufacturing and does not own significant proprietary intellectual property, consistent with its characterization as a limited-risk distributor with ancillary marketing and design-support functions.

Covered Intercompany Transactions. C&H described three categories of intercompany transactions proposed to be covered by the bilateral APA:

1. Tangible Goods (Wafer/Die Sales). The German parent manufactures semiconductor wafers and singulated die at its fabrication facilities and sells finished and semi-finished products to the US subsidiary under a master intercompany supply agreement. The US subsidiary resells these products to third-party customers in North America. For fiscal year 2024, intercompany sales of tangible goods amounted to approximately €988 million (approximately $1.076 billion at applicable exchange rates). This represents the single largest category of intercompany transactions by value.

2. Royalties (IP License). The US subsidiary pays a running royalty to the German parent for the right to use licensed semiconductor process technology and design libraries in connection with its distribution, marketing, and design-support activities. The royalty is computed as a percentage of the US subsidiary's net resale revenue. For fiscal year 2024, the royalty payments amounted to approximately €68 million.

3. Cost-Sharing Contributions (R&D CSA). The German parent and the US subsidiary are parties to a Qualified Cost Sharing Arrangement ("CSA") for next-generation semiconductor process research and development. Under the CSA, the US subsidiary contributes approximately 22.5% of qualified R&D costs, reflecting its anticipated share of the benefits from North American exploitation of the developed intangible property. For fiscal year 2024, the US subsidiary's cost-sharing contribution amounted to approximately €225 million.

Aggregate Intercompany Flows. C&H noted that the aggregate annual intercompany flows across all three transaction categories were approximately €1.28 billion for fiscal year 2024. The significance of these intercompany flows—both in absolute terms and relative to the US subsidiary's third-party revenue—underscores the importance of obtaining certainty on transfer pricing through the APA process.

The APMA team did not raise any questions regarding the general characterization of the taxpayer group or the US subsidiary's functional profile during this portion of the presentation. The team leader acknowledged that the transactions described are typical of those covered by bilateral APAs involving semiconductor groups.

B. Proposed APA Term and Rollback Request

C&H presented the proposed APA term and rollback request as follows:

Prospective APA Term. Five tax years, covering the period from January 1, 2025 through December 31, 2029.

Rollback Request. Three prior tax years, covering the period from January 1, 2022 through December 31, 2024.

Total Covered Period. If the rollback request is granted, the APA would cover a total of eight tax years (2022–2029).

C&H explained that the rollback request is motivated by the taxpayer's desire to obtain certainty for the three most recent completed tax years, during which the same transfer pricing methods and intercompany pricing structure were in effect. The taxpayer's contemporaneous transfer pricing documentation for the rollback years applies the same economic methodologies and functional analyses that will be presented in the formal APA application, providing a consistent basis for the rollback.

IRS Response on Rollback. The APMA team leader noted that rollback requests are evaluated on a case-by-case basis and that there is no automatic entitlement to a rollback. However, the team leader indicated a willingness to consider the rollback provided that the following conditions are satisfied:

(a) the facts and circumstances during the rollback period (2022–2024) are materially consistent with the facts and circumstances during the prospective APA years (2025–2029);

(b) the transfer pricing methods applied during the rollback period are the same as, or materially consistent with, the methods proposed in the APA; and

The APMA team leader specifically asked that the formal APA application include detailed financial data for each of the rollback years (FY 2022, FY 2023, and FY 2024), along with references to the contemporaneous documentation demonstrating that the same methodology was applied in those years. The team leader did not foreclose the rollback request but signaled that the availability and quality of contemporaneous documentation would be a significant factor in APMA's evaluation.

C. Bilateral APA — Treaty Partner Coordination

C&H confirmed that the request is for a bilateral APA between the United States (IRS) and Germany (Bundeszentralamt für Steuern, or "BZSt") under Article 25 (Mutual Agreement Procedure) of the Convention between the United States of America and the Federal Republic of Germany for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and Capital and to Certain Other Taxes, signed June 29, 2006 (the "US-Germany Income Tax Treaty").

C&H informed the APMA team that German tax counsel (described in general terms without identifying Kettner Pflüger Rechtsanwälte by name) will submit a parallel APA application to the BZSt. The target date for the German submission is mid-August 2025, following the completion and filing of the US application in early July.

IRS Receptivity to the Bilateral Approach. The APMA team expressed general receptivity to the bilateral approach. The team leader noted that bilateral APAs with Germany have been pursued successfully in numerous prior cases and that the BZSt has been a cooperative and engaged treaty partner in the competent authority process. The team leader characterized the bilateral approach under the US-Germany Treaty as "routine," which is a favorable signal for the overall process.

APMA encouraged early and concurrent filing with the BZSt to avoid delays in the competent authority negotiation process. The team leader emphasized that APMA's experience indicates that cases proceed more efficiently when both applications are filed within a short time window of each other, as this allows for early engagement between the competent authorities and avoids the situation where one application is significantly more advanced in review than the other.

The APMA team also noted the following procedural points regarding the bilateral process:

(a) The formal APA application filed with IRS APMA should include a copy of, or reference to, the parallel German filing once it has been submitted to the BZSt. If the German application has not yet been filed at the time the US application is submitted, the US application should indicate the anticipated filing date and confirm that the German application will be consistent with the US submission.

(b) Both the US and German applications should use consistent economic analyses and financial data to the greatest extent practicable. Inconsistencies in the economic analyses, benchmarking studies, or financial data between the two submissions can create significant delays in the competent authority process and may require additional rounds of information exchange.

(c) APMA will coordinate directly with the BZSt once both applications have been filed and case teams have been assigned in both jurisdictions. The competent authority negotiation will be conducted in accordance with the procedures established under the US-Germany Treaty and applicable administrative guidance.

C&H acknowledged these points and confirmed that the firm is coordinating closely with German tax counsel to ensure consistency of the applications and economic analyses.

D. Discussion of Proposed Transfer Pricing Methods

The largest portion of the conference was devoted to a discussion of the proposed transfer pricing methods for each of the three categories of covered intercompany transactions. The APMA economist played a prominent role in this portion of the discussion, asking detailed technical questions about the benchmarking analyses and economic methodologies.

1. Tangible Goods — CPM/TNMM. C&H presented the proposed use of the Comparable Profits Method ("CPM") under Treasury Regulation § 1.482-5 for the intercompany sales of semiconductor wafers and singulated die from the German parent to the US subsidiary. C&H noted that the CPM, as applied under US domestic regulations, is the functional equivalent of the Transactional Net Margin Method ("TNMM") under Chapter II of the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, and that the German application to the BZSt will present the analysis under the TNMM framework.

Tested Party. The US subsidiary was identified as the tested party, on the basis that it is the least complex entity in the controlled transaction and the party for which reliable comparable data is most readily available. C&H explained that the US subsidiary performs limited-risk distribution functions, supplemented by marketing and design-support services, and does not own significant unique intangible property. By contrast, the German parent is the developer and owner of valuable semiconductor process technology and design intellectual property, and is the entity performing complex, high-value manufacturing. Accordingly, under the best method rule set forth in Treasury Regulation § 1.482-1(c), testing the US subsidiary's profitability against comparable limited-risk distributors provides the most reliable measure of arm's length results.

Profit Level Indicator. The profit level indicator ("PLI") selected is operating margin on net resales, which C&H described as the most appropriate PLI for a distribution entity given that it directly measures the tested party's return on its distribution and marketing activities relative to the revenue generated from third-party resales of the intercompany products.

Benchmark Set. C&H presented the results of a benchmarking study identifying 17 comparable North American semiconductor distributors. The study covers fiscal years 2020 through 2024, using five-year weighted average operating margins to smooth cyclical and year-to-year variations that are common in the semiconductor industry. The interquartile range of operating margins for the comparable set is 2.8% to 6.1%, with a median of 4.4%. The US subsidiary's fiscal year 2024 operating margin of 4.80% falls within the interquartile range, above the median.

IRS Feedback. The APMA economist raised several questions regarding the CPM/TNMM analysis:

Comparability criteria. The economist asked about the specific comparability criteria used to identify the 17 comparable companies, with particular attention to whether adjustments were made for differences in working capital intensity between the comparable companies and the tested party. The economist noted that working capital intensity can vary significantly among semiconductor distributors depending on inventory management practices, payment terms with customers and suppliers, and the mix of products distributed. The economist requested that the formal application's economic analysis appendix include a detailed description of the working capital adjustments performed and the quantitative impact of those adjustments on the interquartile range.

Product mix. The economist also inquired about whether adjustments were made for differences in product mix among the comparable companies. Specifically, the economist noted that some semiconductor distributors may carry a broader product portfolio (including lower-margin commodity components) while others may specialize in higher-margin, application-specific products. Differences in product mix can affect operating margins and should be addressed in the comparability analysis.

Proprietary IP ownership. The economist asked whether any of the 17 comparable companies possess significant proprietary intellectual property that would distinguish them from the tested party's limited-risk distributor characterization. The economist noted that the presence of material self-developed IP in a comparable company could inflate that company's operating margins above the level that would be expected for a company performing limited-risk distribution functions, thereby distorting the benchmark range.

C&H confirmed that comparability adjustments, including working capital adjustments, were performed as part of the benchmarking study. C&H further confirmed that companies with material self-developed intellectual property were identified during the screening process and excluded from the final comparable set. However, C&H acknowledged the APMA economist's request for additional detail and agreed to provide a more granular description of the comparability adjustments and screening criteria in the formal application's economic analysis appendix.

The APMA team leader indicated that the CPM/TNMM approach with the US subsidiary as the tested party is a commonly accepted methodology for limited-risk distribution activities of the type described, and no objections were raised to the general approach. The team leader's comments suggest that the CPM/TNMM analysis for tangible goods is unlikely to be a significant area of contention, provided the benchmarking study is adequately supported and the comparability adjustments are well-documented.

2. Royalties — CUT Method. C&H presented the proposed use of the Comparable Uncontrolled Transaction ("CUT") method under Treasury Regulation § 1.482-4(c) for the intercompany royalty paid by the US subsidiary to the German parent for licensed semiconductor process technology and design libraries.

Benchmark Set. C&H described a benchmarking study identifying eight comparable uncontrolled license agreements for semiconductor intellectual property. The comparable agreements were sourced from a subscription royalty rate database and publicly available filings with the US Securities and Exchange Commission. The interquartile range of royalty rates for the comparable set is 3.5% to 8.2%, with a median of 5.6%. The controlled royalty rate of 6.0% (expressed as a percentage of the US subsidiary's net resale revenue) falls within the interquartile range, slightly above the median.

C&H noted that the CUT analysis is corroborated by a residual profit split analysis, which was presented as a secondary, confirmatory method rather than the primary method.

