USA Transfer Pricing Case Law: Medtronic v. Commissioner, T.C. Memo. 2016-11

By Robert Robillard - 16 June 2016

This blogpost originally appeared on

In Medtronic v. Commissioner, T.C. Memo. 2016-112, available here, the Court summarizes the main issues as follow:

“(1) whether income related to intercompany licenses for the intangible property required to manufacture medical device pulse generators (devices) and physical therapy delivery devices (leads) should be reallocated under section 482 to Medtronic US from its Puerto Rican subsidiary, Medtronic Puerto Rico Operations Co. (MPROC), for tax years 2005 and 2006 (devices and leads transfer pricing issue) […]”

“(2) whether Medtronic 1 Europe, S.a.r.L. (Medtronic Europe) made arm’s-length payments to Medtronic US or accrued royalties in excess of arm’s length to manufacture devices sold to Medtronic USA, Inc. (Med USA), pursuant to a supply agreement effective as of May 1, 2002, among Medtronic US, MPROC, and Medtronic Europe (Swiss supply agreement issue) [..]”

The Court indicated:

“Respondent [the IRS] took an all-or-nothing approach by advocating a result based on the CPM using value chain method and by refusing to suggest adjustments to petitioner’s CUT method for the devices and leads licenses. Respondent consistently criticized petitioner’s transfer pricing method and contended that respondent’s method was the best.”

Drawing upon Medtronic’s CUT approach and its thorough functional analysis, the Court arrives at a 44% royalty rate.

The Court also indicated:

“Respondent [the IRS] only concluded that the intangible property transactions were not arm’s length. We do not think it is necessary to revise all four transactions to reach an arm’s-length result when only one of the four transactions is not arm’s length. We do not agree with respondent that his approach is the best method and that adjustments could not be made to the one troubling area of petitioner’s methodology–the royalty rates for the licensing of intangibles for devices and leads. We conclude that appropriate adjustments should be made to petitioner’s CUT.”

The methodological approach adopted by the Court should not be confused with a preference for the transaction-by-transaction methodology of the pre-BEPS OECD TP Guidelines (as we have seen suggested elsewhere).

In fact, more than ever, in the BEPS era, the value chain must be thoroughly analyzed and documented to ensure that every entity is indeed rewarded at arm’s length and that each of the component as well as the whole do indeed result in arm’s length arrangements, that is, to minimize tax litigation and the potential for double taxation.

Medtronic v. Commissioner, T.C. Memo. 2016-112

The library on Transfer Pricing in the United States is available here.

Robert Robillard, Ph.D., CPA, CGA, Adm.A., MBA, M.Sc. Econ., M.A.P.
Senior Partner, RBRT Inc.
514-742-8086; robertrobillard “at”

The convergence of RBRT’s tax, accounting and economics expertise makes a difference. The information in this blog post is general information only. Data and information come from sources believed to be reliable but complete accuracy cannot be guaranteed. RBRT Inc. or the author are not responsible or liable for any error, omission or inaccuracy in such information. The opinions expressed in this blogpost are those of the author. Readers should seek advice and counsel from RBRT Inc. as required.