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Biopharm Group Focuses on R&D Issues in FTC Regs

FEB. 5, 2019

Biopharm Group Focuses on R&D Issues in FTC Regs

DATED FEB. 5, 2019
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February 5, 2019

Honorable Charles P. Rettig
Commissioner
Internal Revenue Service
1111 Constitution Avenue, NW
Washington, DC 20044

Re: REG-105600-18 — Proposed Foreign Tax Credit Regulations

Dear Commissioner Rettig:

The Alliance for Biopharmaceutical Competitiveness and Innovation1 (“ABCI”) appreciates that the preamble to the proposed foreign tax credit (“FTC”) regulations invites comments on how U.S. companies should allocate research and development (“R&D”) expenses for FTC purposes.

ABCI is a coalition of leading U.S.-based biopharmaceutical companies who support tax policy that fosters U.S. innovation, investment, and job creation, which is a cornerstone principle of the Tax Cuts and Jobs Act (“TCJA”). As demonstrated by ABCI's members collectively spending over $50 billion performing R&D in 2018, innovation is the lifeblood of the biopharmaceutical sector.

We appreciate TCJA's preservation of the R&D tax credit for U.S. research. To help maintain the United States as a leader in research, it is vital that all forthcoming guidance affecting U.S. R&D incentivize and not discourage the performance of R&D activities in the United States. To this end, we respectfully request that you consider adopting the attached R&D expense allocation comments. We believe that these comments will both encourage R&D activities in the United States and match the expenses with the income to which they relate.

We applaud the impressive efforts of Treasury and IRS staffs in issuing TCJA guidance in a timely and comprehensive manner. We appreciate your consideration of these comments and would welcome the opportunity to further discuss them.

Respectfully submitted,

Gregory S. Nickerson
Washington Tax & Public Policy Group
Washington, DC

cc:
David J. Kautter
Assistant Secretary (Tax Policy)
Department of the Treasury

Lafayette "Chip" G. Harter III
Deputy Assistant Secretary (International Tax Affairs)
Department of the Treasury

Douglas L. Poms
International Tax Counsel
Department of the Treasury

Lindsay Kitzinger
Attorney-Advisor, Office of International Tax Counsel
Department of the Treasury

Brett York
Attorney-Advisor, Office of Tax Legislative Counsel
Department of the Treasury

Marjorie A. Rollinson
Associate Chief Counsel (International)
Internal Revenue Service

Barbara Felker
Branch Chief, Office of Associate Chief Counsel (International)
Internal Revenue Service

Jeffery L. Parry
Attorney-Advisor, Office of Associate Chief Counsel (International)
Internal Revenue Service

Larry R. Pounders
Attorney-Advisor, Office of Associate Chief Counsel (International)
Internal Revenue Service


R&D Expense Allocation and Apportionment Proposal

1. Direct Allocation and Apportionment to Contract Research Agreements

(a) Modify existing regulations to allow an amount of R&D expenses equal to the cost portion of R&D services funded under contract research agreements (e.g., under which a foreign affiliate funds a portion of group R&D costs) to be directly allocated to those contract research agreements. Expenses allocated to these agreements would be apportioned to the U.S. residual basket where the funded R&D is conducted in the United States or through a U.S. affiliate.

2. Sales Method

(a) Exclusive Apportionment

(i) Under existing regulations, exclusive apportionment for the sales method would continue to be 50% of R&D expenses.

(b) Sales Method Apportionment

(i) Modify existing regulations such that the sales method would only apportion R&D to the U.S. residual basket and the general statutory basket groupings and would not apportion R&D expenses to the GILTI statutory basket.

3. Gross Income Method

(a) Exclusive Apportionment

(i) Modify existing regulations to increase exclusive apportionment for the gross income method from 25% to 50% of R&D expenses.

(b) Gross Income Method Apportionment

(i) Under proposed regulations, the gross income method would apportion expenses to all three baskets: the U.S. residual basket (from earnings from sales by U.S. affiliates), the general statutory basket (from royalties), and the GILTI statutory basket (from earnings from CFC sales).

(ii) For apportionment purposes, gross income in the GILTI statutory basket grouping and gross income in the residual basket grouping would receive a hair-cut to the extent of the Section 250 deduction for GILTI and FDII, respectively.

(1) Thus, the apportionment fraction for the general statutory basket would essentially be royalties divided by total gross income less the total Section 250 deductions and the fraction for the GILTI statutory basket would essentially be any GILTI inclusion less the Section 250 deduction attributed to that inclusion divided by total gross income less the total Section 250 deductions.

(iii) Removal of the Floor/Ceiling for the Gross Income Method

(1) Modify existing regulations to remove the Floor/Ceiling under the gross income method, which effectively prevents the gross income method from resulting in less than fifty percent of the R&D expense apportioned to any basket than would be apportioned to that basket under the sales method.

(iv) Treatment of Cost Sharing Under the Gross Income Method

(1) In order to mirror the treatment of cost sharing arrangements for the sales method, modify existing regulations to provide that where a corporation is controlled by the taxpayer, and has a cost sharing arrangement with the taxpayer, no R&D expense would be allocated and apportioned to the gross income of that corporation related to cost-shared R&D.

4. Election

(a) Modify existing regulations to allow taxpayers to make the election annually between the sales and gross income methods.

FOOTNOTES

1 ABCI consists of nine U.S.-headquartered companies — AbbVie, Amgen, Baxter International, Celgene, Eli Lilly and Company, Gilead, Johnson & Johnson, Merck and Pfizer.

END FOOTNOTES

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