FROM THE OFFICE OF PUBLIC AFFAIRS

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Today, the Treasury Department and the IRS issued final regulations on the tax treatment of stock-based compensation under the related party transfer pricing rules governing qualified cost sharing arrangements.

"It is critically important to ensure that related party transactions, particularly transactions involving cross-border transfers of valuable intangible assets, are treated appropriately for tax purposes," stated Treasury Assistant Secretary for Tax Policy Pamela Olson. "These final regulations represent a step in ensuring that the rules governing qualified cost sharing arrangements for the joint development of intangible assets reach results that are consistent with the arm’s length standard of the transfer pricing rules and cannot be used to facilitate the migration of intangibles outside the United States for less than arm’s length compensation. The Treasury Department is continuing to evaluate further regulatory steps that may be needed in this area."

In order for an arrangement to be considered a qualified cost sharing arrangement, the participants in the arrangement must share all costs related to the development of intangibles in the same proportion as they share the reasonably anticipated benefits attributable to the intangible development. The final regulations generally follow the proposed regulations that were published on July 29, 2002. As under the proposed regulations, the final regulations clarify that stock-based compensation, like other compensation, is taken into account in determining the costs of a participant.

The regulations also provide rules for measuring the cost associated with stock-based compensation, generally allowing taxpayers a choice of measuring the cost based on the stock price at the date of exercise or the "fair value", as noted in financial statements, at the date of grant. In response to comments on the proposed regulations, the availability of the fair value method of measurement has been expanded in the final regulations.

The text of the final regulations is attached.

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Related Documents:

• final regulations text