IRS Feedback — Key Area of Questioning. The royalty analysis generated the most extensive and detailed questioning from the APMA team. The APMA economist raised several significant questions regarding the CUT comparables, each of which is summarized below:

Comparability of licensed technology. The economist asked for substantially more detail on whether the comparable license agreements involve the same generation or comparable complexity of semiconductor process technology as the controlled license. Specifically, the economist inquired whether the comparable licenses cover advanced-node technologies (such as 5nm and 3nm process nodes) or whether some or all of the comparable licenses relate to older, less technologically advanced, and potentially less valuable process nodes (such as 14nm or 28nm). The economist emphasized that the value of semiconductor process technology is highly dependent on the process node, and that licenses for legacy-node technologies may command significantly lower royalty rates than licenses for cutting-edge advanced-node technologies. The economist requested that the formal application include a detailed technology comparison matrix for each of the eight comparable license agreements, identifying the specific technology licensed, the process node(s) covered, and the technological sophistication relative to the controlled license.

License terms and conditions. The APMA team inquired about the specific terms and conditions of each comparable license agreement as compared to the controlled license between the German parent and the US subsidiary. The areas of inquiry included:

• Whether each comparable license is exclusive or non-exclusive, and how the exclusivity terms compare to the controlled license;

• The geographic scope of each comparable license (worldwide, regional, or country-specific) versus the controlled license (which grants rights within the North American territory);

• Whether the comparable licenses include sub-licensing rights, and if so, under what terms;

• Whether the comparable licenses contain field-of-use restrictions limiting the licensee to particular applications or end markets; and

• Whether there are material differences in the duration or termination provisions of the comparable licenses relative to the controlled license.

The APMA team noted that differences in exclusivity, geographic scope, and sub-licensing rights can materially affect royalty rates, and that these factors must be carefully analyzed and, where possible, adjusted for in the CUT analysis.

Age and currency of comparable agreements. The APMA economist expressed concern about whether the eight comparable agreements are sufficiently current to provide reliable benchmarks for the proposed APA period (2025–2029, with a rollback to 2022). The economist specifically asked whether any of the comparable agreements were executed prior to 2018, noting that the semiconductor IP landscape has changed materially in recent years due to the industry's shift toward advanced-node technologies, the increasing concentration of advanced fabrication capacity, and the broader geopolitical and supply-chain developments affecting the semiconductor industry. The economist requested that the formal application identify the execution date for each of the eight comparable license agreements and provide an analysis of whether agreements executed in earlier periods remain reliable comparables for the proposed APA term.

Reliability relative to residual profit split. The APMA team leader asked C&H to explain the basis for proposing the CUT method as the primary method for the royalty, rather than a profit split method, given what the team leader described as the "highly integrated nature of semiconductor IP development and distribution." The team leader noted that in cases involving unique, high-value intangible property and significant interrelationship between the licensor's development activities and the licensee's exploitation activities, the profit split method is sometimes viewed as more reliable than the CUT method, particularly where the CUT comparables involve less-than-identical intangible property. The team leader specifically requested that the residual profit split corroboration currently presented as a secondary method be expanded and presented in sufficient detail to serve as a viable alternative method in the event that the CUT analysis proves to be insufficiently reliable.

C&H acknowledged each of these questions and committed to addressing them comprehensively in the formal APA application's economic analysis appendix. Leonard Cross noted during the conference that the CUT method is the preferred best method under Treasury Regulation § 1.482-4(c) given the availability of eight comparable uncontrolled license agreements, which represent direct market evidence of arm's length royalty rates for semiconductor IP. However, Mr. Cross confirmed that the residual profit split corroboration would be expanded in the formal submission to provide a fully developed alternative methodology with sufficient analytical rigor to serve as a fallback if APMA ultimately concludes that the CUT comparables are insufficiently reliable.

3. Cost-Sharing Arrangement — Income Method (PCT Valuation). C&H described the Qualified Cost Sharing Arrangement ("CSA") between the German parent and the US subsidiary, which was executed on July 15, 2018. Under the CSA, the US subsidiary participates with a 22.5% anticipated benefit share, reflecting its share of the reasonably anticipated benefits from the exploitation of developed intangible property in the North American market. The CSA covers next-generation semiconductor process research and development activities.

Platform Contribution Transaction. At the inception of the CSA, the US subsidiary was required to make a platform contribution transaction ("PCT") buy-in payment to compensate the German parent for the pre-existing intangible property and resources made available to the CSA. The PCT buy-in payment was $312.5 million, valued using the income method prescribed by Treasury Regulation § 1.482-7(g)(4). The valuation employed an 11.8% discount rate and a 15-year projection period. The original PCT valuation was performed by an independent valuation firm (referred to during the conference in general terms, without identifying Stonebridge Valuation Partners LLC by name).

Current CSA Cost Sharing. For fiscal year 2024, the total qualified R&D costs subject to the CSA were approximately €998 million. The US subsidiary's share, at 22.5%, was approximately €225 million. C&H noted that the qualified cost pool is a subset of the German parent's total R&D expenditure, which was approximately €1.42 billion for fiscal year 2024.

IRS Feedback — Request for Additional Detail. The APMA team devoted significant attention to the CSA and PCT valuation, consistent with what the team leader described as heightened IRS scrutiny of CSA/PCT arrangements in the semiconductor industry. The specific areas of inquiry are summarized below:

PCT valuation — financial projections. The APMA economist requested additional detail on the financial projections underlying the income method valuation, including revenue growth rate assumptions (both near-term and long-term), operating margin assumptions, and the treatment of terminal value. The economist asked whether the revenue growth projections were based on management forecasts, industry analyst projections, or a combination of both, and whether sensitivity analyses were performed to test the impact of alternative assumptions on the valuation.

discount rate justification. The economist requested a detailed justification for the 11.8% discount rate used in the income method, including the weighted average cost of capital ("WACC") analysis underlying the rate, any technology-specific risk premium applied to reflect the risks associated with semiconductor R&D (including the risk of technology obsolescence), and the basis for selecting comparable companies used in the WACC derivation. The economist noted that the discount rate is a critical input in the income method and that small changes in the rate can produce significant changes in the valuation.

Projection period appropriateness. The economist questioned whether the 15-year projection period is appropriate given the pace of semiconductor technology obsolescence. The economist observed that generational shifts in semiconductor process technology occur approximately every two to three years (e.g., the progression from 7nm to 5nm to 3nm and beyond), and that the useful life of a given process technology platform may be considerably shorter than 15 years. The economist asked C&H to explain the basis for selecting the 15-year projection period and to address whether a shorter projection period, more closely aligned with the typical technology cycle, would be more appropriate.

Periodic adjustment analysis. The economist asked whether periodic adjustments have been evaluated under Treasury Regulation § 1.482-7(i) since the CSA inception in 2018. Under that provision, the Commissioner may propose periodic adjustments to the PCT terms if the actual results of the CSA participants materially deviate from the results that were reasonably anticipated at the time of the PCT valuation. The economist asked whether any such evaluations have been conducted, and if so, what the results were. The APMA team leader reinforced this point by noting that if actual results since 2018 have significantly exceeded the projections used in the original PCT valuation, APMA may take the position that the buy-in was undervalued or that a periodic adjustment under § 1.482-7(i) is warranted.

Completeness of the PCT valuation report. The APMA team leader noted that the formal APA application should include the complete valuation report (or a comprehensive summary with all material assumptions, inputs, and calculations) from the independent valuation firm, along with an updated analysis of whether actual results during the period from 2018 through 2024 have materially deviated from the projections used in the original PCT valuation.

CSA cost pool composition. APMA inquired about the scope of the CSA cost pool, specifically which R&D activities are classified as "qualified" costs included in the cost pool versus those that are excluded. The economist noted the significant gap between the qualified R&D cost pool of approximately €998 million and the German parent's total R&D expenditure of approximately €1.42 billion, and asked for a detailed breakdown and description of the cost pool composition, including the categories of excluded costs and the rationale for each exclusion. C&H agreed to provide this breakdown in the formal application.

Benefit share methodology. APMA inquired about the 22.5% anticipated benefit share assigned to the US subsidiary. Specifically, the team asked how the benefit share was originally determined, whether it has been reviewed and adjusted since inception in accordance with the contractual provisions of the CSA, and what the contractual mechanism is for triennial review of the benefit share. The APMA team was interested in understanding whether the benefit share reflects a forward-looking assessment of reasonably anticipated benefits or a backward-looking measure based on historical results, and how the North American exploitation share relates to the US subsidiary's proportion of the group's total third-party revenue.

C&H confirmed that the benefit share is reviewed on a triennial basis in accordance with the terms of the CSA and that the methodology is based on reasonably anticipated benefits from North American exploitation of the developed intangible property. C&H committed to documenting the benefit share methodology, the triennial review mechanism, and any adjustments made since the CSA's inception in July 2018 in the formal application.

E. Procedural Matters Discussed

The final portion of the conference addressed several procedural matters relating to the formal APA application filing.

1. User Fee. APMA confirmed that the large-case APA user fee of $113,500 (as currently in effect for 2025) is applicable to this filing. The user fee is to accompany the formal APA application and should be made payable to the United States Treasury. APMA noted that the user fee is non-refundable regardless of the outcome of the APA process.

2. Application Completeness and Expected Contents. APMA provided general guidance on the expected contents of the formal APA application, in accordance with Section 4 of Revenue Procedure 2015-41. The following items were identified as required or expected components of a complete application:

(a) Completed IRS Form 14661 (Advance Pricing Agreement Request);

(b) A supporting narrative describing the covered transactions, the proposed transfer pricing methods for each category of transaction, the proposed APA term (including the rollback request), and the factual and functional analysis of the controlled parties;

(c) An economic analysis appendix containing the complete benchmarking studies for each covered transaction, including the CPM/TNMM analysis for tangible goods, the CUT analysis for royalties (with the expanded detail discussed during the conference), and the CSA/PCT analysis, along with all supporting data, comparable company and agreement searches, acceptance and rejection logs, and quantitative adjustments;

(d) A legal analysis addressing the best method rule under Treasury Regulation § 1.482-1(c), the comparability analysis under Treasury Regulation § 1.482-1(d), the application of the specific method regulations (§§ 1.482-4(c), 1.482-5, and 1.482-7), and the relevant provisions of the US-Germany Income Tax Treaty;

(e) A financial data appendix containing segmented profit and loss statements for both the German parent and the US subsidiary, intercompany transaction schedules for each category of covered transaction, and a reconciliation of the segmented financial data to audited financial statements for fiscal years 2020 through 2024;

(f) A properly executed IRS Form 2848 (Power of Attorney and Declaration of Representative) authorizing the named Calderwood & Harkness attorneys to represent the US subsidiary before the IRS in connection with the APA;

(g) Copies of, or references to, the intercompany agreements governing the covered transactions, including the Master Intercompany Supply Agreement, the IP License Agreement, and the Cost Sharing Arrangement; and

(h) Any additional materials relevant to the specific issues discussed during the pre-filing conference, including the expanded CUT analysis, the residual profit split alternative, the PCT valuation report, and the rollback-year documentation.

APMA noted a preference for receiving the application in both hard copy (three copies) and searchable electronic format (on a USB drive or via a secure electronic submission mechanism, as specified in APMA administrative guidance).

