U.S. Tax Court Applies Unspecified Method in Medtronic Transfer Pricing Dispute

August 2022

The U.S. Tax Court ruled on a transfer pricing dispute between Medtronic and the IRS regarding the appropriate method to determine the arm’s length royalty rate for intra-group licensing of intellectual property. The IRS had applied a modified Comparable Profits Method (CPM), allocating 90% of device and lead profits to the U.S. parent, while Medtronic had relied on the Comparable Uncontrolled Transaction (CUT) method.

Following a remand from the Court of Appeals, which found the Tax Court’s initial factual findings insufficient, a retrial was held. The Tax Court concluded that Medtronic’s CUT-based allocation did not satisfy the arm’s length standard and instead adopted a three-step unspecified method, incorporating elements of CUT, CPM, and a residual profit split based on the Siemens Pacesetter agreement.

The Court generated a modified CUT profit for Medtronic US, a modified CPM profit for Puerto Rico, and split the residual 80/20 in favor of Medtronic US, ultimately allocating 68.72% of total profits to the U.S. and 31.28% to Puerto Rico. This approach produced a wholesale royalty rate of 48.8%, rejecting both the IRS’s and Medtronic’s original proposals.

Full Link to English Translation: IRS appeals Tax Court's latest decision in Medtronic