The IRS’s Cost-Sharing Proposals in the Worldwide Tax System: Why Congress Should Avoid Anti-Competitive Transfer Pricing Regulations and Embrace a Territorial Tax
FORDHAM JOURNAL OF
CORPORATE & FINANCIAL LAW
Fordham Journal of Corporate & Financial Law
James D. Mandolfo
Copyright c 2007 by the authors. Fordham Journal of Corporate & Financial Law is produced
by The Berkeley Electronic Press (bepress). http://ir.lawnet.fordham.edu/jcfl
The Internal Revenue Service’s failure to adequately regulate
costsharing arrangements highlights the need for the U.S. to adopt a
territorial tax system.1 Under the current worldwide tax system,
costsharing arrangements and transfer pricing techniques effectively allow
U.S. corporations to move profits overseas.2 Attempting to confront
* J.D. candidate, Fordham University School of Law, 2007; B.A., with highest
honors, Pennsylvania State University, 2003. I would like to thank the members of the
Fordham Journal of Corporate & Financial Law for their dedication and editorial
assistance. In addition, I am grateful to Prof. Matt McKenna, Fordham University
School of Law and Senior Vice President of Finance for PepsiCo, Inc., for his inspiring
classes and beneficial advice.
1. See Chris Atkins & Scott Hodge, The U.S. Corporate Income Tax System:
Once a World Leader, Now A Millstone Around the Neck of American Business, TAX
FOUNDATION (SPECIAL REPORT), Nov. 2005, at 2-3. The U.S. has one of the highest
effective tax rates for corporate taxpayers compared to other OECD countries. Id.
Therefore, many corporations store profits abroad to avoid paying U.S. taxes
(sometimes twice). Id. The cost-sharing proposals, discussed infra, were attempts to
curtail deferral behavior. Id. The IRS, however, and Congress must resolve the cause
for deferral, not the result of such strategies.
2. For international tax purposes, transfer pricing is the “division of intragroup
profits or losses when members of a multinational group are jointly responsible for
those profits or losses.” Michelle Markham, Tax In A Changing World: The Transfer
Pricing of Intangible Assets, 40 TAX NOTES INT’L 895, 896 (2005); see Martin Sullivan,
International Tax Planning: A Guide for Journalist, 105 TAX NOTES 32, 32-33 (2004).
Transfer pricing is a means to take profits from a high tax jurisdiction to a low tax
such strategic behavior, the Internal Revenue Service (“IRS”) proposed
rules in 2005 that would impose overzealous regulations on participants
to a cost-sharing arrangement.3 The 2005 proposals did not account for
the international competition facing U.S. corporations in a global
market. This Note proposes that Congress resolve the IRS’s concerns
pertaining to cost-sharing and other transfer pricing techniques by
adopting a territorial tax system, thereby eliminating policies that
encourage profit deferment.
The government’s response to these arrangements is too draconian.
The IRS purports that corporations strategically evade tax obligations by
unevenly pricing the value of cost-sharing arrangements.4 Specifically,
the IRS is concerned that many companies sell intangible property to
their foreign subsidiaries at below fair market value.5 This allows U.S.
jurisdiction in order to reap the tax deferral benefits. See Sullivan, 105 TAX NOTES
at 32. For example, suppose a U.S. company with a foreign subsidiary sells a
manufacturing part to its subsidiary. The subsidiary is a well-run company and is able
to sell the part, which costs $2 to manufacture, at a reasonable percentage over cost at
$3 per part (net gain of $1 per part). The U.S. corporation argues that the subsidiary’s
manufacturing parts should sell for more because of its innovative techniques, at no
contribution of the parent company. As such, the subsidiary claims its product should
sell for $5 per part, transferring more profit to the foreign subsidiary. The foreign
subsidiary profits from an increased $3 per part compared to the $1 per part and is
subject only to a low jurisdictional tax. Thus, there is a significant cost savings strategy
when a company begins to produce millions of parts subject to minimal tax. Id. at 33;
see generally Bob Ackerman et al., Global Transfer Pricing Update, 40 TAX NOTES
INT’L 1139 (2005) (outlining the state of current and proposed transfer pricing rules and
regulations in fourteen countries).
3. Prop. Treas. Reg. § 1.482-7, 70 Fed. Reg. 51, 116 (Aug. 29, 2005) (providing
notice of proposed revisions to the existing Treas. Reg. § 1.482-7 (as amended in 2003)
“regarding methods . . . to determine taxable income in connection with a cost-sharing
arrangement.”). Id. at 51, 116; see Section 482 White Paper; Service Develops New
Method For Finding Comparable Price For Intangibles, 1988 TAX NOTES TODAY
21374 (1988) (quoting the conference report on the Tax Reform Act of 1986 that a
costsharing arrangement is “an agreement between two or more persons to share the costs
and risks of research and development as they are incurred in exchange for a specified
interest in any intangible property that is developed.”); H.R. REP. NO. 99-841 at
II-63738 (1986) (Conf. Rep.), as reprinted in 1986 U.S.C.C.A.N. 4075, 4725-26; IRS Issues
Proposed Cost-Sharing Regs, Sets Hearing Date, 2005 TAX NOTES TODAY 162-1
(2005) (summarizing the proposed alterations to § 1.482-7).
4. See Herman P. Ayayo & Lee Sheppard, IRS Reassures Practitioners on
CostSharing Regs., 41 TAX NOTES INT’L 537 (Feb. 13, 2006).
5. See Keith Reams et al., Proposed U.S. Cost Sharing Regulations: Are They A
Realistic Alternative?, 40 TAX NOTES INT’L 269, 270 (Oct. 17, 2005).
corporations to store profits abroad6 and—according to the IRS—avoid
paying U.S. taxes under its worldwide tax system.7 The IRS attributes
$2.6 to $2.8 billion average annual losses to cost-sharing arrangements.8
Microsoft, for example, saves $500 million annually through tax
strategies, which caused former Treasury Secretary John Snow to
describe the current regulations as “ineffectual.”9 Facing the challenges
of remaining competitive in a global market, corporate America
predictably criticizes the government’s response as too severe.10
The central policy tension confronting Congress is caused by the
need to facilitate U.S. business health abroad and ensure revenue at
home. The IRS voices legitimate concerns. For domestic companies to
compete abroad, the U.S.’s international tax policy must confront the
realities of competing against foreign corporations subject to fewer taxes
under a territorial tax system. The problem of accurately taxing
costsharing arrangements should encourage Congress to adopt a territorial
tax system, rather than claustrophobic regulations.