3. Timeline Expectations. APMA provided the following guidance on expected timelines:

(a) Upon filing of the formal application (currently targeted for July 7, 2025), the case will be assigned to a designated APMA team within approximately 60 to 90 days. The assigned team will include a team leader, an economist, and potentially additional specialists depending on the complexity of the case.

(b) Bilateral negotiations with the BZSt under the mutual agreement procedure of Article 25 of the US-Germany Treaty typically take 18 to 30 months from the date both applications are filed with the respective competent authorities. APMA encouraged concurrent or near-concurrent filing of the US and German applications to expedite the process.

(c) The rollback request (covering tax years 2022–2024) may extend the overall timeline if the APMA team determines that additional review of the historical years is required beyond what is presented in the application. APMA noted that a well-documented rollback request with robust contemporaneous documentation can help minimize any additional delay.

4. Confidentiality and Privilege. APMA confirmed that information submitted in the APA application is treated as confidential under Section 10 of Revenue Procedure 2015-41 and is not shared with IRS examination teams absent the taxpayer's written consent. The APMA team leader noted that the APA process is a separate administrative process from the examination function and that the information provided in the application will be used solely for purposes of evaluating and negotiating the APA.

C&H confirmed that the firm will assert applicable privileges over attorney work product and attorney-client communications throughout the APA process. C&H noted that the submission of factual information, economic analyses, and financial data in the APA application does not constitute a waiver of any applicable privilege with respect to legal analyses, strategic assessments, or attorney-client communications related to the engagement.

IV. Action Items

The following action items arise from the pre-filing conference and are organized by responsible party. All dates are firm deadlines intended to support the July 7, 2025 formal application filing date.

A. Action Items for Calderwood & Harkness LLP

B. Action Items for Client (HSAG/HSI)

C. Action Items for German Counsel (Kettner Pflüger Rechtsanwälte)

D. Action Items for Meridian Economics GmbH

V. Assessment and Strategic Observations

A. Overall IRS Receptivity

The pre-filing conference was constructive and productive. The APMA team was prepared, having reviewed the anonymous pre-filing memorandum in advance, and engaged substantively with the proposed covered transactions and transfer pricing methods. Notably, APMA expressed no fundamental objections to the bilateral approach under the US-Germany Treaty, the proposed APA term (2025–2029), or the general selection of the CPM/TNMM for tangible goods transactions with HSI as the tested party.

The bilateral approach with Germany under Article 25 of the US-Germany Income Tax Treaty was characterized by the APMA team leader as "routine," which is a favorable characterization that suggests APMA does not anticipate significant procedural complications in the competent authority process with the BZSt. This is consistent with the general understanding that Germany has been a cooperative treaty partner in the bilateral APA context.

The tone of the conference was professional and collaborative, consistent with the general IRS posture in APA pre-filing conferences. While the APMA economist raised detailed and probing questions (particularly regarding the CUT analysis and the CSA/PCT valuation), these questions were framed as requests for additional information and analysis rather than objections to the proposed methods. We view this as a positive signal, indicating that APMA is engaging with the case on the merits and is open to the bilateral APA request.

B. Key Risk Areas Identified

Notwithstanding the generally positive tone of the conference, three key risk areas were identified based on the nature and intensity of APMA's questioning. These risk areas should be carefully addressed in the formal APA application:

1. CUT Comparables for Royalty. The royalty analysis generated the most extensive questioning during the conference, and we assess the CUT method for the IP royalty as the most significant area of potential IRS scrutiny. The APMA economist's questions regarding the comparability of the licensed technology (process node generation), the terms and conditions of the comparable licenses, and the currency of the comparable agreements suggest that APMA will closely examine whether the eight CUT comparables are sufficiently similar to the controlled license to provide reliable arm's length benchmarks. If APMA ultimately determines that the CUT comparables are insufficiently similar—particularly with respect to the generation and complexity of the licensed semiconductor process technology—APMA may push for a profit split method as the primary method for determining the arm's length royalty. A shift from the CUT method to a profit split method could have a meaningful impact on the royalty rate and the overall allocation of residual profits between the German parent and the US subsidiary. Accordingly, it is imperative that the expanded CUT analysis in the formal application address each of APMA's specific concerns with thorough documentation and, where feasible, quantitative comparability adjustments. Equally important, the residual profit split corroboration must be developed to a level of analytical rigor sufficient to serve as a credible alternative method, both to demonstrate that the CUT result is corroborated by an independent methodology and to provide a well-developed fallback position in the event the CUT method is rejected.

2. CSA/PCT Valuation. APMA's heightened scrutiny of cost-sharing arrangements in the semiconductor sector is consistent with broader IRS enforcement trends in recent years. The IRS has taken aggressive positions on PCT valuations in several high-profile cases involving technology companies, and the APMA team leader's explicit reference to "heightened scrutiny" in this industry should be taken seriously. The original 2018 PCT valuation by Stonebridge Valuation Partners LLC must be defensible across all critical assumptions, particularly: (a) the 11.8% discount rate, which must be supported by a robust WACC analysis with an appropriately calibrated technology-specific risk premium; (b) the 15-year projection period, which must be justified in light of the relatively short technology cycles in the semiconductor process technology space (approximately two to three years per generational shift); and (c) the actual-versus-projected performance analysis for the period 2018–2024. If actual results since 2018 have significantly exceeded the financial projections used in the original PCT valuation, APMA may argue either that the buy-in payment was undervalued at inception or that a periodic adjustment under Treasury Regulation § 1.482-7(i) is warranted. The periodic adjustment analysis is therefore a critical deliverable and should be approached with the expectation that APMA will scrutinize it closely. The C&H team should coordinate with Stonebridge Valuation Partners and Meridian Economics to ensure the analysis is thorough and defensible.

3. Rollback Period. While APMA indicated a willingness to consider the rollback to cover tax years 2022 through 2024, the team leader's comments made clear that the availability and quality of contemporaneous transfer pricing documentation for each rollback year will be a significant factor in APMA's evaluation. The rollback request will be strengthened materially if the US Local Files for each of the three rollback years are complete, finalized, and demonstrate the application of the same transfer pricing methods proposed in the APA. C&H must ensure that the US Local Files for fiscal years 2022 and 2023 are fully finalized and that the fiscal year 2024 documentation is completed in advance of the application filing. Any gaps in contemporaneous documentation could jeopardize the rollback request or, at a minimum, extend the overall APA timeline as APMA conducts additional review.

C. Impact on Application Timeline

The additional detail requested by APMA, particularly with respect to the CUT analysis (technology comparison matrix, license term comparability, execution dates, and staleness analysis) and the CSA/PCT valuation (complete valuation report, periodic adjustment analysis, cost pool breakdown, benefit share documentation), will require approximately four to six weeks of additional analytical work by Meridian Economics GmbH, in coordination with Stonebridge Valuation Partners LLC and the client's tax and R&D functions.

The July 7, 2025 target filing date for the formal APA application remains achievable, provided the following critical-path conditions are met:

(a) Client data—specifically the original PCT valuation report from Stonebridge Valuation Partners, the R&D cost pool breakdown, and the triennial benefit share review documentation—is received by Calderwood & Harkness no later than May 30, 2025.

(b) Meridian Economics delivers the revised CUT benchmarking study (including the technology comparison matrix and license terms analysis) and the additional CPM/TNMM comparability adjustment documentation no later than June 13, 2025.

(c) Meridian Economics delivers the expanded residual profit split corroboration and the PCT periodic adjustment analysis no later than June 20, 2025.

(d) The rollback-year financial data and documentation compilation is completed by Robert Jansen no later than June 20, 2025.

If any of these deliverables are materially delayed, the July 7, 2025 filing date may need to be pushed back, which could in turn delay the German BZSt submission and the overall bilateral negotiation timeline. The C&H team should communicate the urgency of the May 30 client data deadline to Priya Raghavan and Dr. Erwin Fassbinder promptly.

The German BZSt submission target of August 15, 2025 remains on track, contingent on the timely completion and transmittal of the US application package to Kettner Pflüger Rechtsanwälte following the July 7 filing.

D. Budget Implications

The additional analytical work identified during the pre-filing conference—specifically the expanded CUT analysis with technology comparison matrix, the full alternative-method residual profit split, and the PCT periodic adjustment analysis—may result in increased fees from Meridian Economics GmbH beyond the original fixed-fee engagement of €485,000. These additional deliverables were not specifically contemplated in the original scope of work, and the level of detail requested by APMA is more extensive than initially anticipated. Leila Nazari should discuss the scope of additional work and potential amendment to the Meridian Economics engagement letter with Dr. Annika Breitner at the earliest opportunity to quantify the additional cost and obtain client approval.

With respect to Calderwood & Harkness's own fees, the time spent on the expanded application is currently within the Phase 1 fee cap of $1,850,000 based on current utilization through the May 19, 2025 conference. However, given the additional deliverables and the expanded scope of the application, the team should monitor hours closely throughout the June drafting period. If the additional work threatens to approach the Phase 1 cap, Leonard Cross should be notified promptly so that a scope and budget discussion can be initiated with the client before the fee cap is reached.

VI. Next Steps and Upcoming Milestones

The following table sets forth the key milestones and target dates for the period between the pre-filing conference and the formal APA application filing, as well as subsequent milestones through the German BZSt submission and the FY 2024 contemporaneous documentation deadline:

The C&H team should schedule a working session for the week of May 26, 2025, to review incoming client data and coordinate with Meridian Economics on the revised analytical deliverables. A status conference call with Kettner Pflüger should be scheduled for the week of June 2, 2025, to ensure alignment of the US and German applications.

VII. Distribution

This memorandum is for internal Calderwood & Harkness LLP distribution only. Distribution is limited to the following individuals:

• Leonard Cross, Partner, Tax

• Sylvia Hartwell, Partner, Tax

• Leila Nazari, Senior Associate, Tax

• Robert Jansen, Associate, Tax

This memorandum is not to be distributed externally to the client, German counsel, Meridian Economics, or any other third party without the prior written approval of Leonard Cross. A separate client summary memorandum will be prepared for transmittal to Priya Raghavan (Vice President, Tax — HSI) and Dr. Erwin Fassbinder (Head of Transfer Pricing — HSAG), redacting attorney work product assessments and strategic observations as appropriate.

