Applying Scenario Analysis for Computing Discount Rates in Cost Sharing Arrangements

25 June 2015
Dr. Vladimir Starkov

Cost-sharing arrangements—arrangements that enable taxpayers to share the costs and risks of developing intangible assets with other related parties in exchange for granting the related parties rights in intangibles being developed—may cause intense scrutiny from tax authorities. This article from Bloomberg BNA’s Tax Management Transfer Pricing Report demonstrates how the discount rate associated with the investment in intangibles developed under a cost-sharing arrangement can be calculated using the ‘‘probability-weighted scenario analysis,’’ an analytical framework that explicitly considers variability of outcomes in profitability of the intangibles to be developed.