The transfer pricing case analyzed the transfer pricing issue of locating operations and intangible assets in Medtronic, Inc.’s subsidiary in Puerto Rico.
Medtronic, Inc.’s view, on the one hand, was that, because its Puerto Rico subsidiary bears manufacturing / quality risk, such risk is significant and costly, etc.; a significant portion of its overall profit belongs properly allocated to Puerto Rico. The Tax Court agreed with Medtronic’s approach and rejected what the IRS had determined would be appropriate in order to allocate less profit to Puerto Rico.
The IRS, on the other hand, viewed this as a typical case of a multinational enterprise aiming to erode its tax base by allocating too much profit to a jurisdiction with a low tax rate. The Eighth Circuit Court of Appeals noted that the Tax Court failed to apply all of the required tests for inter-company transfer pricing and concluded that the lower court must reconsider.
The IRS Commissioner claimed that the Tax Court made a mistake in not properly applying the Comparable Uncontrolled Transaction Method (or “CUT,” a transfer pricing method that is sometimes used for royalty rates) when calculating the arm’s length royalty rates for Medtronic’s licenses.
The Tax Court’s order was vacated and the case was remanded for further review by the Tax Court.