8. Charles H. Gustafson et al., TAXATION OF INT’L TRANSACTIONS, ¶ 8000, at 626
(2d ed. 2001) (citing I.R.S. Pub. No. 3218 (Apr. 21, 1999)), available at
http://www.irs.gov/pub/irs-pdf/p3218.pdf. The U.S. lost tax revenue estimated at $35.6
billion in 1998 due to transfer pricing. Id. Analysts estimate that revenue loss due to
transfer pricing has continued to grow annually. See Rosanne Altshuler & Harry
Grubert, Governments and Multinational Corporations in The Race To The Bottom, 41
TAX NOTES INT’L 459, 460-61 (Feb. 6, 2006).
9. See Jonathan Rickman, Current Cost-Sharing Rules Don’t Stop Evasion,
Treasury Snow Says, 41 TAX NOTES INT’L 540 (Feb. 13, 2006).
10. See American Bar Association Section of Taxation Task Force on International
Tax Reform, U.S. International Tax Reform: Objectives and Overview, 43 TAX NOTES
INT’L 317 (July
) (stating that “[i]n designing international tax rules,
policymakers must take account of the effects of business pressures in lowering tax
costs on U.S. and foreign business activity, as well as broader competitive pressures
arising from global markets.”). The regulations ignore the fundamental problem of
deferral and the reasons for such activity. See Rickman, supra note 9, at 540
(explaining that transfer pricing strategies allow corporations to defer profits abroad
despite any regulations). The IRS’s mere response to deferral will not solve the cause
for cost-sharing activities. See Cornelius C. Shields, Proposed Regulations for U.S.
Cost-Sharing Arrangements Not Enforceable, 40 TAX NOTES INT’L 33, 34 (Oct. 3,
2005) (stating that “[t]he core of the problem is that the proposed regulations set up a
game and encourage taxpayers to try for the benefits of the periodic return ratio
Part II of this Note explains the financial incentives for corporations
to defer profits in low tax jurisdictions under the worldwide tax system.
Part III analyzes the current transfer pricing regulations and the IRS’s
proposals to tame cost-sharing arrangements.11 Finally, Part IV argues
that the U.S. should implement a territorial tax system and eliminate tax
policies that encourage deferral. Congress should learn from the IRS’s
recent mistakes and instead focus on the impetus for the use of
costsharing arrangements under the current worldwide tax system.12 Such
action will resolve the IRS’s concerns regarding cost-sharing
arrangements while simultaneously promoting U.S. competition and
II. THE WORLDWIDE TAX SYSTEM PROMOTES DEFERRAL OF PROFITS
A. U.S. Profits Rise Overseas, but Not at Home
As evidenced by the surge in U.S. profits overseas in the last five
years, the U.S.’s worldwide tax system encourages companies to defer
profits abroad in order to avoid paying taxes at home. U.S. companies
accomplish deferral by incorporating companies in low tax jurisdictions
and then holding profits in these foreign subsidiaries.13 This explains
12. See Audrey Nutt, ABA Tax Section Meeting: Tax Officials Comment on
Transfer Pricing Regs., 113 TAX NOTES 433 (2006) (discussing IRS official comments
that admitted many of its approaches in the cost-sharing proposals will be changed,
including the “arm’s-length ranges,” which will “be introduced into the cost-sharing
regulations’ buy-in valuations.”).
13. See Martin Sullivan, Economic Analysis: Data Show Dramatic Shift of Profits
to Tax Havens, 104 TAX NOTES 1190, 1191-94 (2004); John Almond & Martin
Sullivan, Economic Analysis: While Congress Dawdles, Trapped Foreign Profits Surge,
103 TAX NOTES 1587, 1587-90 (2004). In 2003, it was estimated that 237 of the 500
leading companies held $400 billion to $510 billion of unrepatriated foreign earnings
abroad. Almond & Sullivan, 103 TAX NOTES at 1587. The companies with the largest
pool of profits were Pfizer, ExxonMobil, General Electric, IBM, and Merck with $38
billion, $21 billion, $18 billion, and $18 billion respectively. Id. at 1588. Pursuant to
the current law, if these profits were distributed as dividends to the U.S. parent, the
corporations would pay a 35% tax rate (minus any foreign tax credits). Id. at 1587.
Incorporating this strategy into tax planning, companies such as Pfizer have grown their
accumulated profits from $3.9 billion in 1996 to $38 billion in 2003. Id. at 1591. This
is a clear indication that deferral maintains an increasing role in U.S. corporations’
business strategy and financial planning. See Martin A. Sullivan, Economic Analysis:
U.S. Drug Firms Move Profits to Save Billions, 43 TAX NOTES INT’L 539 (Aug. 14,
the significant increase in U.S. profits in countries that lowered their
corporate tax rate.14 For instance, Ireland’s effective tax rate remained
constant at a low 8% from 1999 to 2002, which is well below the U.S.’s
35% corporate tax, and consequently, Ireland’s pre-tax profits doubled
to over $26 billion in 2002.15 Moreover, when Denmark reduced its tax
rate from 23.9% to 7.6%, U.S. profits stored in Denmark subsequently
surged 200%.16 Additionally, Belgium dropped its tax rate from 26.6%
to 12.5%, and U.S. profits increased there by 84%.17 Lastly, when
Bermuda lowered its tax rate to 2% in 2002, its U.S. profits tripled
compared to three years prior. This placed Bermuda ahead of the United
Kingdom in pre-tax profits.18 Due to this trend, the IRS continues to
lose potential tax revenue.
Corporations defer profits overseas to avoid paying U.S. taxes.
Transfer pricing is an effective and common method for a U.S. company
to hold profits abroad. In short, transfer pricing is the technique by
which corporations move gains realized in a high-tax jurisdiction to a
foreign subsidiary in a low-tax jurisdiction.19 For example, Parent Corp.
buys widgets from International Subsidiary Ltd., which is incorporated
in a low-tax jurisdiction. Parent Corp. buys these widgets for a higher
price than the fair market value. Although International Subsidiary Ltd.
pays taxes in the jurisdiction where it is incorporated, the IRS cannot tax
International Subsidiary Ltd. until the profits are repatriated to the U.S.
