How can intangible property be valued in transfer pricing calculations?
NEWS ALERT: On August 1, 2006 the IRS issued temporary and proposed regulations amending the treatment of intangible property under Section 482. This page will be revised when those regulations are finalized. In the mean time, you may:
Section Sec. 1.482-4(b) of the Internal Revenue regulations defines intangible property as:
(b) Definition of intangible. For purposes of section 482, an
intangible is an asset that comprises any of the following items and has
substantial value independent of the services of any individual--
(1) Patents, inventions, formulae, processes, designs, patterns, or
(2) Copyrights and literary, musical, or artistic compositions;
(3) Trademarks, trade names, or brand names;
(4) Franchises, licenses, or contracts;
(5) Methods, programs, systems, procedures, campaigns, surveys,
studies, forecasts, estimates, customer lists, or technical data; and
(6) Other similar items. For purposes of section 482, an item is
considered similar to those listed in paragraph (b)(1) through (5) of
this section if it derives its value not from its physical attributes
but from its intellectual content or other intangible properties.
Here is a pdf of the complete regulations: 26 CFR 1.482.
Section Sec. 1.482-4(a) of the regulations offer four transfer pricing methodologies for use with intangible property:
(1) The comparable uncontrolled transaction method, described in
paragraph (c) of this section;
(2) The comparable profits method, described in Sec. 1.482-5;
(3) The profit split method, described in Sec. 1.482-6; and
(4) Unspecified methods described in paragraph (d) of this section.
In addition to the transfer pricing methodologies discussed above, cost-sharing arrangements as authorized under Section 482-7 may be used to distribute costs and income associated with intangible property. An article by FTI Consulting describes this possibility as follows:
The cost-sharing rules (Treasury Regulations section 1.482-7) adopted by the US
Internal Revenue Service (IRS) in 1996, and the principles outlined in Chapter VIII
of the 1995 OECD Guidelines, provide a flexible framework. MNEs used this framework
to build corporate structures that located the ownership of highly valuable
intangibles in tax-advantaged jurisdictions, in entities referred to as “intangible holding
companies,” or “IHCo’s,” while limiting exposure to withholding taxes and maintaining
ease of internal administration. Some MNEs have achieved significant reductions
in their worldwide effective tax rates by shifting the ownership of intangibles.
Here are some articles that discuss intangible property: