To what extent should costs relating to operations, brand recognition, and R&D be included in transfer pricing calculations?
One of the most difficult and controversial calculations in a transfer pricing analysis can be the attribution of "indirect costs" to a transaction. To the extent that a U.S. parent company has conducted research and development on a product or has invested in advertising to build the product's acceptance and recognition, those costs may be applicable to a transfer pricing analysis. These considerations are particularly relevant to the transfer pricing of intangible property, which is often developed in cooperation between related parties across national borders.
The official definition of indirect costs as it apply in the United States can be found in Section 482-2 of the transfer pricing regulations:
(iii) Indirect costs or deductions are those which are not
specifically identified with a particular activity or service but which
relate to the direct costs referred to in paragraph (b)(4)(ii) of this
section. Indirect costs or deductions generally include costs or
deductions with respect to utilities, occupancy, supervisory and
clerical compensation, and other overhead burden of the department
incurring the direct costs or deductions referred to in paragraph
(b)(4)(ii) of this section. Indirect costs or deductions also generally
include an appropriate share of the costs or deductions relating to
supporting departments and other applicable general and administrative
expenses to the extent reasonably allocable to a particular service or
activity. Thus, for example, if a domestic corporation's advertising
department performs services for the direct benefit of a foreign
subsidiary, in addition to direct costs of such department, such as
salaries of employees and fees paid to advertising agencies or
consultants, which are attributable to such foreign advertising,
indirect costs must be taken into account on some reasonable basis in
determining the amount of costs or deductions with respect to which the
arm's length charge to the foreign subsidiary is to be determined. These
generally include depreciation, rent, property taxes, other costs of
occupancy, and other overhead costs of the advertising department
itself, and allocations of costs from other departments which service
the advertising department, such as the personnel, accounting, payroll,
and maintenance departments, and other applicable general and
administrative expenses including compensation of top management.
Here is a pdf of the complete regulations: 26 CFR 1.482.
Here are some articles that discuss indirect costs: