Transfer pricing methods in the context of intangible property

Abstract

The purpose of this study is to evaluate the suitability of existing acceptable transfer pricing methods and their application to international transactions between related parties involving intangible property, more specifically intellectual property that is legally protected. The application of the internationally accepted transfer pricing methodology, which is based on the application of the arm’s length standard to the transaction, necessitates the finding of suitable comparables between independent enterprises. However, the methods of determining an arm’s length value are being challenged as intangible property, which is often unique and for which no suitable comparables exist, increasingly migrates between tax jurisdictions. Consequently, the existing and accepted transfer pricing methods may not always be appropriate to establish an arm’s length value for intangible property migrations.

The study established that the comparable uncontrolled price (CUP) method remains highly relevant as a method of determining an arm’s length transfer price for intellectual property transfers. Since the potential for finding suitable comparables in order to apply this method is very limited in the context of unique intellectual property, the less preferred transactional profit methods such as the transactional net margin method (TNMM) and the profit split method may be more relevant from a practical perspective. The key risk for tax authorities becomes apparent in this study, however, namely, that taxpayers may use these less reliable measures of the arm’s length standard purely for the sake of convenience and ease of application. The study therefore recommends that taxpayers should be required to provide documentary evidence that a search for suitable comparables to apply an appropriate traditional method such as CUP has been unsuccessful, in order to justify having recourse to the less accurate transactional profit methods.

Key Words:

• Arm’s length principle
• contract research agreement
• comparable uncontrolled price (CUP) method
• cost contribution agreements
• cost plus (CP) method
• intangible property
• profit split method
• resale price (RP) method
• traditional transaction methods
• transactional net margin method (TNMM)
• transactional profit methods
• transfer pricing
• transfer pricing methods.