VIII. Preparer Information

Prepared by:

________________________________________

Leila Nazari Senior Associate, Tax Calderwood & Harkness LLP 599 Lexington Avenue, 38th Floor New York, New York 10022

Assisted by:

________________________________________

Robert Jansen Associate, Tax Calderwood & Harkness LLP

Reviewed and Approved by:

________________________________________

Leonard Cross Partner, Tax Calderwood & Harkness LLP

Date: May 20, 2025

PRIVILEGED AND CONFIDENTIAL — ATTORNEY WORK PRODUCT Calderwood & Harkness LLP — Matter No. 1032-00006 — HSAG-TP-2025

#	Action Item	Responsible Attorney	Target Date
1	Expand the CUT analysis to include a technology comparison matrix for each of the eight comparable license agreements, detailing the type and generation of semiconductor technology licensed, the process node(s) covered, and the technological sophistication relative to the controlled license	Leila Nazari / Dr. Annika Breitner (Meridian Economics)	June 13, 2025
2	Provide execution dates and license term durations for all eight CUT comparable agreements; address currency/staleness concerns raised by APMA economist, including analysis of whether agreements executed prior to 2018 remain reliable comparables	Leila Nazari / Maximilian Voss (Meridian Economics)	June 13, 2025
3	Detail comparability of license terms (exclusive vs. non-exclusive, geographic scope, sub-licensing rights, field-of-use restrictions) for each CUT comparable, with qualitative and quantitative adjustments where feasible	Leila Nazari / Dr. Annika Breitner (Meridian Economics)	June 13, 2025
4	Expand the residual profit split corroboration to full alternative-method detail, sufficient to serve as a standalone fallback methodology if CUT reliability is challenged by APMA; include allocation keys, routine and residual profit splits, and sensitivity analyses	Dr. Annika Breitner (Meridian Economics) / Leila Nazari	June 20, 2025
5	Obtain and include the complete PCT valuation report (or comprehensive summary) from Stonebridge Valuation Partners LLC (Marcus Reinhardt, Managing Director); coordinate with Dr. Erwin Fassbinder and Priya Raghavan for access and any necessary confidentiality waivers	Robert Jansen	June 6, 2025
6	Prepare detailed analysis of PCT income method assumptions: revenue growth projections (near-term and long-term), margin assumptions, terminal value treatment, discount rate justification (WACC derivation plus technology-specific risk premium), and appropriateness of the 15-year projection period in light of semiconductor technology cycles	Leila Nazari / Dr. Annika Breitner (Meridian Economics)	June 20, 2025
7	Document periodic adjustment evaluation under Treas. Reg. § 1.482-7(i) — compare actual results for 2018–2024 against original PCT projections; assess whether trigger events for periodic adjustments have occurred and prepare supporting quantitative analysis	Robert Jansen / Meridian Economics	June 20, 2025
8	Prepare breakdown of qualified CSA R&D cost pool (€998.2M) versus total HSAG R&D expenditure (€1,420M); describe categories of excluded costs and the rationale for each exclusion, with reference to the CSA terms and Treas. Reg. § 1.482-7(d)	Robert Jansen (with input from Dr. Hendrik Möller via Priya Raghavan)	June 6, 2025
9	Document the 22.5% anticipated benefit share methodology, including the original determination of the benefit share, the triennial review mechanism under the CSA, and any historical adjustments made since CSA inception on July 15, 2018	Leila Nazari	June 13, 2025
10	Provide additional detail on CPM/TNMM comparability adjustments (working capital adjustments with quantitative impact, product mix adjustments, and confirmation of screening exclusion criteria for IP-owning distributors) in the economic analysis appendix	Dr. Annika Breitner / Maximilian Voss (Meridian Economics)	June 13, 2025
11	Compile rollback-year (FY 2022–2024) financial data and contemporaneous transfer pricing documentation references to support the rollback request; confirm that US Local Files for FY 2022 and FY 2023 are finalized	Robert Jansen	June 20, 2025
12	Finalize the formal APA application (IRS Form 14661, narrative, legal analysis, and all appendices) for internal partner review	Leila Nazari / Robert Jansen	June 27, 2025
13	Partner review of the complete APA application package, including all appendices and supporting materials	Leonard Cross / Sylvia Hartwell	July 1, 2025
14	File the formal APA application with IRS APMA, accompanied by the user fee of $113,500 and executed IRS Form 2848 (Power of Attorney)	Leonard Cross	July 7, 2025
15	Transmit the US APA application package to Kettner Pflüger Rechtsanwälte (Dr. Tobias Kettner / Friederike Lang) for coordination of the parallel German BZSt submission and alignment of economic analyses	Leila Nazari	July 11, 2025
#	Action Item	Client Contact	Target Date
1	Provide access to the original 2018 PCT valuation report prepared by Stonebridge Valuation Partners LLC, including all appendices, financial projections, and discount rate analyses	Priya Raghavan / Dr. Erwin Fassbinder	May 30, 2025
2	Provide detailed breakdown of FY 2024 R&D cost pool — qualified costs versus non-qualified costs, with descriptions of each excluded category and the rationale for exclusion	Dr. Hendrik Möller (via Priya Raghavan)	May 30, 2025
3	Confirm and document any triennial reviews of the 22.5% anticipated benefit share conducted since CSA inception on July 15, 2018, including the results of each review and any adjustments made	Priya Raghavan / Dr. Erwin Fassbinder	May 30, 2025
4	Provide segmented financial data for FY 2020–2024 (both HSAG and HSI), including segmented profit and loss statements, intercompany transaction schedules, and reconciliation to audited financial statements prepared by Gresham Whitfield LLP	Priya Raghavan / Margarethe Stein	June 6, 2025
5	Execute IRS Form 2848 (Power of Attorney and Declaration of Representative) authorizing Leonard Cross, Sylvia Hartwell, and Leila Nazari of Calderwood & Harkness LLP to represent HSI (EIN 84-2917630) before the IRS for tax years 2022–2029, with respect to IRC § 482 transfer pricing matters	Priya Raghavan (on behalf of Victor Almeida, General Counsel)	June 13, 2025
#	Action Item	Contact	Target Date
1	Prepare the German APA application for submission to BZSt, ensuring alignment of proposed transfer pricing methodology, financial data, and transaction characterization with the US application	Dr. Tobias Kettner / Friederike Lang	August 15, 2025
2	Coordinate with C&H on consistent presentation of economic analyses, benchmarking studies, and intercompany transaction characterization across the US and German applications; review and comment on C&H's economic analysis appendix prior to US filing	Dr. Tobias Kettner	Ongoing

#	Action Item	Contact	Target Date
1	Revise the CUT benchmarking study per IRS feedback, including preparation of a technology comparison matrix, identification of execution dates and license term durations, and detailed analysis of license terms comparability (exclusivity, geographic scope, sub-licensing rights, field-of-use restrictions) for each of the eight comparable agreements	Dr. Annika Breitner / Maximilian Voss	June 13, 2025
2	Expand the residual profit split corroboration to a full alternative-method level of detail, including identification and quantification of routine returns for all controlled parties, allocation of residual profits based on appropriate allocation keys, and sensitivity analyses under alternative assumptions	Dr. Annika Breitner	June 20, 2025
3	Prepare PCT periodic adjustment analysis comparing actual results for 2018–2024 against the original income method projections used in the 2018 PCT valuation; identify and quantify any material deviations and assess whether trigger events under Treas. Reg. § 1.482-7(i) have occurred	Dr. Annika Breitner / Maximilian Voss	June 20, 2025
4	Provide additional CPM/TNMM comparability adjustment documentation, including quantitative working capital adjustments, product mix analysis, and enhanced documentation of the IP screening criteria applied to exclude IP-owning distributors from the comparable set	Maximilian Voss	June 13, 2025
Milestone	Target Date
Client data collection (PCT valuation report, R&D cost pool breakdown, triennial benefit share reviews)	May 30, 2025
Revised CUT analysis and CPM/TNMM comparability adjustment detail from Meridian Economics	June 13, 2025
Expanded residual profit split corroboration and PCT periodic adjustment analysis from Meridian Economics	June 2

