THE severely criticized investor model approach to the taxation of cost sharing arrangements has got the approval of the IRS. The final regulation that was released, spells bad news for businesses that have R&D hubs in the US. According to the regulations, if a company in the US intends to perform R&D in the US and then move an intangible offshore it can do so only according to the guidelines of the regulation. Every move that is made by the company to move the intangible off shore should conform to the arm length standard. Taxpayers have not welcomed this fundamental approach of the investor model.

The regulations enable the IRS to construct income streams under different alternatives and then determine the discount rate to apply to them using their formulae. Objections have also been raised on the periodic trigger rule which if tripped would need the transfer pricing to be adjusted. In such scenario the foreign cost sharing participant is only entitled to a small return of its functions which does not provide sufficient compensation to the foreign subsidiary for the risk incurred. Businesses may also suffer because of the retroactive adjustments rule which means taxpayers can no longer make catch up payments if the actual cost sharing ratio does not match that projected in previous years.