By using transfer pricing strategies, Parent Corp. successfully shifts
profits to International Subsidiary Ltd., which is subject only to the
lower foreign tax rate.20
The problem of cost-sharing from the IRS’s standpoint is that it
deprives the U.S. Treasury of revenue. The IRS claims that it is unable
to effectively audit many transfer pricing strategies21 because
14. See Sullivan, Economic Analysis: Data Show Dramatic Shift of Profits to Tax
Havens, supra note 13, at 1190.
16. Id. at 1192.
19. Id. at 1190.
20. See Myron S. Scholes et al., TAXES AND BUSINESS STRATEGY: A PLANNING
APPROACH, 299-302 (3d ed. 2005).
21. See Gustafson, supra note 8, ¶ 8000, at 626-27.
arrangements like the deal between Parent Corp. and International
Subsidiary Ltd. remain a highly unregulated aspect of transfer pricing
under the current rules.22 To the IRS, this connotes a failure.
Consequently, the IRS proposed the 2005 regulations as an effort to
revamp cost-sharing rules.23 Congress and the IRS must therefore
decide whether taxes generated under the new proposals could hinder
U.S. corporate competitiveness.
B. The IRS’s Authority to Regulate Transfer Pricing and Cost-Sharing
With profits rising abroad, the IRS contends that the current transfer
pricing regulations fail to adequately police cost-sharing strategies. The
Internal Revenue Code (“IRC”) gives the IRS its authority to regulate
transfer pricing and cost-sharing agreements in § 482.24 Section 482
grants the IRS authority to transfer income, deductions, and other
taxable items between “controlled”25 taxpayers in order “to prevent
evasion of taxes” or “clearly to reflect income.”26 The Code of Federal
Regulation (“CFR”) stipulates that the purpose of § 482 is to place “a
controlled taxpayer on a tax parity with an uncontrolled taxpayer by
determining the true taxable income of the controlled taxpayer.”27 The
IRS applies the fair market value test, more commonly termed the
“arm’s length method” to determine if the transfer pricing transaction
satisfies the requirements of § 482.28 The CFR, in describing “arm’s
length,” provides that:
A controlled transaction meets the arm’s length standard if the
results of the transaction are consistent with the results that would
have been realized if uncontrolled taxpayers had engaged in the same
transaction under the same circumstances (arm’s length result).
However, because identical transactions can rarely be located,
whether a transaction produces an arm’s length result generally will
be determined by reference to the results of comparable transactions
under comparable circumstances.29
The IRS and U.S. corporations clash on how to value an “arm’s
length” transaction. Application of the “arm’s length” standard to
intangible property, such as intellectual property, presents particular
challenges because parties must find similar transactions with identical
properties under “comparable circumstances.”30 “Comparable
circumstances” rarely exist31 where corporations earn profits from
research and development, licensing, patents, or other common forms of
intellectual property.32 Moreover, when “referenc[ing] comparable
taxpayers not owned or controlled directly or indirectly by the same interests.
transactions under comparable circumstances,” multiple valuing
analyses of the intangible property could apply.33 To meet these
regulatory requirements, U.S. parent corporations enter cost-sharing
arrangements with their controlled foreign subsidiaries.
The fulcrum of conflict between corporate America and the IRS’s
concerns with regard to cost-sharing lies at the subsidiary’s “buy-in” of
the intangible property. Accordingly, the IRS focuses its attention here.
U.S. corporations enjoy significant tax benefits when they enter into
cost-sharing agreements with an overseas subsidiary. The deals
typically involve one participant that contributes the intellectual property
and the other party that pays for the use of such property.34 The party
purchasing the intangible property makes a “buy-in” for the value of the
current intellectual property at the time of formation of the cost-sharing
arrangement.35 The intangible property is generally valued low at the
inception of the cost-sharing arrangement because the intangible
property is not yet fully developed. This allows the overseas subsidiary
to make minimal “buy-in” payments for intangible property, from which
it could eventually reap high profits. Cost-sharing arrangements allow
the parties to allocate the costs and risks incurred in developing
intangible property according to the company’s expected benefit from
Techniques, 44 TAX NOTES INT’L 55 (2006). The article finds that the:
[t]ax authorities of industrialized countries are attaching increasing importance to
compliance with the arm’s length principle. In 1994 only one country had formal
transfer pricing documentation and penalty rules (the U.S.). By 2005 that number
grew to 32 countries and is expected to grow to over 40 in 2007. Consequently, more
and more countries adopt transfer pricing rules and more importantly, learn how to
enforce those rules.
Id. (citing Matheson Ormsby Prentice, Ireland: Minister Commits to Low Taxes, INT’L
TAX REV., Feb. 2006). Allocating a value to intangible property remains a difficult
process because there are very few comparable situations against which to measure.
See Treas. Reg. § 1.482-1(b)(1); Stanley I. Langbein, U.S. Transfer Pricing and the
Outsourcing Problem, 37 TAX NOTES INT’L 1065, 1068 (2005). The prior standard was
to look at whether the transaction would have occurred between two non-related parties.
See Langbein, 37 TAX NOTES INT’L at 1068-69. The “arm’s length method” has,
however, increased in popularity among other countries. See id. at 1090-92.
33. Gustafson, supra note 8, ¶ 12, 130, at 899-901.
34. Ken Wood, Proposed U.S. Cost-Sharing Regulations—Rules in Search of
Authority, 43 TAX NOTES INT’L 893 (2006); see Rickman, supra note 9, at 540
(“Grassley cited stories in The Wall Street Journal and The New York Times, which
reported that Microsoft Corp. saves as much as $500 million in taxes annually by
transferring intangible assets to subsidiaries in low-tax countries.”).
35. How Cost-Sharing Arrangements Work, Jan. 2006, http://www.rsmmcgladrey.
the property.36 Taxation is a cost. The minimization of the cost-sharing
“buy-in” price leaves the IRS unable to tax the transaction at its actual
value, lowering otherwise potential revenue. Consequently, much of the
IRS’s proposed cost-sharing regulations attempt to increase the initial
The IRS regulates cost-sharing “buy-in” strategies under the
umbrella of § 482.37 To be a “qualified cost-sharing arrangement,”38 the
parties to the agreement incur costs equal to their shares of reasonably
anticipated benefits.39 Furthermore, a corporation and its subsidiary
must value the intangible property so that it is “commensurate with its
income.”40 The “arm’s length” standard is the measure by which tax
courts determine whether the parties satisfied the provisions of § 482.