MEMORANDUM
PRIVILEGED AND CONFIDENTIAL — ATTORNEY WORK PRODUCT
This memorandum constitutes attorney work product prepared in anticipation of litigation and/or for the purpose of providing legal advice. It is protected by the attorney-client privilege, the work product doctrine, and all other applicable privileges. This document is not to be disclosed to any person or entity outside of Calderwood & Harkness LLP without the express written authorization of the responsible partner. Inadvertent disclosure does not constitute a waiver of any applicable privilege.
CALDERWOOD & HARKNESS LLP 599 Lexington Avenue, 38th Floor New York, New York 10022
Matter Number: 1032-00006 Billing Code: HSAG-TP-2025
Date: May 20, 2025
To: Leonard Cross, Partner, Tax Sylvia Hartwell, Partner, Tax
From: Leila Nazari, Senior Associate, Tax Robert Jansen, Associate, Tax
Re: Summary of Pre-Filing Conference with IRS APMA — May 19, 2025
Subject Matter: Bilateral Advance Pricing Agreement — Halcyon Semiconductor AG / Halcyon Semiconductor Inc.
I. Purpose of Memorandum
This memorandum summarizes the pre-filing conference held on May 19, 2025, with the Internal Revenue Service Advance Pricing and Mutual Agreement Program ("APMA") within the Large Business & International ("LB&I") Division, pursuant to Section 3 of Revenue Procedure 2015-41, 2015-35 I.R.B. 263. The conference was conducted in accordance with the anonymous pre-filing conference procedures set forth in that revenue procedure, and accordingly neither Halcyon Semiconductor AG ("HSAG") nor its wholly owned United States subsidiary, Halcyon Semiconductor Inc. ("HSI"), was identified by name at any point during the meeting. All references to the taxpayer and its affiliated entities were made in general terms consistent with the anonymous pre-filing memorandum previously submitted.
The anonymous pre-filing memorandum had been submitted to IRS APMA on April 14, 2025, describing a German-parented multinational semiconductor group with a US distribution subsidiary and setting forth the proposed covered transactions, transfer pricing methods, and APA term. That memorandum was the principal document referenced by the APMA team during the conference.
The primary purposes of the pre-filing conference were as follows:
(a) to gauge IRS receptivity to the proposed bilateral APA request, including the scope of the covered transactions and the proposed APA term;
(b) to discuss the proposed transfer pricing methods for each category of intercompany transaction and identify any preliminary analytical concerns or deficiencies that the IRS may wish to see addressed in the formal application;
(c) to confirm procedural requirements, including application contents, user fee, and filing logistics, for the formal APA application; and
(d) to identify any preliminary substantive or procedural concerns before the formal application filing, which is currently targeted for July 7, 2025.
This memorandum is intended to serve as the firm's contemporaneous record of the conference and to guide the preparation of the formal APA application. It also assigns and tracks action items arising from the conference for all relevant parties, including Calderwood & Harkness LLP, the client (HSAG/HSI), German tax counsel (Kettner Pflüger Rechtsanwälte), and the economic advisory firm (Meridian Economics GmbH).
II. Conference Logistics
A. Date, Time, and Format
The pre-filing conference was held on May 19, 2025, commencing at 10:00 a.m. Eastern Time and concluding at approximately 12:15 p.m. Eastern Time. The total duration of the substantive meeting was approximately two hours and fifteen minutes.
The conference was conducted in person at the IRS APMA offices in Washington, D.C. Leonard Cross (Partner, Tax) and Leila Nazari (Senior Associate, Tax) attended in person on behalf of Calderwood & Harkness LLP. Robert Jansen (Associate, Tax) participated remotely via a secure videoconference connection from the firm's New York office. All participants confirmed at the outset of the meeting that the videoconference link was secure and that no unauthorized individuals were present in the room or on the line.
B. Attendees.  The following individuals participated in the conference:
Calderwood & Harkness LLP:
•  Leonard Cross, Partner, Tax — responsible partner for the engagement and principal presenter at the conference
•  Leila Nazari, Senior Associate, Tax — lead associate for the engagement, co-presenter and note-taker
•  Robert Jansen, Associate, Tax — participating remotely via secure videoconference; assisted with note-taking and document references
IRS APMA:
•  Two APMA team members participated on behalf of the IRS. As is customary at the pre-filing stage, these individuals have not yet been formally assigned to the case; formal team assignment will occur upon the filing of the APA application. Based on introductions made during the conference, one participant was a team leader and the other was an economist. Their names were exchanged informally during introductions but will be confirmed and documented upon formal case assignment following the filing of the application.
Client Personnel:
•  No client personnel attended the conference. Specifically, neither Priya Raghavan (Vice President, Tax — HSI) nor Dr. Erwin Fassbinder (Head of Transfer Pricing — HSAG) participated in or observed the conference. This is consistent with the anonymous pre-filing conference protocol under Rev. Proc. 2015-41, Section 3, which contemplates that taxpayer representatives (i.e., outside counsel and advisors) attend without identifying the taxpayer.
C. Materials Referenced
The principal document referenced during the conference was the anonymous pre-filing memorandum submitted to IRS APMA on April 14, 2025. That memorandum described the taxpayer group as a publicly traded German semiconductor manufacturer with a wholly owned US distribution subsidiary, and set forth the three categories of intercompany transactions, the proposed transfer pricing methods, and the proposed APA term. The APMA team confirmed at the outset of the meeting that both the team leader and the economist had reviewed the pre-filing memorandum in advance.
No taxpayer-identifying documents were exchanged during the conference. No financial statements, intercompany agreements, or other documents bearing the name of HSAG, HSI, or any affiliated entity were presented or referenced. Calderwood & Harkness's presentation was made entirely with reference to the anonymous pre-filing memorandum and oral descriptions consistent therewith.
III. Summary of Discussion Points
A. Overview of Taxpayer and Transactions Presented
Calderwood & Harkness opened the substantive discussion by providing the APMA team with an overview of the taxpayer group and the intercompany transactions proposed to be covered by the bilateral APA. The presentation followed the structure of the pre-filing memorandum and elaborated on key points as follows.
Taxpayer Group Description. C&H described the applicant as a publicly traded German semiconductor manufacturer (organized as an Aktiengesellschaft under German law) with advanced-node fabrication operations encompassing 7nm, 5nm, and 3nm process technologies. The parent entity's principal fabrication facilities are located in Germany. The semiconductor products manufactured by the parent serve three primary end markets: automotive semiconductors, industrial Internet of Things ("IoT") applications, and data-center infrastructure. The parent's consolidated revenue was described as approximately €8.7 billion for fiscal year 2024, reflecting the parent's position as a significant player in the global semiconductor industry.
US Subsidiary Description. The US subsidiary was characterized as a wholly owned Delaware C-corporation functioning as the exclusive US distributor, marketing entity, and design-support provider for the parent's semiconductor products within the North American market. The subsidiary is headquartered in Austin, Texas, and maintains a design center in San Jose, California, as well as regional sales offices in multiple locations across the United States. The US subsidiary's third-party revenue for fiscal year 2024 was described as approximately $4.1 billion, reflecting its role as the parent group's primary channel to the North American customer base. C&H emphasized that the US subsidiary does not engage in independent manufacturing and does not own significant proprietary intellectual property, consistent with its characterization as a limited-risk distributor with ancillary marketing and design-support functions.
Covered Intercompany Transactions. C&H described three categories of intercompany transactions proposed to be covered by the bilateral APA:
1. Tangible Goods (Wafer/Die Sales). The German parent manufactures semiconductor wafers and singulated die at its fabrication facilities and sells finished and semi-finished products to the US subsidiary under a master intercompany supply agreement. The US subsidiary resells these products to third-party customers in North America. For fiscal year 2024, intercompany sales of tangible goods amounted to approximately €988 million (approximately $1.076 billion at applicable exchange rates). This represents the single largest category of intercompany transactions by value.
2. Royalties (IP License). The US subsidiary pays a running royalty to the German parent for the right to use licensed semiconductor process technology and design libraries in connection with its distribution, marketing, and design-support activities. The royalty is computed as a percentage of the US subsidiary's net resale revenue. For fiscal year 2024, the royalty payments amounted to approximately €68 million.
3. Cost-Sharing Contributions (R&D CSA). The German parent and the US subsidiary are parties to a Qualified Cost Sharing Arrangement ("CSA") for next-generation semiconductor process research and development. Under the CSA, the US subsidiary contributes approximately 22.5% of qualified R&D costs, reflecting its anticipated share of the benefits from North American exploitation of the developed intangible property. For fiscal year 2024, the US subsidiary's cost-sharing contribution amounted to approximately €225 million.
Aggregate Intercompany Flows. C&H noted that the aggregate annual intercompany flows across all three transaction categories were approximately €1.28 billion for fiscal year 2024. The significance of these intercompany flows—both in absolute terms and relative to the US subsidiary's third-party revenue—underscores the importance of obtaining certainty on transfer pricing through the APA process.
The APMA team did not raise any questions regarding the general characterization of the taxpayer group or the US subsidiary's functional profile during this portion of the presentation. The team leader acknowledged that the transactions described are typical of those covered by bilateral APAs involving semiconductor groups.
B. Proposed APA Term and Rollback Request
C&H presented the proposed APA term and rollback request as follows:
Prospective APA Term. Five tax years, covering the period from January 1, 2025 through December 31, 2029.
Rollback Request. Three prior tax years, covering the period from January 1, 2022 through December 31, 2024.
Total Covered Period. If the rollback request is granted, the APA would cover a total of eight tax years (2022–2029).
C&H explained that the rollback request is motivated by the taxpayer's desire to obtain certainty for the three most recent completed tax years, during which the same transfer pricing methods and intercompany pricing structure were in effect. The taxpayer's contemporaneous transfer pricing documentation for the rollback years applies the same economic methodologies and functional analyses that will be presented in the formal APA application, providing a consistent basis for the rollback.
IRS Response on Rollback. The APMA team leader noted that rollback requests are evaluated on a case-by-case basis and that there is no automatic entitlement to a rollback. However, the team leader indicated a willingness to consider the rollback provided that the following conditions are satisfied:
(a) the facts and circumstances during the rollback period (2022–2024) are materially consistent with the facts and circumstances during the prospective APA years (2025–2029);
(b) the transfer pricing methods applied during the rollback period are the same as, or materially consistent with, the methods proposed in the APA; and
(c) contemporaneous transfer pricing documentation exists for each of the rollback years and is available for review.
The APMA team leader specifically asked that the formal APA application include detailed financial data for each of the rollback years (FY 2022, FY 2023, and FY 2024), along with references to the contemporaneous documentation demonstrating that the same methodology was applied in those years. The team leader did not foreclose the rollback request but signaled that the availability and quality of contemporaneous documentation would be a significant factor in APMA's evaluation.
C. Bilateral APA — Treaty Partner Coordination
C&H confirmed that the request is for a bilateral APA between the United States (IRS) and Germany (Bundeszentralamt für Steuern, or "BZSt") under Article 25 (Mutual Agreement Procedure) of the Convention between the United States of America and the Federal Republic of Germany for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and Capital and to Certain Other Taxes, signed June 29, 2006 (the "US-Germany Income Tax Treaty").
C&H informed the APMA team that German tax counsel (described in general terms without identifying Kettner Pflüger Rechtsanwälte by name) will submit a parallel APA application to the BZSt. The target date for the German submission is mid-August 2025, following the completion and filing of the US application in early July.
IRS Receptivity to the Bilateral Approach. The APMA team expressed general receptivity to the bilateral approach. The team leader noted that bilateral APAs with Germany have been pursued successfully in numerous prior cases and that the BZSt has been a cooperative and engaged treaty partner in the competent authority process. The team leader characterized the bilateral approach under the US-Germany Treaty as "routine," which is a favorable signal for the overall process.
APMA encouraged early and concurrent filing with the BZSt to avoid delays in the competent authority negotiation process. The team leader emphasized that APMA's experience indicates that cases proceed more efficiently when both applications are filed within a short time window of each other, as this allows for early engagement between the competent authorities and avoids the situation where one application is significantly more advanced in review than the other.
The APMA team also noted the following procedural points regarding the bilateral process:
