Cisco's Cost Sharing Arrangement-Frankenstein Poker

This paper performs a forensic analysis of Cisco’s transfer pricing cost sharing arrangement based on forensic economic analysis of public information, including Cisco’s SEC and foreign country regulatory filings, published materials containing insider accounts of Cisco’s operations, books, periodicals and other sources. The paper finds that Cisco appears to have violated U.S. transfer pricing laws in 2009 and later years, in ways that appear to have invalidated its cost sharing arrangement but which were not detected by the IRS. These tax violations appear to have led to the potential for tax assessments by the IRS of as much as $21 billion. The company's reserves for Uncertain Tax Positions were $3.1 billion as of July 31, 2021 – reserves that are about 86% less than this tax adjustment risk. The ability of the IRS to apply periodic adjustments is not limited by any statute of limitations. Cisco’s cost sharing arrangement also appeared to violate the economic substance doctrine, and regulations governing the taxation of effectively connected income. The IRS has historically not enforced the periodic adjustment regulations of the U.S. tax code, despite these regulations being mandated by Congress in the Tax Reform Act of 1986 and made effective in Treasury Regulation Section 1.482-7(i)(6) on January 5, 2009. Companies such as Cisco with “preexisting” cost sharing arrangements were subject to a transition rule under Treasury Regulation Section 1.482-7(m)(1) that could waive this adjustment, but the company appears to have failed to comply with these rules, triggering exposure to the indicated periodic adjustment