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Transfer Pricing Intellectual Property: Multinational Tax Accounting

Section 482 of the Code authorizes the IRS to adjust the income, deductions ,credits, or allowances of commonly controlled taxpayers to prevent evasion of taxes or to clearly reflect their income. The regulations under section 482 generally provide that prices charged by one affiliate to another, in an intercompany transaction involving the transfer of goods, services, or intangibles, yield results that are consistent with the results that would have been realized if uncontrolled taxpayers had engaged in the same transaction under the same circumstances.

Intangible Asset Valuation

Intellectual Capital means the intangible assets of a company (which include relationships, branding and reputation) which provide the route to commercialization through specific key skills, know-how and processes – for example, the performance of your business processes. Computing the true value of a company requires an accurate, defensible assessment of both types of assets --tangible and intangible property.

Sec. 482 of the United States Internal Revenue Code, for Transfer Pricing in its entirety, states:

"In any case of two or more organizations, trades, or businesses (whether or not incorporated, whether or not organized in the United States, and whether or not affiliated) owned or controlled directly or indirectly by the same interests, the Secretary may distribute, apportion, or allocate gross income, deductions, credits, or allowances between or among such organizations, trades, or businesses, if he determines that such distribution, apportionment, or allocation is necessary in order to prevent evasion of taxes or clearly to reflect the income of any of such organizations, trades, or businesses. In the case of any transfer (or license) of intangible property (within the meaning of section 936(h)(3)(B)), the income with respect to such transfer or license shall be commensurate with the income attributable to the intangible."

The last sentence of the section, which was added to the code by the Tax Reform Act of 1986, applies to taxable years beginning after Dec. 31, 1986, but only with respect to intangibles transferred after Nov. 16, 1985, or licenses granted after such date, or before such date with respect to property not in existence or owned by the taxpayer on such date, except that for purposes of section 936(h)(5)(C) of this title, such amendment applicable to taxable years beginning after Dec. 31, 1986, without regard to when the transfer or license was made.

Intellectual Property - IP and International Transfer Pricing

The laws that define and protect intellectual property span across three distinctly different areas: patent, trademark and copyright. Many business contain information that is of proprietary nature. It generates value from usage, research, development, design, etc. Therefore, the investment in that information product, knowledge product or the virtual product must be protected to encourage other similar research.

Methods for valuation of identifiable intangible assets including Intellectual Capital and intellectual property fall into three broad categories. They are market based, cost based, or estimates of past and future economic benefits.

Intangible assets such as brands, intellectual property and licenses now comprise a greater percentage of the economic value of successful businesses than ever before. Some economists argue that intangibles represent the main performance drivers in the current transition from a traditional financial economic structure to a new knowledge-based economy. (Appraisal Economics Inc.)

Trade Secrets

A trade secret is a formula, practice, process, design, instrument, pattern, or compilation of information which is not generally known or reasonably ascertainable, by which a business can obtain an economic advantage over competitors or customers. In some jurisdictions, such secrets are referred to as "confidential information" or "classified information". (Wikipedia)

All confidential business information which provides an enterprise a competitive edge may be considered a trade secret. The subject matter of trade secrets is usually defined in broad terms and includes sales methods, distribution methods, consumer profiles, advertising strategies, lists of suppliers and clients, and manufacturing processes. While a final determination of what information constitutes a trade secret will depend on the circumstances of each individual case, clearly unfair practices in respect of secret information include industrial or commercial espionage, breach of contract and breach of confidence. (WIPO)

Best Method Rule of Transfer Pricing

Transfer Pricing: The best method rule had three limitations:

1) Tangible property rules normally do not adequately consider the effect of nonroutine intangibles in determining which method is the best method. In these cases, adjustments may be required under the intangible property rules.
2) Tangible property comparable methods may be superseded, especially as they effect significant nonroutine intangibles that are not defined.
3) A taxpayer can request an “advance pricing agreement” to determine its best method.

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