(a) The formal APA application filed with IRS APMA should include a copy of, or reference to, the parallel German filing once it has been submitted to the BZSt. If the German application has not yet been filed at the time the US application is submitted, the US application should indicate the anticipated filing date and confirm that the German application will be consistent with the US submission.
(b) Both the US and German applications should use consistent economic analyses and financial data to the greatest extent practicable. Inconsistencies in the economic analyses, benchmarking studies, or financial data between the two submissions can create significant delays in the competent authority process and may require additional rounds of information exchange.
(c) APMA will coordinate directly with the BZSt once both applications have been filed and case teams have been assigned in both jurisdictions. The competent authority negotiation will be conducted in accordance with the procedures established under the US-Germany Treaty and applicable administrative guidance.
C&H acknowledged these points and confirmed that the firm is coordinating closely with German tax counsel to ensure consistency of the applications and economic analyses.
D. Discussion of Proposed Transfer Pricing Methods
The largest portion of the conference was devoted to a discussion of the proposed transfer pricing methods for each of the three categories of covered intercompany transactions. The APMA economist played a prominent role in this portion of the discussion, asking detailed technical questions about the benchmarking analyses and economic methodologies.
1. Tangible Goods — CPM/TNMM.  C&H presented the proposed use of the Comparable Profits Method ("CPM") under Treasury Regulation § 1.482-5 for the intercompany sales of semiconductor wafers and singulated die from the German parent to the US subsidiary. C&H noted that the CPM, as applied under US domestic regulations, is the functional equivalent of the Transactional Net Margin Method ("TNMM") under Chapter II of the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, and that the German application to the BZSt will present the analysis under the TNMM framework.
Tested Party. The US subsidiary was identified as the tested party, on the basis that it is the least complex entity in the controlled transaction and the party for which reliable comparable data is most readily available. C&H explained that the US subsidiary performs limited-risk distribution functions, supplemented by marketing and design-support services, and does not own significant unique intangible property. By contrast, the German parent is the developer and owner of valuable semiconductor process technology and design intellectual property, and is the entity performing complex, high-value manufacturing. Accordingly, under the best method rule set forth in Treasury Regulation § 1.482-1(c), testing the US subsidiary's profitability against comparable limited-risk distributors provides the most reliable measure of arm's length results.
Profit Level Indicator. The profit level indicator ("PLI") selected is operating margin on net resales, which C&H described as the most appropriate PLI for a distribution entity given that it directly measures the tested party's return on its distribution and marketing activities relative to the revenue generated from third-party resales of the intercompany products.
Benchmark Set. C&H presented the results of a benchmarking study identifying 17 comparable North American semiconductor distributors. The study covers fiscal years 2020 through 2024, using five-year weighted average operating margins to smooth cyclical and year-to-year variations that are common in the semiconductor industry. The interquartile range of operating margins for the comparable set is 2.8% to 6.1%, with a median of 4.4%. The US subsidiary's fiscal year 2024 operating margin of 4.80% falls within the interquartile range, above the median.
IRS Feedback. The APMA economist raised several questions regarding the CPM/TNMM analysis:
Comparability criteria. The economist asked about the specific comparability criteria used to identify the 17 comparable companies, with particular attention to whether adjustments were made for differences in working capital intensity between the comparable companies and the tested party. The economist noted that working capital intensity can vary significantly among semiconductor distributors depending on inventory management practices, payment terms with customers and suppliers, and the mix of products distributed. The economist requested that the formal application's economic analysis appendix include a detailed description of the working capital adjustments performed and the quantitative impact of those adjustments on the interquartile range.
Product mix. The economist also inquired about whether adjustments were made for differences in product mix among the comparable companies. Specifically, the economist noted that some semiconductor distributors may carry a broader product portfolio (including lower-margin commodity components) while others may specialize in higher-margin, application-specific products. Differences in product mix can affect operating margins and should be addressed in the comparability analysis.
Proprietary IP ownership. The economist asked whether any of the 17 comparable companies possess significant proprietary intellectual property that would distinguish them from the tested party's limited-risk distributor characterization. The economist noted that the presence of material self-developed IP in a comparable company could inflate that company's operating margins above the level that would be expected for a company performing limited-risk distribution functions, thereby distorting the benchmark range.
C&H confirmed that comparability adjustments, including working capital adjustments, were performed as part of the benchmarking study. C&H further confirmed that companies with material self-developed intellectual property were identified during the screening process and excluded from the final comparable set. However, C&H acknowledged the APMA economist's request for additional detail and agreed to provide a more granular description of the comparability adjustments and screening criteria in the formal application's economic analysis appendix.
The APMA team leader indicated that the CPM/TNMM approach with the US subsidiary as the tested party is a commonly accepted methodology for limited-risk distribution activities of the type described, and no objections were raised to the general approach. The team leader's comments suggest that the CPM/TNMM analysis for tangible goods is unlikely to be a significant area of contention, provided the benchmarking study is adequately supported and the comparability adjustments are well-documented.
2. Royalties — CUT Method.  C&H presented the proposed use of the Comparable Uncontrolled Transaction ("CUT") method under Treasury Regulation § 1.482-4(c) for the intercompany royalty paid by the US subsidiary to the German parent for licensed semiconductor process technology and design libraries.
Benchmark Set. C&H described a benchmarking study identifying eight comparable uncontrolled license agreements for semiconductor intellectual property. The comparable agreements were sourced from a subscription royalty rate database and publicly available filings with the US Securities and Exchange Commission. The interquartile range of royalty rates for the comparable set is 3.5% to 8.2%, with a median of 5.6%. The controlled royalty rate of 6.0% (expressed as a percentage of the US subsidiary's net resale revenue) falls within the interquartile range, slightly above the median.
C&H noted that the CUT analysis is corroborated by a residual profit split analysis, which was presented as a secondary, confirmatory method rather than the primary method.
IRS Feedback — Key Area of Questioning. The royalty analysis generated the most extensive and detailed questioning from the APMA team. The APMA economist raised several significant questions regarding the CUT comparables, each of which is summarized below:
Comparability of licensed technology. The economist asked for substantially more detail on whether the comparable license agreements involve the same generation or comparable complexity of semiconductor process technology as the controlled license. Specifically, the economist inquired whether the comparable licenses cover advanced-node technologies (such as 5nm and 3nm process nodes) or whether some or all of the comparable licenses relate to older, less technologically advanced, and potentially less valuable process nodes (such as 14nm or 28nm). The economist emphasized that the value of semiconductor process technology is highly dependent on the process node, and that licenses for legacy-node technologies may command significantly lower royalty rates than licenses for cutting-edge advanced-node technologies. The economist requested that the formal application include a detailed technology comparison matrix for each of the eight comparable license agreements, identifying the specific technology licensed, the process node(s) covered, and the technological sophistication relative to the controlled license.
License terms and conditions. The APMA team inquired about the specific terms and conditions of each comparable license agreement as compared to the controlled license between the German parent and the US subsidiary. The areas of inquiry included:
•  Whether each comparable license is exclusive or non-exclusive, and how the exclusivity terms compare to the controlled license;
•  The geographic scope of each comparable license (worldwide, regional, or country-specific) versus the controlled license (which grants rights within the North American territory);
•  Whether the comparable licenses include sub-licensing rights, and if so, under what terms;
•  Whether the comparable licenses contain field-of-use restrictions limiting the licensee to particular applications or end markets; and
•  Whether there are material differences in the duration or termination provisions of the comparable licenses relative to the controlled license.
The APMA team noted that differences in exclusivity, geographic scope, and sub-licensing rights can materially affect royalty rates, and that these factors must be carefully analyzed and, where possible, adjusted for in the CUT analysis.
Age and currency of comparable agreements. The APMA economist expressed concern about whether the eight comparable agreements are sufficiently current to provide reliable benchmarks for the proposed APA period (2025–2029, with a rollback to 2022). The economist specifically asked whether any of the comparable agreements were executed prior to 2018, noting that the semiconductor IP landscape has changed materially in recent years due to the industry's shift toward advanced-node technologies, the increasing concentration of advanced fabrication capacity, and the broader geopolitical and supply-chain developments affecting the semiconductor industry. The economist requested that the formal application identify the execution date for each of the eight comparable license agreements and provide an analysis of whether agreements executed in earlier periods remain reliable comparables for the proposed APA term.
Reliability relative to residual profit split. The APMA team leader asked C&H to explain the basis for proposing the CUT method as the primary method for the royalty, rather than a profit split method, given what the team leader described as the "highly integrated nature of semiconductor IP development and distribution." The team leader noted that in cases involving unique, high-value intangible property and significant interrelationship between the licensor's development activities and the licensee's exploitation activities, the profit split method is sometimes viewed as more reliable than the CUT method, particularly where the CUT comparables involve less-than-identical intangible property. The team leader specifically requested that the residual profit split corroboration currently presented as a secondary method be expanded and presented in sufficient detail to serve as a viable alternative method in the event that the CUT analysis proves to be insufficiently reliable.
C&H acknowledged each of these questions and committed to addressing them comprehensively in the formal APA application's economic analysis appendix. Leonard Cross noted during the conference that the CUT method is the preferred best method under Treasury Regulation § 1.482-4(c) given the availability of eight comparable uncontrolled license agreements, which represent direct market evidence of arm's length royalty rates for semiconductor IP. However, Mr. Cross confirmed that the residual profit split corroboration would be expanded in the formal submission to provide a fully developed alternative methodology with sufficient analytical rigor to serve as a fallback if APMA ultimately concludes that the CUT comparables are insufficiently reliable.
3. Cost-Sharing Arrangement — Income Method (PCT Valuation).  C&H described the Qualified Cost Sharing Arrangement ("CSA") between the German parent and the US subsidiary, which was executed on July 15, 2018. Under the CSA, the US subsidiary participates with a 22.5% anticipated benefit share, reflecting its share of the reasonably anticipated benefits from the exploitation of developed intangible property in the North American market. The CSA covers next-generation semiconductor process research and development activities.
Platform Contribution Transaction. At the inception of the CSA, the US subsidiary was required to make a platform contribution transaction ("PCT") buy-in payment to compensate the German parent for the pre-existing intangible property and resources made available to the CSA. The PCT buy-in payment was $312.5 million, valued using the income method prescribed by Treasury Regulation § 1.482-7(g)(4). The valuation employed an 11.8% discount rate and a 15-year projection period. The original PCT valuation was performed by an independent valuation firm (referred to during the conference in general terms, without identifying Stonebridge Valuation Partners LLC by name).
Current CSA Cost Sharing. For fiscal year 2024, the total qualified R&D costs subject to the CSA were approximately €998 million. The US subsidiary's share, at 22.5%, was approximately €225 million. C&H noted that the qualified cost pool is a subset of the German parent's total R&D expenditure, which was approximately €1.42 billion for fiscal year 2024.
IRS Feedback — Request for Additional Detail. The APMA team devoted significant attention to the CSA and PCT valuation, consistent with what the team leader described as heightened IRS scrutiny of CSA/PCT arrangements in the semiconductor industry. The specific areas of inquiry are summarized below:
