US Tax Court favors unspecified method to determine royalty rate

The first US transfer pricing court decision of 2022 was published on Thursday, August 18, 2022, specifically Medtronic, Inc. and Consolidated Subsidiaries v. Commissioner of Internal Revenue.¹ At issue was the allocation of 2005-2006 system profit between the US parent company, Medtronic Inc. (Medtronic US), the developer of intangibles (IP) relating to Class III cardio and neuro medical devices, and an offshore manufacturing affiliate, Medtronic Puerto Rico Operations Co. (MPROC). Chief Judge Kathleen Kerrigan’s judgment in Medtronic 2022 ultimately allocated approximately 70% of system profit to Medtronic US and 30% to MPROC by applying a three-step unspecified method which results in an increase in the royalty rate owed to Medtronic US. While IRS examiners, taxpayers, and practitioners look to court cases for precedent, the main take away from this ruling is that transfer pricing outcomes are very specific to facts and circumstances.