This article from International Tax Review’s Intellectual Property Supplement examines top-down and bottom-up quantification approaches, which represent the two types of valuation logic that exist for the quantification of arm’s length royalties for know-how and knowledge in intercompany transactions. Top-down approaches typically take the overall profits generated in combined operations as a starting point and then carve functional routine profits and other profit elements out, thus deriving a residual value for the transferred intangibles and provided entrepreneurial services. In contrast, bottom-up approaches start with analyzing and valuing the specific activities and single know-how and knowledge elements involved in the transaction. The authors argue that bottom-up approaches for analyzing know-how, IP, and entrepreneurial services provide a valuable alternative compared to more traditional top-down methodologies.

This article first appeard in the sixth edition of International Tax Review’s Intellectual Property supplement, December 2007. For more information, please visit www.internationaltaxreview.com.