PCT valuation — financial projections. The APMA economist requested additional detail on the financial projections underlying the income method valuation, including revenue growth rate assumptions (both near-term and long-term), operating margin assumptions, and the treatment of terminal value. The economist asked whether the revenue growth projections were based on management forecasts, industry analyst projections, or a combination of both, and whether sensitivity analyses were performed to test the impact of alternative assumptions on the valuation.
discount rate justification. The economist requested a detailed justification for the 11.8% discount rate used in the income method, including the weighted average cost of capital ("WACC") analysis underlying the rate, any technology-specific risk premium applied to reflect the risks associated with semiconductor R&D (including the risk of technology obsolescence), and the basis for selecting comparable companies used in the WACC derivation. The economist noted that the discount rate is a critical input in the income method and that small changes in the rate can produce significant changes in the valuation.
Projection period appropriateness. The economist questioned whether the 15-year projection period is appropriate given the pace of semiconductor technology obsolescence. The economist observed that generational shifts in semiconductor process technology occur approximately every two to three years (e.g., the progression from 7nm to 5nm to 3nm and beyond), and that the useful life of a given process technology platform may be considerably shorter than 15 years. The economist asked C&H to explain the basis for selecting the 15-year projection period and to address whether a shorter projection period, more closely aligned with the typical technology cycle, would be more appropriate.
Periodic adjustment analysis. The economist asked whether periodic adjustments have been evaluated under Treasury Regulation § 1.482-7(i) since the CSA inception in 2018. Under that provision, the Commissioner may propose periodic adjustments to the PCT terms if the actual results of the CSA participants materially deviate from the results that were reasonably anticipated at the time of the PCT valuation. The economist asked whether any such evaluations have been conducted, and if so, what the results were. The APMA team leader reinforced this point by noting that if actual results since 2018 have significantly exceeded the projections used in the original PCT valuation, APMA may take the position that the buy-in was undervalued or that a periodic adjustment under § 1.482-7(i) is warranted.
Completeness of the PCT valuation report. The APMA team leader noted that the formal APA application should include the complete valuation report (or a comprehensive summary with all material assumptions, inputs, and calculations) from the independent valuation firm, along with an updated analysis of whether actual results during the period from 2018 through 2024 have materially deviated from the projections used in the original PCT valuation.
CSA cost pool composition. APMA inquired about the scope of the CSA cost pool, specifically which R&D activities are classified as "qualified" costs included in the cost pool versus those that are excluded. The economist noted the significant gap between the qualified R&D cost pool of approximately €998 million and the German parent's total R&D expenditure of approximately €1.42 billion, and asked for a detailed breakdown and description of the cost pool composition, including the categories of excluded costs and the rationale for each exclusion. C&H agreed to provide this breakdown in the formal application.
Benefit share methodology. APMA inquired about the 22.5% anticipated benefit share assigned to the US subsidiary. Specifically, the team asked how the benefit share was originally determined, whether it has been reviewed and adjusted since inception in accordance with the contractual provisions of the CSA, and what the contractual mechanism is for triennial review of the benefit share. The APMA team was interested in understanding whether the benefit share reflects a forward-looking assessment of reasonably anticipated benefits or a backward-looking measure based on historical results, and how the North American exploitation share relates to the US subsidiary's proportion of the group's total third-party revenue.
C&H confirmed that the benefit share is reviewed on a triennial basis in accordance with the terms of the CSA and that the methodology is based on reasonably anticipated benefits from North American exploitation of the developed intangible property. C&H committed to documenting the benefit share methodology, the triennial review mechanism, and any adjustments made since the CSA's inception in July 2018 in the formal application.
E. Procedural Matters Discussed
The final portion of the conference addressed several procedural matters relating to the formal APA application filing.
1. User Fee.  APMA confirmed that the large-case APA user fee of $113,500 (as currently in effect for 2025) is applicable to this filing. The user fee is to accompany the formal APA application and should be made payable to the United States Treasury. APMA noted that the user fee is non-refundable regardless of the outcome of the APA process.
2. Application Completeness and Expected Contents.  APMA provided general guidance on the expected contents of the formal APA application, in accordance with Section 4 of Revenue Procedure 2015-41. The following items were identified as required or expected components of a complete application:
(a) Completed IRS Form 14661 (Advance Pricing Agreement Request);
(b) A supporting narrative describing the covered transactions, the proposed transfer pricing methods for each category of transaction, the proposed APA term (including the rollback request), and the factual and functional analysis of the controlled parties;
(c) An economic analysis appendix containing the complete benchmarking studies for each covered transaction, including the CPM/TNMM analysis for tangible goods, the CUT analysis for royalties (with the expanded detail discussed during the conference), and the CSA/PCT analysis, along with all supporting data, comparable company and agreement searches, acceptance and rejection logs, and quantitative adjustments;
(d) A legal analysis addressing the best method rule under Treasury Regulation § 1.482-1(c), the comparability analysis under Treasury Regulation § 1.482-1(d), the application of the specific method regulations (§§ 1.482-4(c), 1.482-5, and 1.482-7), and the relevant provisions of the US-Germany Income Tax Treaty;
(e) A financial data appendix containing segmented profit and loss statements for both the German parent and the US subsidiary, intercompany transaction schedules for each category of covered transaction, and a reconciliation of the segmented financial data to audited financial statements for fiscal years 2020 through 2024;
(f) A properly executed IRS Form 2848 (Power of Attorney and Declaration of Representative) authorizing the named Calderwood & Harkness attorneys to represent the US subsidiary before the IRS in connection with the APA;
(g) Copies of, or references to, the intercompany agreements governing the covered transactions, including the Master Intercompany Supply Agreement, the IP License Agreement, and the Cost Sharing Arrangement; and
(h) Any additional materials relevant to the specific issues discussed during the pre-filing conference, including the expanded CUT analysis, the residual profit split alternative, the PCT valuation report, and the rollback-year documentation.
APMA noted a preference for receiving the application in both hard copy (three copies) and searchable electronic format (on a USB drive or via a secure electronic submission mechanism, as specified in APMA administrative guidance).
3. Timeline Expectations.  APMA provided the following guidance on expected timelines:
(a) Upon filing of the formal application (currently targeted for July 7, 2025), the case will be assigned to a designated APMA team within approximately 60 to 90 days. The assigned team will include a team leader, an economist, and potentially additional specialists depending on the complexity of the case.
(b) Bilateral negotiations with the BZSt under the mutual agreement procedure of Article 25 of the US-Germany Treaty typically take 18 to 30 months from the date both applications are filed with the respective competent authorities. APMA encouraged concurrent or near-concurrent filing of the US and German applications to expedite the process.
(c) The rollback request (covering tax years 2022–2024) may extend the overall timeline if the APMA team determines that additional review of the historical years is required beyond what is presented in the application. APMA noted that a well-documented rollback request with robust contemporaneous documentation can help minimize any additional delay.
4. Confidentiality and Privilege.  APMA confirmed that information submitted in the APA application is treated as confidential under Section 10 of Revenue Procedure 2015-41 and is not shared with IRS examination teams absent the taxpayer's written consent. The APMA team leader noted that the APA process is a separate administrative process from the examination function and that the information provided in the application will be used solely for purposes of evaluating and negotiating the APA.
C&H confirmed that the firm will assert applicable privileges over attorney work product and attorney-client communications throughout the APA process. C&H noted that the submission of factual information, economic analyses, and financial data in the APA application does not constitute a waiver of any applicable privilege with respect to legal analyses, strategic assessments, or attorney-client communications related to the engagement.
IV. Action Items
The following action items arise from the pre-filing conference and are organized by responsible party. All dates are firm deadlines intended to support the July 7, 2025 formal application filing date.
A. Action Items for Calderwood & Harkness LLP
B. Action Items for Client (HSAG/HSI)
C. Action Items for German Counsel (Kettner Pflüger Rechtsanwälte)
D. Action Items for Meridian Economics GmbH
V. Assessment and Strategic Observations
A. Overall IRS Receptivity
The pre-filing conference was constructive and productive. The APMA team was prepared, having reviewed the anonymous pre-filing memorandum in advance, and engaged substantively with the proposed covered transactions and transfer pricing methods. Notably, APMA expressed no fundamental objections to the bilateral approach under the US-Germany Treaty, the proposed APA term (2025–2029), or the general selection of the CPM/TNMM for tangible goods transactions with HSI as the tested party.
The bilateral approach with Germany under Article 25 of the US-Germany Income Tax Treaty was characterized by the APMA team leader as "routine," which is a favorable characterization that suggests APMA does not anticipate significant procedural complications in the competent authority process with the BZSt. This is consistent with the general understanding that Germany has been a cooperative treaty partner in the bilateral APA context.
The tone of the conference was professional and collaborative, consistent with the general IRS posture in APA pre-filing conferences. While the APMA economist raised detailed and probing questions (particularly regarding the CUT analysis and the CSA/PCT valuation), these questions were framed as requests for additional information and analysis rather than objections to the proposed methods. We view this as a positive signal, indicating that APMA is engaging with the case on the merits and is open to the bilateral APA request.
B. Key Risk Areas Identified
Notwithstanding the generally positive tone of the conference, three key risk areas were identified based on the nature and intensity of APMA's questioning. These risk areas should be carefully addressed in the formal APA application:
1. CUT Comparables for Royalty. The royalty analysis generated the most extensive questioning during the conference, and we assess the CUT method for the IP royalty as the most significant area of potential IRS scrutiny. The APMA economist's questions regarding the comparability of the licensed technology (process node generation), the terms and conditions of the comparable licenses, and the currency of the comparable agreements suggest that APMA will closely examine whether the eight CUT comparables are sufficiently similar to the controlled license to provide reliable arm's length benchmarks. If APMA ultimately determines that the CUT comparables are insufficiently similar—particularly with respect to the generation and complexity of the licensed semiconductor process technology—APMA may push for a profit split method as the primary method for determining the arm's length royalty. A shift from the CUT method to a profit split method could have a meaningful impact on the royalty rate and the overall allocation of residual profits between the German parent and the US subsidiary. Accordingly, it is imperative that the expanded CUT analysis in the formal application address each of APMA's specific concerns with thorough documentation and, where feasible, quantitative comparability adjustments. Equally important, the residual profit split corroboration must be developed to a level of analytical rigor sufficient to serve as a credible alternative method, both to demonstrate that the CUT result is corroborated by an independent methodology and to provide a well-developed fallback position in the event the CUT method is rejected.
2. CSA/PCT Valuation. APMA's heightened scrutiny of cost-sharing arrangements in the semiconductor sector is consistent with broader IRS enforcement trends in recent years. The IRS has taken aggressive positions on PCT valuations in several high-profile cases involving technology companies, and the APMA team leader's explicit reference to "heightened scrutiny" in this industry should be taken seriously. The original 2018 PCT valuation by Stonebridge Valuation Partners LLC must be defensible across all critical assumptions, particularly: (a) the 11.8% discount rate, which must be supported by a robust WACC analysis with an appropriately calibrated technology-specific risk premium; (b) the 15-year projection period, which must be justified in light of the relatively short technology cycles in the semiconductor process technology space (approximately two to three years per generational shift); and (c) the actual-versus-projected performance analysis for the period 2018–2024. If actual results since 2018 have significantly exceeded the financial projections used in the original PCT valuation, APMA may argue either that the buy-in payment was undervalued at inception or that a periodic adjustment under Treasury Regulation § 1.482-7(i) is warranted. The periodic adjustment analysis is therefore a critical deliverable and should be approached with the expectation that APMA will scrutinize it closely. The C&H team should coordinate with Stonebridge Valuation Partners and Meridian Economics to ensure the analysis is thorough and defensible.
