IN a case closely watched around the world, for its transfer pricing implications, the US Internal Revenue Service (IRS) has chosen not to appeal against the Tax Court’s verdict in the Veritas Software case, even though it has expressed dissent with the legal reasoning of the court in this decision.

The deadline for the IRS appeal passed on November 8th whereby the IRS by not initiating any action seemed to have given up its claim involving an increased tax burden of USD 2.5 billion for Veritas including back taxes, penalties and interest.

The IRS however issued a six page, "Action on Decision" stating that the tax court's “factual findings and legal assertions were erroneous.”

In the Veritas case, involving the valuation of cost sharing agreements, the company had used the comparable uncontrolled transaction method for pricing the licensing of intangible property to a wholly owned offshore affiliate in Ireland, which paid Veritas US $118 million. The income was duly reported in its federal tax returns. The agreement included a feature in which the royalty declined over time. Subsequently, Veritas Software was acquired by Symantec Corp. in 2005.

The IRS later audited the company and opposed the use of this pricing method, claiming that the transaction was like a business transfer, which should have been valued as a continuing business using the income method, whereby the company owed the IRS more than US $1 billion as taxes, penalties and interest.

Symantec took the case to the US Tax Court in December 2009 where the Court rejected the IRS claim, holding that the issue was comparable to establish the arm’s length range of royalties for the intangible property and the company owed the IRS nothing for the relevant period.

This case is expected to become a landmark multinational transfer pricing precedent against the IRS.