The document addresses all the points made by the IRS and stresses the need for a rehearing.

The IRS based its argument to deny a rehearing on three main points.

First, that “rehearing on the basis of “exceptional importance” – the only ground proffered by Xilinx – is not warranted.” The IRS cited case law to say that exceptional importance is not a sufficient basis for rehearing; rather, it must be accompanied by the need to correct an erroneous judgment.

In response to this, Xilinx states that “these tortured efforts to deny the importance of this case only underscore the need for rehearing.”

The court papers go on to explain how the company believes there is a fundamental error of law at stake; stating that every judge on the panel in the Tax Court rejected the position that the sharing of employee stock option costs is the arm’s-length result.

Second, the IRS argued that “in any event, Xilinx’s claim of “exceptional importance” is wholly undermined by the subsequent changes to the QCSA [qualified cost-sharing arrangement] regulation and the overall regulatory scheme.”  This relates to the significant changes to the regulatory regime. The court papers state “the panel majority’s validation of a former regulation that, in the panel’s view, did not produce an arm’s length result as described in former Treas. Reg. § 1.482-1(b) – the aspect of the decision that forms the basis of Xilinx’s petition for rehearing – has no continuing significance.”

Xilinx states that the “IRS has no statutory authority to adopt regulations that depart from an ordinary understanding of the arm’s-length standard. The 2003 amendments are then unenforceable to the extent they would produce non-arm’s-length results.”

The final arm of the government’s rebuttal is “this case is not the proper forum for addressing whether the United States and Ireland – or any other US treaty partner – have a common understanding of the arm’s-length principles contained in tax treaties.” In the Xilinx petition for rehearing there was a damning letter from the Irish government, which the IRS claims has no place being addressed in this case.

Xilinx lays out some important points in response to this argument.

“The fact that the entire international tax treaty system requires use of the arm’s-length standard by all signatory countries is highly relevant to the proper interpretation of US law,” states the document.

“Furthermore, the panel majority’s erroneous interpretation of domestic law to permit departures from the international standard is especially significant because of the effect it will have on the proper operation of the treaty system. A transfer pricing standard must be applied reciprocally or it will not work at all.”

It remains to be seen whether the US Court of Appeals for the Ninth Circuit will grant a rehearing.

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