3. Rollback Period. While APMA indicated a willingness to consider the rollback to cover tax years 2022 through 2024, the team leader's comments made clear that the availability and quality of contemporaneous transfer pricing documentation for each rollback year will be a significant factor in APMA's evaluation. The rollback request will be strengthened materially if the US Local Files for each of the three rollback years are complete, finalized, and demonstrate the application of the same transfer pricing methods proposed in the APA. C&H must ensure that the US Local Files for fiscal years 2022 and 2023 are fully finalized and that the fiscal year 2024 documentation is completed in advance of the application filing. Any gaps in contemporaneous documentation could jeopardize the rollback request or, at a minimum, extend the overall APA timeline as APMA conducts additional review.
C. Impact on Application Timeline
The additional detail requested by APMA, particularly with respect to the CUT analysis (technology comparison matrix, license term comparability, execution dates, and staleness analysis) and the CSA/PCT valuation (complete valuation report, periodic adjustment analysis, cost pool breakdown, benefit share documentation), will require approximately four to six weeks of additional analytical work by Meridian Economics GmbH, in coordination with Stonebridge Valuation Partners LLC and the client's tax and R&D functions.
The July 7, 2025 target filing date for the formal APA application remains achievable, provided the following critical-path conditions are met:
(a) Client data—specifically the original PCT valuation report from Stonebridge Valuation Partners, the R&D cost pool breakdown, and the triennial benefit share review documentation—is received by Calderwood & Harkness no later than May 30, 2025.
(b) Meridian Economics delivers the revised CUT benchmarking study (including the technology comparison matrix and license terms analysis) and the additional CPM/TNMM comparability adjustment documentation no later than June 13, 2025.
(c) Meridian Economics delivers the expanded residual profit split corroboration and the PCT periodic adjustment analysis no later than June 20, 2025.
(d) The rollback-year financial data and documentation compilation is completed by Robert Jansen no later than June 20, 2025.
If any of these deliverables are materially delayed, the July 7, 2025 filing date may need to be pushed back, which could in turn delay the German BZSt submission and the overall bilateral negotiation timeline. The C&H team should communicate the urgency of the May 30 client data deadline to Priya Raghavan and Dr. Erwin Fassbinder promptly.
The German BZSt submission target of August 15, 2025 remains on track, contingent on the timely completion and transmittal of the US application package to Kettner Pflüger Rechtsanwälte following the July 7 filing.
D. Budget Implications
The additional analytical work identified during the pre-filing conference—specifically the expanded CUT analysis with technology comparison matrix, the full alternative-method residual profit split, and the PCT periodic adjustment analysis—may result in increased fees from Meridian Economics GmbH beyond the original fixed-fee engagement of €485,000. These additional deliverables were not specifically contemplated in the original scope of work, and the level of detail requested by APMA is more extensive than initially anticipated. Leila Nazari should discuss the scope of additional work and potential amendment to the Meridian Economics engagement letter with Dr. Annika Breitner at the earliest opportunity to quantify the additional cost and obtain client approval.
With respect to Calderwood & Harkness's own fees, the time spent on the expanded application is currently within the Phase 1 fee cap of $1,850,000 based on current utilization through the May 19, 2025 conference. However, given the additional deliverables and the expanded scope of the application, the team should monitor hours closely throughout the June drafting period. If the additional work threatens to approach the Phase 1 cap, Leonard Cross should be notified promptly so that a scope and budget discussion can be initiated with the client before the fee cap is reached.
VI. Next Steps and Upcoming Milestones
The following table sets forth the key milestones and target dates for the period between the pre-filing conference and the formal APA application filing, as well as subsequent milestones through the German BZSt submission and the FY 2024 contemporaneous documentation deadline:
The C&H team should schedule a working session for the week of May 26, 2025, to review incoming client data and coordinate with Meridian Economics on the revised analytical deliverables. A status conference call with Kettner Pflüger should be scheduled for the week of June 2, 2025, to ensure alignment of the US and German applications.
VII. Distribution
This memorandum is for internal Calderwood & Harkness LLP distribution only. Distribution is limited to the following individuals:
•  Leonard Cross, Partner, Tax
•  Sylvia Hartwell, Partner, Tax
•  Leila Nazari, Senior Associate, Tax
•  Robert Jansen, Associate, Tax
This memorandum is not to be distributed externally to the client, German counsel, Meridian Economics, or any other third party without the prior written approval of Leonard Cross. A separate client summary memorandum will be prepared for transmittal to Priya Raghavan (Vice President, Tax — HSI) and Dr. Erwin Fassbinder (Head of Transfer Pricing — HSAG), redacting attorney work product assessments and strategic observations as appropriate.
VIII. Preparer Information
Prepared by:
________________________________________
Leila Nazari Senior Associate, Tax Calderwood & Harkness LLP 599 Lexington Avenue, 38th Floor New York, New York 10022
Assisted by:
________________________________________
Robert Jansen Associate, Tax Calderwood & Harkness LLP
Reviewed and Approved by:
________________________________________
Leonard Cross Partner, Tax Calderwood & Harkness LLP
Date: May 20, 2025
PRIVILEGED AND CONFIDENTIAL — ATTORNEY WORK PRODUCT Calderwood & Harkness LLP — Matter No. 1032-00006 — HSAG-TP-2025
# | Action Item | Responsible Attorney | Target Date
1 | Expand the CUT analysis to include a technology comparison matrix for each of the eight comparable license agreements, detailing the type and generation of semiconductor technology licensed, the process node(s) covered, and the technological sophistication relative to the controlled license | Leila Nazari / Dr. Annika Breitner (Meridian Economics) | June 13, 2025
2 | Provide execution dates and license term durations for all eight CUT comparable agreements; address currency/staleness concerns raised by APMA economist, including analysis of whether agreements executed prior to 2018 remain reliable comparables | Leila Nazari / Maximilian Voss (Meridian Economics) | June 13, 2025
3 | Detail comparability of license terms (exclusive vs. non-exclusive, geographic scope, sub-licensing rights, field-of-use restrictions) for each CUT comparable, with qualitative and quantitative adjustments where feasible | Leila Nazari / Dr. Annika Breitner (Meridian Economics) | June 13, 2025
4 | Expand the residual profit split corroboration to full alternative-method detail, sufficient to serve as a standalone fallback methodology if CUT reliability is challenged by APMA; include allocation keys, routine and residual profit splits, and sensitivity analyses | Dr. Annika Breitner (Meridian Economics) / Leila Nazari | June 20, 2025
5 | Obtain and include the complete PCT valuation report (or comprehensive summary) from Stonebridge Valuation Partners LLC (Marcus Reinhardt, Managing Director); coordinate with Dr. Erwin Fassbinder and Priya Raghavan for access and any necessary confidentiality waivers | Robert Jansen | June 6, 2025
6 | Prepare detailed analysis of PCT income method assumptions: revenue growth projections (near-term and long-term), margin assumptions, terminal value treatment, discount rate justification (WACC derivation plus technology-specific risk premium), and appropriateness of the 15-year projection period in light of semiconductor technology cycles | Leila Nazari / Dr. Annika Breitner (Meridian Economics) | June 20, 2025
7 | Document periodic adjustment evaluation under Treas. Reg. § 1.482-7(i) — compare actual results for 2018–2024 against original PCT projections; assess whether trigger events for periodic adjustments have occurred and prepare supporting quantitative analysis | Robert Jansen / Meridian Economics | June 20, 2025
8 | Prepare breakdown of qualified CSA R&D cost pool (€998.2M) versus total HSAG R&D expenditure (€1,420M); describe categories of excluded costs and the rationale for each exclusion, with reference to the CSA terms and Treas. Reg. § 1.482-7(d) | Robert Jansen (with input from Dr. Hendrik Möller via Priya Raghavan) | June 6, 2025
9 | Document the 22.5% anticipated benefit share methodology, including the original determination of the benefit share, the triennial review mechanism under the CSA, and any historical adjustments made since CSA inception on July 15, 2018 | Leila Nazari | June 13, 2025
10 | Provide additional detail on CPM/TNMM comparability adjustments (working capital adjustments with quantitative impact, product mix adjustments, and confirmation of screening exclusion criteria for IP-owning distributors) in the economic analysis appendix | Dr. Annika Breitner / Maximilian Voss (Meridian Economics) | June 13, 2025
11 | Compile rollback-year (FY 2022–2024) financial data and contemporaneous transfer pricing documentation references to support the rollback request; confirm that US Local Files for FY 2022 and FY 2023 are finalized | Robert Jansen | June 20, 2025
12 | Finalize the formal APA application (IRS Form 14661, narrative, legal analysis, and all appendices) for internal partner review | Leila Nazari / Robert Jansen | June 27, 2025
13 | Partner review of the complete APA application package, including all appendices and supporting materials | Leonard Cross / Sylvia Hartwell | July 1, 2025
14 | File the formal APA application with IRS APMA, accompanied by the user fee of $113,500 and executed IRS Form 2848 (Power of Attorney) | Leonard Cross | July 7, 2025
15 | Transmit the US APA application package to Kettner Pflüger Rechtsanwälte (Dr. Tobias Kettner / Friederike Lang) for coordination of the parallel German BZSt submission and alignment of economic analyses | Leila Nazari | July 11, 2025
# | Action Item | Client Contact | Target Date
1 | Provide access to the original 2018 PCT valuation report prepared by Stonebridge Valuation Partners LLC, including all appendices, financial projections, and discount rate analyses | Priya Raghavan / Dr. Erwin Fassbinder | May 30, 2025
2 | Provide detailed breakdown of FY 2024 R&D cost pool — qualified costs versus non-qualified costs, with descriptions of each excluded category and the rationale for exclusion | Dr. Hendrik Möller (via Priya Raghavan) | May 30, 2025
3 | Confirm and document any triennial reviews of the 22.5% anticipated benefit share conducted since CSA inception on July 15, 2018, including the results of each review and any adjustments made | Priya Raghavan / Dr. Erwin Fassbinder | May 30, 2025
4 | Provide segmented financial data for FY 2020–2024 (both HSAG and HSI), including segmented profit and loss statements, intercompany transaction schedules, and reconciliation to audited financial statements prepared by Gresham Whitfield LLP | Priya Raghavan / Margarethe Stein | June 6, 2025
5 | Execute IRS Form 2848 (Power of Attorney and Declaration of Representative) authorizing Leonard Cross, Sylvia Hartwell, and Leila Nazari of Calderwood & Harkness LLP to represent HSI (EIN 84-2917630) before the IRS for tax years 2022–2029, with respect to IRC § 482 transfer pricing matters | Priya Raghavan (on behalf of Victor Almeida, General Counsel) | June 13, 2025
# | Action Item | Contact | Target Date
1 | Prepare the German APA application for submission to BZSt, ensuring alignment of proposed transfer pricing methodology, financial data, and transaction characterization with the US application | Dr. Tobias Kettner / Friederike Lang | August 15, 2025
2 | Coordinate with C&H on consistent presentation of economic analyses, benchmarking studies, and intercompany transaction characterization across the US and German applications; review and comment on C&H's economic analysis appendix prior to US filing | Dr. Tobias Kettner | Ongoing
# | Action Item | Contact | Target Date
1 | Revise the CUT benchmarking study per IRS feedback, including preparation of a technology comparison matrix, identification of execution dates and license term durations, and detailed analysis of license terms comparability (exclusivity, geographic scope, sub-licensing rights, field-of-use restrictions) for each of the eight comparable agreements | Dr. Annika Breitner / Maximilian Voss | June 13, 2025
2 | Expand the residual profit split corroboration to a full alternative-method level of detail, including identification and quantification of routine returns for all controlled parties, allocation of residual profits based on appropriate allocation keys, and sensitivity analyses under alternative assumptions | Dr. Annika Breitner | June 20, 2025
3 | Prepare PCT periodic adjustment analysis comparing actual results for 2018–2024 against the original income method projections used in the 2018 PCT valuation; identify and quantify any material deviations and assess whether trigger events under Treas. Reg. § 1.482-7(i) have occurred | Dr. Annika Breitner / Maximilian Voss | June 20, 2025
4 | Provide additional CPM/TNMM comparability adjustment documentation, including quantitative working capital adjustments, product mix analysis, and enhanced documentation of the IP screening criteria applied to exclude IP-owning distributors from the comparable set | Maximilian Voss | June 13, 2025
Milestone | Target Date
Client data collection (PCT valuation report, R&D cost pool breakdown, triennial benefit share reviews) | May 30, 2025
Revised CUT analysis and CPM/TNMM comparability adjustment detail from Meridian Economics | June 13, 2025
Expanded residual profit split corroboration and PCT periodic adjustment analysis from Meridian Economics | June 2

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