On The Transfer Pricing Methodologies Of Intangibles

The introduction points out that Although there are market similarities in the US, OECD approaches to choosing a transfer pricing methodology for intangible property transfers, there are also some important differences.The first section of Chapter 1 makes an introduction to the'Best Method Rule'adopted by the US final regulations. However, from a practical point of view, it may be difficult to choose the best method for an intro transfer of intangible property. Section 482 designates certain allowable transfer pricing methods for a determination of taxable income in connection with a transfer of intangible property. They are the comparable uncontrolled transaction method, the comparable profits method and the profit split method. The second section of Chapter I says that Unlike the US regulations, The Guidelines do not designate certain specific methods as applicable to transfers of intangible assets. The MNE groups are given the freedom to apply methods other than those described in the Report to establish prices, provided those prices satisfying the arm's length principle.Chapter 2 made an introduction of the traditional transactional transfer pricing methods for intangible asset transactions. In the first section, in the United States, The only transaction-based method which taxpayers are allowed to apply to intangible asset transactions is the Comparable Uncontrolled Transaction. CUP method will only be the most reliable measure of an arm's length result if the'best method'factors determine it to be so. However, its reliability depends on finding an uncontrolled transaction involving the transfer of the same intangible under the same, or substantially the same circumstances. Where such uncontrolled transactions cannot be identified, comparable intangible transferred under comparable circumstances in uncontrolled transactions may be used. In the Second section, the Comparable Uncontrolled Price method, the Resale Price method and the Cost Plus method are definitely discussed.Chapter 3 definitely discussed the Profit- Based methods. Traditional transactional methods have been preferred over profit methods, as they are seen to be more in line with the arm's length principle. However, in recent years, more and more attention has been focused on profit-based methods. Two sections definitely discussed the Comparable Profits Method of USA and the OECD Transactional Net Margin method. The US led the way in promoting the increased use of transactional profit methods in determining the arm's length nature of cross-border transactions between affiliates.Chapter 4 discussed the profit split methods definitely. Although profit split methods may be viewed as being at he outer limits of acceptable transfer pricing methodologies, they are becoming increasingly accepted in a global business environment characterized by a proliferation of intangible asset transactions. Revenue authorities are hesitant to condone methodologies that remains that in certain intro transactions, especially those involving intangibles, it is impossible to identify sufficiently similar uncontrolled comparables that form the basis for the other specified methods Another advantage of profit split methods is that the value-added approach of licensee is best recognized by the way of a profit split methodology.Chapter 5 discussed the global formulary appointment. Because of the difference in the accounting systems and lack in the uniform of the economy, the global formulary appointment method will not come true in the near future.The final chapter concludes that in light of the fact that independent comparable transactions are very difficult to find in respect of intangible asset transactions, greater flexibility in choosing a transfer pricing methodology for such intangible transactions is recommended.