Applying the Best Method Rule When Reliable Internal Comparable Intangibles Exist
8 April 1996
By Dr. Richard Rozek
On July 1, 1994, the Internal Revenue Service (IRS) issued new regulations regarding transfer pricing. In light of these new regulations, many taxpayers re-examined their transfer pricing methodologies for both tangible and intangible property. In this article, Dr. Rozek demonstrates that the best method rule incorporated in the regulations suggests that a taxpayer could apply the comparable uncontrolled transaction (CUT) method to determine transfer prices for intangible property in those cases when reliable data pertaining to internal third-party transactions exist. Furthermore, the availability of detailed data on these third-party licenses allows for the application of comparable profit split method (CPSM) to confirm the results obtained from applying the CUT method. The CUT method and CPSM may be successfully applied in a variety of industries; this paper uses the pharmaceutical industry as an illustration.
This paper was published in Tax Notes International, Volume 12, No.15, pp. 1191-1204. A reprint of this article is available from the author upon request.