The IRS argues that § 482 is too weak and acts as a windfall for
cost-sharing participants.41 By allowing corporations to make minimal
“buy-in” payments, the IRS purports that corporations can easily
overcome the “arm’s length” standard.42 These shortcomings provided
the impetus for the IRS’s 2005 proposals to amend the tax code. As the
U.S. Tax Court decision in Xilinx, Inc. and Subsidiaries v.
Commissioner will elucidate, the IRS proposed overbearing and more
stringent requirements than actually imposed by the “arm’s length
method.”43 The next section will explain the IRS’s proposed
costsharing regulations and the issues posed by the Xilinx decision.
36. See Ackerman et al., supra note 2, at 1142.
37. Reams et al., supra note 5, at 273.
38. For purposes of this Note, a cost-sharing arrangement becomes “qualified”
once it meets the requirements of Treas. Reg. § 1.482-7.
39. Gustafson, supra note 8, ¶ 8165, at 665.
41. See Rickman, supra note 9, at 540.
43. 125 T.C. 37 (2005); see Joseph DiSciullo, NYSBA Comments on Mergers,
Transferor Stock Transactions, 113 TAX NOTES 317 (2006) (discussing the IRS’s future
changes that would dilute the previously proposed regulations).
III. THE IRS’S GO-GO-GADGET “ARM”44
The IRS’s 2005 proposals to revamp cost-sharing regulations
gained little traction in the tax courts.45 At the 2002 testimony to the
House Ways and Means Committee, Pamela Olson, the former Acting
Assistant Secretary for Tax Policy, explained the IRS’s concern
regarding cost-sharing agreements.46 She stated that many multinational
corporations avoid taxes by strategically maneuvering profits overseas to
subsidiaries.47 Although technically correct, neither she nor the IRS
addressed the reason corporations defer profits. In essence, the IRS’s
proposals treat the symptom rather than the cause of such corporate tax
Nonetheless, the IRS heeded Ms. Olson’s comments and focused its
regulatory efforts on ensuring that corporations do not “erode” the tax
base.48 Notwithstanding the fact that the IRS would tax more
costsharing profits, corporations criticize the proposed guidelines because
they diverge from the “arm’s length method” set forth in § 482.49 The
2005 proposals would use more analytical approaches to value
costsharing arrangements, apply specific methods to price intellectual
property that parent companies shift to subsidiaries, and transfer foreign
subsidiary profits back to the U.S. if a controlled foreign corporation
enjoys excessive returns.50 Consequently, the IRS intended for these
policies to deter corporations from forming cost-sharing arrangements.
A. Cost-Sharing Proposals Heighten Regulation and Complexity
In drafting proposals that extend beyond the “arm’s length”
standard, the IRS made one simple oversight: most corporations would
not form such arrangements under the proposed rules. The proposed
regulations would change the method by which corporations determine
the value of their cost-sharing arrangements.51 The IRS continues to
term a subsidiary’s initial purchase of intangible property as the
“buyin.”52 When a parent transfers an intangible property to the subsidiary,
the subsidiary would have to pay the parent for (1) the value of the
existing technology53 and (2) its potential monetary development.54
Accordingly, a party’s payment would account for both its worth at the
time of the purchase and the future profits from the intellectual
property.55 The IRS terms the combination of these two elements a
Preliminary or Contemporaneous Transaction (“PCT”).56 The PCT is
not an “arm’s length” transaction. Under the proposed regulations,
corporations would include future profits at the “buy-in” payment,
increasing the price for subsidiaries to enter into cost-sharing
arrangements.57 Although participants may correctly value the price of
intellectual property at the inception of a cost-sharing arrangement, it is
unrealistic to expect corporations to predict future profits from such
products at the outset. Accordingly, this is not the industry norm, and
this aspect of the proposed rules restricts corporations beyond the “arm’s
The IRS’s description of PCTs will affect the initial cost for
corporations to enter cost-sharing arrangements. The IRS terms the
“future development” of intellectual property the “external
51. Id. at 1098.
53. Herman P. Ayayo, Treasury Hicks Reviews Upcoming M&A Guidance, 44 TAX
NOTES INT’L 519 (Nov. 13, 2006). As stated above, this would be the “buy-in.” Id.; see
also Sheppard, infra note 61 and accompanying text.
54. See Sheppard, supra note 4.
55. See § 1.482-7. This is not required under the current regulations. Id.
56. See Sullivan, supra note 50, at 1099.
57. See Reams et al., supra note 5, at 270-72.
contribution.”58 The cost-sharing proposals would force corporations to
include all external contributions of intellectual property.59 This
language enjoys a broader range of revenue-generating potential than the
current rules for cost-sharing agreements because parties would continue
to pay for the development of the intellectual property after the
costsharing arrangement commences.60 The IRS contends that this will
deter minimal “buy-in” payments because parties would be required to
continuously pay for the increase in value of the intellectual property.
In effect, the proposed rules are tantamount to the imposition of
contract terms between a parent company and its subsidiary. When
entering into a cost-sharing arrangement, a foreign subsidiary would pay
a parent for the “exclusive, perpetual, and territorial rights” to use the
intangible property.61 Pursuant to the current cost-sharing regulations,
corporations may limit their rights to the product, which drives down the
“buy-in” price when entering a cost-sharing agreement. The 2005
proposed regulations attempt to deter corporations from forming
arrangements that place time and geographic limitations on an intangible
product, which justifies a minimal price for a “buy-in.” Accordingly,
the proposed regulations would increase “buy-in” prices, thereby
generating more taxes from “buy-in” payments.62 Moreover, the
proposed regulations would prevent the participants from amending
60. See Reams et al., supra note 5, at 272. “An external contribution is broadly
defined as a resource or capability developed, maintained, or acquired outside the CSA
that is reasonably anticipated to contribute to the development of the cost-shared
intangibles.” Id. This also means that “external contributions would include the
potential for value added contributions such as the future research capabilities of an
assembled scientific team.” Id.
61. See Prop. Reg. § 1.482-7(b)(3)(iv); see also Lee Sheppard, News Analysis: Is
Apportionment The Formula For Intangible Development?, 39 TAX NOTES INT’L 987,
989 (Sept. 12, 2005). This would be included as part of the PCT during the initial
“buyin” transaction. Id.
62. For example, a newly developed drug will maintain large research and
development expenses (including the brand value and the research and development)
for that drug, which will allow for more pharmaceutical developments in the future.
