Cross-Border Transactions Involving Intellectual Property: Valuation Under Internal Revenue Code Section 482
7 January 1997
By Dr. Stuart Harshbarger with Dr. Anthony Barbera
In this article, NERA Vice President Dr. Stuart Harshbarger and Dr. Anthony Barbera examine methods of intellectual property valuation appropriate for related party transactions under US Internal Revenue Code Section 482, which mandates the use of an arm's length standard to determine the appropriate level of intercompany prices. The authors also address the issue of transfer pricing as it may arise in intercompany cross-border intellectual property transactions, with a focus on the commensurate-with-income standard, which requires that parties in a controlled transaction periodically adjust royalty rates to reflect an intangible asset's income.
While many commentators and practitioners have dismissed the commensurate-with-income standard as a highly restrictive and difficult to implement procedure, Drs. Harshbarger and Barbera instead conclude that the standard is well-suited for adaptation to specific individual circumstances. The authors point to the ways in which they have used planning opportunities that embrace this standard to design royalties for companies in the automotive, chemical, and electronic manufacturing industries and emphasize that companies who have applied the commensurate with income standard in a reasonable and economically sensible way have successfully defended themselves against aggressive audits.
This article was published in The California International Practitioner, Spring-Summer 1997, Vol. 8, Number 1.
