Unspecified Methods

What are the "unspecified methods" for valuing intangible property allowed by the transfer pricing regulations?

Section 482 offers four transfer pricing methodologies for use with intangible property, the fourth of which is listed as "unspecified methods," which are further defined as:

(d) Unspecified methods--(1) In general. Methods not specified in
paragraphs (a)(1), (2), and (3) of this section may be used to evaluate
whether the amount charged in a controlled transaction is arm's length.
Any method used under this paragraph (d) must be applied in accordance
with the provisions of Sec. 1.482-1. Consistent with the specified
methods, an unspecified method should take into account the general
principle that uncontrolled taxpayers evaluate the terms of a
transaction by considering the realistic alternatives to that
transaction, and only enter into a particular transaction if none of the
alternatives is preferable to it. For example, the comparable
uncontrolled transaction method compares a controlled transaction to
similar uncontrolled transactions to provide a direct estimate of the
price the parties would have agreed to had they resorted directly to a
market alternative to the controlled transaction. Therefore, in
establishing whether a controlled transaction achieved an arm's length
result, an unspecified method should provide information on the prices
or profits that the controlled taxpayer could have realized by choosing
a realistic alternative to the controlled transaction. As with any
method, an unspecified method will not be applied unless it provides the
most reliable measure of an arm's length result under the principles of
the best method rule. See Sec. 1.482-1(c). Therefore, in accordance with
Sec. 1.482-1(d) (Comparability), to the extent that a method relies on
internal data rather than uncontrolled comparables, its reliability will
be reduced. Similarly, the reliability of a method will be affected by
the reliability of the data and assumptions used to apply the method,
including any projections used.
(2) Example. The following example illustrates an application of the
principle of this paragraph (d).

Example (i) USbond is a U.S. company that licenses to its foreign
subsidiary, Eurobond, a proprietary process that permits the manufacture
of Longbond, a long-lasting industrial adhesive, at a substantially
lower cost than otherwise would be possible. Using the proprietary
process, Eurobond manufactures Longbond and sells it to related and
unrelated parties for the market price of $550 per ton. Under the terms
of the license agreement, Eurobond pays USbond a royalty of $100 per ton
of Longbond sold. USbond also manufactures and markets Longbond in the
United States.
(ii) In evaluating whether the consideration paid for the transfer
of the proprietary process to Eurobond was arm's length, the district
director may consider, subject to the best method rule of Sec. 1.482-
1(c), USbond's alternative of producing and selling Longbond itself.
Reasonably reliable estimates indicate that if USbond directly supplied
Longbond to the European market, a selling price of $300 per ton would
cover its costs and provide a reasonable profit for its functions, risks
and investment of capital associated with the production of Longbond for
the European market. Given that the market price of Longbond was $550
per ton, by licensing the proprietary process to Eurobond, USbond
forgoes $250 per ton of profit over the profit that would be necessary
to compensate it for the functions, risks and investment involved in
supplying Longbond to the European market itself. Based on these facts,
the district director concludes that a royalty of $100 for the
proprietary process is not arm's length.

Here is a pdf of the complete regulations: 26 CFR 1.482.

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