See Sheppard, supra note 61, at 989. Under the suggested regulations, subsidiary
corporations must pay for the existing technology and the further development of the
technology from the parent company (this also requires geographical constraints). Id.
This should include projected pharmaceutical discoveries and sales produced by the
research and development activities. See id. Accordingly, one buy-in payment for the
technology will not suffice for payment of future development. See id.
payments for external contributions after agreeing to the qualified
arrangement.63 The only party permitted to alter payments for external
contributions would be the IRS commissioner.64 This policy restricts
the freedom of parties to restructure a cost-sharing arrangement after its
inception. Many critics argue that this form of financial analysis holds
the participants hostage to the transaction and does not acknowledge the
realities of complex corporate agreements.65 Much like a minimum
wage, the IRS constructs an artificial bargaining position. Rather than
raising prices to benefit workers, it effectively raises prices to benefit the
Additionally, the proposals suggest a new method—the “investor
model”—to value a PCT.66 The investor model proposes that both CSA
participants make an aggregate investment composed of two parts: (1)
what an investor would pay to invest in such an arrangement, and (2)
what a parent would require given the external contributions leading to
the formation of the arrangement.67 The investor model therefore
requires parties to value the intellectual property based upon the
development costs and potential risks of the agreement. After
corporations enter an arrangement, the proposed rules permit only one
method of dividing profits between cost-sharing participants.68 To
properly value a cost-sharing arrangement under the proposed rules, the
IRS would use an ex ante test to determine the amount an investor
would pay at the beginning of the transaction for the perpetual rights to
use the property.69 In addition to the difficulty in valuing an initial
“buy-in,” the “investor model” is likely to cause more confusion and
63. See id.
65. See, e.g., Reams et al., supra note 5, at 271-72. The article explains how the
proposed regulations ignore corporate negotiations and amendments made to
transactions, which react to the economic markets. See id. at 271-73, 280. Both parties
bring in more than technology to the deal, such as “hard” assets. See id. at 273 n.23.
The transaction price should reflect the value brought by each party and this may
change over time. Id. at 280. Therefore, it is important that the arrangement can be
amended at the election of the parties, not the IRS. Id. The proposed regulations would
lock parties into transactions just to assure revenue growth. See id. This type of
activity will likely stifle productivity for multinational corporations. See id. at 285.
66. Reams, supra note 5, at 272.
67. Id. at 271-72
69. Id. at 271.
litigation when parties assess a price for the external contribution ex
ante. This is particularly true for risky technology companies that rely
upon intellectual property to remain competitive.
Furthermore, the would-be regulations are inconsistent with the
existing Treasury Department’s standard of review. In addition to
setting forth more stringent criteria for parties to satisfy the “arm’s
length” standard, the proposed “investor model” conflicts with Treasury
Regulation § 1.482-1(f)(2)(ii).70 The current rules state that the IRS will
analyze the transaction as structured by the participants.71 The only
requirement by the IRS is that the participants’ structure does not lack
economic substance grounded in sound business reasons.72 Conversely,
the 2005 proposals value the price pursuant to the “investor model” or
the IRS’s ex ante analysis.73 Therefore, parties that price cost-sharing
arrangements using sound business principals, but ultimately failed to
use the “investor model’s” methods, would find no solace in the 2005
proposals. Essentially, the IRS would force corporations to use the
“investor model” despite its rare application in industry practice.
B. The Tax Court Keeps the IRS at “Arm’s Length” In Xilinx, Inc. and Subsidiaries v. Commissioner of Internal
Revenue,74 the court addressed how stock-based compensation should be
valued in the context of a cost-sharing arrangement. On April 2, 1995,
Xilinx Inc., a software development company, entered into a
costsharing agreement with its Irish subsidiary.75 Xilinx’s parent company
employed more research and development employees than its Irish
subsidiary during the cost-sharing agreement.76 The employee benefits
plan gave the researchers and developers the ability to purchase
employee stock options with a five-year vesting period.77 The
employees could buy the options for 85% of the cost over a period of
two years.78 Xilinx granted the options “at-the-money.”79 The IRS and
Xilinx clashed over whether these stock options should be valued when
determining the price for the “buy-in” payment.80
The IRS claimed that Xilinx should have incorporated such
sharedcompensation into the arrangement. The IRS contended that Statement
of Financial Accounting Standards No. 123 required reporting
companies to price share-based compensation at current fair value and
spread that cost over the vesting period (termed fair method value) as an
expense on their income statement.81 Additionally, the International
Accounting Standards Board adopted this standard by “requir[ing]
recognition of an expense for the fair value of share-based
compensation.”82 During the years of the agreement, however,
Accounting Principles Board Opinion No. 25 (APB 25) only requested
companies to report the “intrinsic value” of share-based compensation.83
In regards to reporting the intrinsic value, Xilinx argued they were not
obliged to report the cost for these options because they were
“at-theoptions would be worth a higher value to the parent company during the “buy in”
because it had more employees.
77. See Xilinx, Inc., 125 T.C. at 42. Employee stock options are “offers to sell
stock at a stated price (i.e. exercising price)” for a designated period of time to
78. See id.
79. Id. When an option is granted, it may be “in-the-money,” “at-the-money,” or
“out-of-the money.” Richard A. Brealey & Stewart C. Myers, PRINCIPLES OF
CORPORATE FINANCE (7th Edition 2003). If the exercise price is below the stock market
price of the stock, then the stock option is “in-the-money.” Id. If the option is equal to
the price of the stock, then it is “at-the-money.” Id. However, if the exercise price is
above the price of the stock, then it is termed “out of the money.” Id.
80. See Xilinx, Inc., 125 T.C. at 42. If a tax administrator brought this case today,
Treasury Regulation Section 1.482-7(d) would apply, which dictates that corporations
must account for any stock-based compensation in a cost-sharing arrangement. See
C.F.R. § 1.482-7(d) (2006). The IRS, however, initiated their suit against Xilinx prior
to the promulgation of the 2003 regulations, which speaks directly to valuing stock
options for cost-sharing arrangements. Id.
81. Id. at 45.
83. See id. at 44. The intrinsic value is the difference between the purchase price
and the market price of the shares of stock. Id.
In October 1995, the Financial Accounting Standards Board
(“FASB”) established that employee stock options would be valued
using the “fair value method” as the “preferred method” of measuring
the stock options.85 The IRS claimed that although the fair value
method was difficult to apply, it provided more realistic values to stock
options than the “intrinsic value.”86 Despite sentiments from some
agencies directing corporations to use the fair value method, a majority
of companies in the industry elected to value the options based on their
“intrinsic value,” as permitted by the FASB.87
The IRS argued that cost-sharing arrangements require a
“hypothetical market transaction” to value costs, not the “arm’s length
method.”88 As stated in § 1.482-1(b)(1), an “arm’s length” transaction is
generally “determined by reference to the results of comparable
transactions.”89 The IRS purported that § 482’s settled standard did not
apply in the Xilinx case.90 Instead, the IRS asked the tax court to
develop a “hypothetical transaction,” rather than analyzing the “industry
practice.” The IRS further contended that the “comparable transaction”
should not apply because the instant case addressed a cost-sharing
arrangement.91 The IRS failed to convince the court to apply a different
standard than an “arm’s length.”
The tax court disagreed with the IRS, stating that the section in
totality requires a “comparable transaction” when no similar transactions
exist.92 The tax court dismissed the IRS’s argument because it
conflicted with § 482.93 The court instead applied the “arm’s length”
84. See id. at 46-47. Essentially, there was no difference between the purchase
price and the market price of shares. See id.
85. See id. at 45. For Xilinx’s stock option purposes, there were two parts used to
determine the value of a stock option: (1) the intrinsic value, and (2) the call premium,
which is the fiscal gain of the stock minus the intrinsic value. The call premium is
difficult to measure because “it cannot be valued daily based on market transactions”
(opposed to a publicly traded company’s stock because it is easily determinable on a
daily basis). Id.
87. Xilinx, Inc., 125 T.C. at 62.
88. Ayayo & Sheppard, supra note 4, at 404.
89. See C.F.R. § 1.482-1(b)(1).
90. Xilinx, Inc., 125 T.C. at 51.
93. Ayayo & Sheppard, supra note 4, at 38-41. The court held that pursuant to
test, and looked to “industry practice,” to determine whether unrelated
parties would in fact not share the spread or grant date.94 Xilinx’s
witnesses testified that the industry did not account for employee stock
options when forming cost-sharing arrangements.95 The tax court
agreed, finding that employee stock options were rarely included in
costsharing arrangements.96 Applying “industry practice,” the tax court held
that corporations could continue to use the investor valuation method.97
Hence, the taxpayers were found to have met the “arm’s length”
standard and to have complied with § 482.
Xilinx holds that cost-sharing arrangements will face the “arm’s
length” standard and be judged against “industry practices.”98 Neither
the PCT nor “investor model” reflect “industry practices” when parties
enter cost-sharing arrangements. Accordingly, the Xilinx decision is
proof that the 2005 proposals over-regulate cost-sharing parties where
the “arm’s length” standard remains the applicable test, and that the IRS
must therefore amend the proposed rules. More importantly, there is a
bigger lesson learned from the conflict between the IRS’s proposed
regulations and the Xilinx holdings.
It is unlikely that complex cost-sharing proposals, which merely
react to corporate tax strategies, will be successful under current
international tax policies. The IRS’s proposals ignore the more pertinent
question of why cost-sharing participants use tax-deferral strategies.
Congress and the IRS should address the reasons for strategic corporate
behavior and enact legislation that will enable U.S. corporations to lead
in a global market. The Xilinx opinion should discourage the IRS from
proposing policies that only place a band-aid on a festering wound.99
§ 482, cost-sharing arrangements should apply the “arm’s length method.” See Xilinx,
Inc., 125 T.C. at 51.
95. Xilinx, Inc., 125 T.C. at 43-45. Xilinx pressed upon the court a most
convincing argument explaining that the IRS failed to consider the actual culture of the
tax market. See id. at 54-59. The “hypothetical market transaction” was unnecessary
given there was testimony of actual industry practices. Id.
96. Id. at 46-49.
97. Id. at 49.
98. See id. at 56. Xilinx assures corporations that the IRS cannot dismantle the
“arm’s length” standard in light of “industry norms.” Id.
99. The IRS will likely change its 2005 cost-sharing proposals after the Xilinx
decision once the U.S. Ninth Circuit Court of Appeals rules on the U.S.’s appeal. See
Audrey Nutt, U.S. Government Files Appeal In Xilinx, 45 TAX NOTES INT’L 404 (Feb. 5,
Under the worldwide tax system, the IRS’s proposals do not reflect
“industry norms,” promote U.S. competition abroad, or give incentives
to bring profits home. The “industry practice” in the international
market is to play by the rules of a territorial tax system. It is time for
Congress to allow U.S. corporations to compete on a level playing field
with their international competitors.
IV. A TERRITORIAL TAX SYSTEM WOULD PROMOTE COMPETITION
The Xilinx decision illustrates that the IRS reacted incorrectly to
complex cost-sharing issues, which arise under a worldwide tax system.
The U.S. should instead adopt a territorial tax system,100 which will
neither promote deferral nor result in profits being transferred abroad.101
Congress has the opportunity to embrace a territorial tax system and
proactively resolve the cost-sharing and deferral issues that a worldwide
tax system causes.102
2007). It will probably defer on the “arm’s length” and exclusive territorial points. See
Audrey Nutt, ABA Tax Section Meeting: Tax Officials Comment on Transfer Pricing
Services Regs., 113 TAX NOTES 433 (Oct. 30, 2006) (discussing the possible IRS
strategies to change the 2005 cost-sharing proposals). The IRS has, however, stated its
intention to continue drafting more regulations. Unfortunately, there will likely be
more than two rounds in this bout. Id.
100. See Peter Mullins, Moving to Territoriality? Implications for the U.S. and the
Rest of the World, 43 TAX NOTES INT’L 839 (Sept. 4, 2006). This Note does not take a
stance on the specifics of the territorial tax systems recently proposed by the
Presidential Panel on Tax Reform. Although, either regime in accordance with a lower
corporate tax rate would evolve U.S. tax law to promote competition, and subsequent
IRS regulations aimed at further enforcing transfer pricing strategies would be
welcomed. Initiating restrictions under a tax system that already decreases competition
leads to bad policy and over taxation of U.S. multinational corporations.
101. But see Samuel Thompson, Federal Tax Reform and Reducing the Bush Deficit
by $800 Billion, Statements at Pennsylvania State University, State College, PA (Mar.
