Altera, the Armms Length Standard, and Customary International Tax Law

Abstract

The recent Altera case in the US Tax Court (on appeal to the Ninth Circuit) raises interesting issues in regard to the much-debated topic of whether customary international tax law (CITL) exists. Altera involved the question whether the cost of employee stock options should be included in the pool of cost that must be shared under a cost sharing agreement. In Xilinx, the Ninth Circuit held under a previous version of the regulations that these costs should not be included because unrelated parties operating at arm’s length would not have agreed to include them. Treasury then amended the regulation to state specifically that “all” costs includes the cost of stock options, but did not carve out an exception from the arm’s length standard. In Altera, the Tax Court sitting en banc invalidated the new regulation on the ground that it was inconsistent with the arm’s length standard (ALS). This paper discusses the implications of Altera for the long-running debate about whether CITL exists and whether it is binding on the United States.