27, 2006) (adopting the view that a territorial tax system should not be implemented
because “the Office of Management and Budget estimates that the tax cost of our
current deferral system is $69 billion over the period 2007 through 2011.”). The
deferral argument provided by Mr. Thompson is actually the exact reason for adopting a
territorial tax system. Corporations will not have an incentive to defer profits once
Congress passes a territorial tax regime. Transfer pricing would still require
regulations, but the U.S. could enjoy the investments from repatriated profits. Again, if
the concern for Congress is tax revenue, then Congress would not have passed the
Repatriation Act in the American Jobs Creation Act of 2004.
102. Although Congress should develop a territorial tax regime, many issues must
be addressed before the passage of a new tax system. These include, but are not limited
Regulations that merely seek to redress narrow tax haven issues
overlook the fundamental problems posed by a worldwide tax system.
Under the current tax regime, U.S. multinationals will freely form
costsharing arrangements that meet the “arm’s length” standard and proceed
to defer the profits – that is until Congress grants a repatriation holiday.
Congress should implement a territorial tax system with the
understanding that globalization, not tax revenue, should drive the
U.S.’s international tax policies.103
Under a territorial tax system, corporations would not be subject to
a U.S. tax on business income earned in foreign countries.104 Critics
contend that a territorial tax system will not resolve the current
costto the corporate tax rate, transfer pricing regulations post implementation of a territorial
tax regime, tax exemptions, passive-income, etc.
103. Hearing on the Impact of International Tax Reform on U.S. Competitiveness
Before the Subcomm. on Select Revenue Measures of the H. Comm. on Ways and
Means, 109th Cong. (2006) (statement of Kenneth Petrini, Chairman of the Tax
Council). Mr. Petrini stated that:
[i]nternational tax policy cannot be based on misplaced concerns of those who believe
that investment by U.S. firms in foreign locations substitutes for investments in the
United States. The decision is not to ‘invest here or there.’ In today’s global
economy, it is increasingly a question whether U.S. companies will invest in growing
markets around the world or cede that investment to foreign competition. The
question is not investment in U.S. or foreign markets but rather investment and
growth by U.S. or foreign companies. The U.S. economic health is not improved by
foreign investment in foreign markets.
104. See Hearing on the Impact of International Tax Reform on U.S.
Competitiveness Before the Subcomm. on Select Revenue Measures of the H. Comm. on
Ways and Means, 109th Cong. (2006) (statement of Matt McKenna, Senior Vice
President of Finance for PepsiCo, Inc.) (“The global success of U.S. businesses
provides real benefits in terms of economic growth and jobs in the United States.
Congress must ensure that policies are in place to allow U.S. businesses to make the
most of the tremendous opportunities that globalization and technological advances
provide.”); see Hearing on the Impact of International Tax Reform on U.S.
Competitiveness Before the Subcomm. on Select Revenue Measures of the H. Comm. on
Ways and Means, 109th Cong. (2006) (statement of Citigroup, Inc.). As described by
Citigroup, Inc., the U.S. will enhance its competitive ability in international markets by:
[m]oving the U.S. tax system to a territorial regime [which] could improve the
competitiveness of U.S.-based financial services companies operating globally.
However, adoption of a territorial tax system by the United States will only enhance
the competitiveness of U.S. companies if it is constructed in a fair and effective
manner. Further, concurrent with any adoption of a territorial system must be a
reduction of the U.S. corporate tax rate.
sharing issues because it would encourage parties to continue transfering
profits overseas and evade paying a U.S. tax completely, causing the
U.S. to lose even more tax revenue. This argument ignores the fact that
cost-sharing participants would still be subject to the “arm’s length”
standard of § 482. Courts will continue to require that cost-sharing
arrangements meet the industry norm. More importantly, corporations
would not have an incentive to defer profits abroad because the IRS
could not tax repatriated dividends that companies earned outside the
U.S.105 Under the current regime, cost-sharing arrangements and other
transfer pricing strategies damage the U.S. economy because profits
rarely come home. The failure of the worldwide tax system to generate
its expected tax revenue from U.S. multinational corporations should not
be further compounded by policies that encourage corporate profits to
Moreover, the lost tax revenue argument is futile in light of the
American Jobs Creation Act of 2004. This legislation illustrated that
Congress is more concerned with repatriating the profits than fattening
the Treasury’s wallet. Once critics accept that both regimes fail to
adequately tax profits earned abroad, it makes sense to focus on policies
that remove the deferral barrier. A territorial tax system limits deferral
strategies and encourages U.S. corporations to spend foreign profits
back in the U.S. since the repatriated profits would no longer be subject
to U.S. taxes. This gives corporations the opportunity to invest in U.S.
jobs, production plants, advertisement, marketing, human capital, and
products. Conversely, under the current regime, corporations invest
overseas to prevent the IRS from taxing their profits.
The IRS’s attempts to heighten regulations under the current
worldwide tax system hinders U.S. corporations’ ability to enter and
105. See Hearing on the Impact of International Tax Reform on U.S.
Competitiveness Before the Subcomm. on Select Revenue Measures of the H. Comm. on
Ways and Means, 109th Cong. (2006) (statement of Paul W. Oosterhuis, Partner,
Skadden Arps Slate Meagher & Flom, LLP). Explaining the dilemma posed by
deferral, Mr. Oosterhuis stated that:
[i]n large part in response to the build-up of earnings resulting from the check-the-box
and other deferral planning, over the past couple of years increased the interest has
been given to proposals to move to a territorial system. By permitting tax-free
repatriation of earnings that benefit from deferral today, a territorial system would
eliminate the distortions that result from the requirement under deferral that offshore
earnings remain offshore, and invested in foreign assets, in order to avoid U.S. tax.
maintain a place in growing international markets. Accordingly,
Congress should enact a tax regime that accounts for globalization and
U.S. corporate competition abroad. As stated by Matt McKenna, Senior
Vice-President of Finance for PepsiCo., Inc., to the House Ways and
Means Committee, “Congress has an opportunity to develop a system to
sustain our competitiveness and growth for the generations to come.”106
The current tax system places U.S. corporations at a disadvantage
compared to foreign companies that are subject to lower tax rates.107
U.S. tax policy should promote “competitiveness,” and if nothing else,
prevent tax regulations from debilitating U.S. companies that compete
internationally. The worldwide tax system undermines policies that
support the U.S. economy. To begin, it places U.S. companies at a
competitive disadvantage (versus their foreign competition). Under a
worldwide tax system, “U.S. companies are generally taxed at the higher
of the source country or U.S. tax rate.”108 Moreover, these U.S.
corporations often face double taxation, resulting in an incredibly high
tax rate. Under a territorial tax system, corporations rightfully pay only
one tax from the country where it gained the source of income. Less tax
amounts to more investment, both domestic and foreign.
In addition, opponents to a territorial tax system wrongly criticize
corporate tax structures that permit U.S. corporations to invest abroad.
A territorial tax system will enable corporations to organize abroad, gain
profits, and dividend such gains back to the U.S. Due to globalization,
corporations must seek emerging markets and continue investing in
foreign projects.109 The current tax system limits corporate investment
in the U.S. and forces corporations to implement unnecessary tax
strategies to evade the IRS. The U.S. will ultimately reap the benefits
from tax policies that promote the most competitive international
business model possible. The current regime cuts against this
In conclusion, it is time for Congress to pave a new road for U.S.
companies and implement a territorial tax system that promotes
competitiveness rather than deferral. The IRS’s proposed cost-sharing
regulations ignored the cause of the transfer pricing dilemma. Unless
Congress makes a concerted effort to reform the current system and pass
legislation that reflects the global market, taxpayers will continue to
fund the IRS’s reactionary research projects that fail to produce realistic
strategies. Fortunately, the proposed regulations remain mere
suggestions, and in the wake of the President’s Panel on Federal Tax
Reform, a territorial tax system is one-step closer to becoming a reality.
22. See id., ¶ 8096 ( stating that “[t]he OECD cite[s] technological progress as one of the reasons for the rise of the multinational enterprise in the global economy over the past twenty years .”).
23. See Transfer Pricing: First Half of 1997 Adds $92 Million to Allocations Challenged in Courts, 131 Daily Tax Rep. (BNA) G-4, at d11 (July 9, 1997 ) (discussing that in 1997 over 127 court cases disputed an estimated $2.7 billion) .
24. Martin Przysuski et al., Management Fees and Other Intra-Group Service Charges: The Pandora's Box of Transfer Pricing, 34 TAX NOTES INT'L 367 , 372 (Apr. 26, 2004 ). The Internal Revenue Code may be referenced as title 26 of the United States Code (“USC” ). I.R.C. § 482 ( 2006 ) states that: [i]n any case of two or more organizations, trades, or businesses (whether or not incorporated, whether or not organized in the United States, and whether or not affiliated) owned or controlled directly or indirectly by the same interests, the Secretary may distribute, apportion, or allocate gross income, deductions, credits, or allowances between or among such organizations, trades, or businesses, if he determines that such distribution, apportionment, or allocation is necessary in order to prevent evasion of taxes or clearly to reflect the income of any of such organizations, trades, or businesses. In the case of any transfer (or license) of intangible property (within the meaning of section 936(h)(3)(b)), the income with respect to such transfer or license shall be commensurate with the income attributable to the intangible . Id.; see Treas. Reg. § 1 . 482 -1 (a)(1) (as amended in 2003) (stating that “[t]he purpose of Section 482 is to ensure that taxpayers clearly reflect income attributable to controlled transactions, and to prevent the avoidance of taxes with respect to such transactions”).
25. See Treas . Reg. § 1 . 482 - 1(i)(5). It provides that a: [c]ontrolled taxpayer means any one of two or more taxpayers owned or controlled directly or indirectly by the same interests, and includes the taxpayer that owns or controls the other taxpayers. Uncontrolled taxpayer means any one of two or more
44. Prop . Treas. Reg. § 1 . 482 - 7 , 70 Fed. Reg. 51 , 116 (Aug. 29, 2005 ). “Go-Go Gadget” refers to the children's' cartoon show, “Inspector Gadget,” about a bumbling, absent-minded detective with arms and legs loaded with mechanical springs. When Inspector Gadget commanded, “Go-Go-Gadget Arms,” for example, his arms would expand beyond normal human capabilities and thus hinder his ability to solve mysteries.
45. See id. Also, the proposals fail to address the issues that promote transfer pricing techniques, globalization, and the worldwide tax system . Id.
46. Reams et al., supra note 5 , at 270.
47. Id . (discussing the IRS's three purposes in drafting new regulations: (1) “buyins” (see infra regarding buy-ins) are valued too low under the current regulations; (2) unrelated parties do not enter CSA's with the same “form and substance” as related parties; and (3) taxpayers advantage of weighing cost-sharing arrangements made ex ante under an ex post scheme).
48. Id . The American Jobs Creation Act of 2004 effectively permitted U.S. corporations to avoid paying taxes . American Jobs Creation Act of 2004 , Pub. L. No. 108 - 357 , 118 Stat. 1418 ( 2004 ). If the concern remains with “eroding” the tax base, then Congress should address such legislation . Id.
49. Reams et al., supra note 5 , at 270-71.
50. Martin A. Sullivan , Economics Analysis: Proposed IRS Rules Would Close Cost-Sharing Loophole , 108 TAX NOTES TODAY 1098, 1099 (Sept. 5 , 2005 ).
70. See Cornelius C. Shields , Proposed Regulations for U.S. Cost-Sharing Arrangements Not Enforceable, 40 TAX NOTES INT'L 33 (Oct. 3 , 2005 ).
71. Id .
72. Id .
73. See Langbein, supra note 32.
74. 125 T.C. 37 ( 2005 ).
75. See id. at 41 . The agreement stated that any technology created by either party would be jointly owned . Id. at 39 . The parties contracted to pay for any research and development based upon projected profits . Id . Every year thereafter, the parties agreed to “review [the agreement], and when appropriate, adjust such percentages .” Id. at 39- 40.
76. See generally Ayayo & Sheppard, supra note 4, at 989 (explaining that the parent company maintained between 338 and 394 research and development employees. Xilinx's Irish subsidiary employed between 6 and 16 researchers .). Id. The stock 106 . See Hearing on the Impact of International Tax Reform on U.S. Competitiveness Before the Subcomm. on Select Revenue Measures of the H . Comm. on Ways and Means, 109th Cong . ( 2006 ) (statement of Matt McKenna, Senior Vice President of Finance for PepsiCo, Inc .).
107. Id .
108. Id .
109. See id. “[I] t is a plain and simple fact that in order for U.S. companies to remain healthy, and even viable, they must compete with their foreign competitors and invest in the growing and emerging markets around the world .” Id.