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What Is Transfer Pricing?

How transfer pricing works, transfer pricing and taxes, transfer pricing and the irs, the bottom line.

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Transfer Pricing: What It Is and How It Works, With Examples

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Transfer pricing is an accounting practice that represents the price that one division in a company charges another division for goods and services provided.

Transfer pricing allows for the establishment of prices for the goods and services exchanged between subsidiaries , affiliates , or commonly controlled companies that are part of the same larger enterprise. Transfer pricing can lead to tax savings for corporations, though tax authorities may contest their claims.

Key Takeaways

• Transfer pricing accounting occurs when goods or services are exchanged between divisions of the same company.
• A transfer price is based on market prices in charging another division, subsidiary, or holding company for services rendered.
• Companies use transfer pricing to reduce the overall tax burden of the parent company.
• Companies charge a higher price to divisions in high-tax countries (reducing profit) while charging a lower price (increasing profits) for divisions in low-tax countries.
• The IRS states that transfer pricing should be the same between intercompany transactions as it would have been had the company done the transaction outside the company.

Transfer pricing is an accounting and taxation practic e that allows for pricing transactions internally within businesses and between subsidiaries that operate under common control or ownership. The transfer pricing practice extends to cross-border transactions as well as domestic ones.

A transfer price is used to determine the cost to charge another division, subsidiary, or holding company for services rendered. Typically, transfer prices are reflective of the going market price for that good or service. Transfer pricing can also be applied to intellectual property such as research, patents, and royalties.

Multinational corporations (MNCs) are legally allowed to use the transfer pricing method to allocate earnings among their subsidiary and affiliate companies that are part of the parent organization . However, companies sometimes can also use (or misuse) this practice by altering their taxable income, thus reducing their overall taxes. The transfer pricing mechanism is a way that companies can shift tax liabilities to low-cost tax jurisdictions.

To better understand how transfer pricing impacts a company's tax bill, let's consider the following scenario. Let's say that an automobile manufacturer has two divisions: Division A, which manufactures software, and Division B, which manufactures cars. Division A sells the software to other carmakers as well as its parent company. Division B pays Division A for the software, typically at the prevailing market price that Division A charges other carmakers.

Let's say that Division A decides to charge a lower price to Division B instead of using the market price. As a result, Division A's sales or revenues are lower because of the lower pricing. On the other hand, Division B's costs of goods sold (COGS) are lower, increasing the division's profits. In short, Division A's revenues are lower by the same amount as Division B's cost savings—so there's no financial impact on the overall corporation.

However, let's say that Division A is in a higher tax country than Division B. The overall company can save on taxes by making Division A less profitable and Division B more profitable. By making Division A charge lower prices and pass those savings on to Division B, boosting its profits through a lower COGS, Division B will be taxed at a lower rate. In other words, Division A's decision not to charge market pricing to Division B allows the overall company to evade taxes.

In short, by charging above or below the market price, companies can use transfer pricing to transfer profits and costs to other divisions internally to reduce their tax burden.

The IRS states that transfer pricing should be the same between intercompany transactions that would have otherwise occurred had the company done the transaction with a party or customer outside the company. According to the IRS website, transfer pricing is defined as follows:

The regulations under section 482 generally provide that prices charged by one affiliate to another, in an intercompany transaction involving the transfer of goods, services, or intangibles, yield results that are consistent with the results that would have been realized if uncontrolled taxpayers had engaged in the same transaction under the same circumstances.

As a result, the financial reporting of transfer pricing has strict guidelines and is closely watched by tax authorities. Auditors and regulators often require extensive documentation. If the transfer value is done incorrectly or inappropriately, the financial statements may need to be restated, and fees or penalties could be applied.

However, there is much debate and ambiguity surrounding how transfer pricing between divisions should be accounted for and which division should take the brunt of the tax burden.

Tax authorities have strict rules regarding transfer pricing to discourage companies from using it to avoid taxes.

Examples of Transfer Pricing

A few prominent cases remain a matter of contention between tax authorities and the companies involved.

Because the production, marketing, and sales of Coca-Cola Co. ( KO ) are concentrated in various overseas markets, the company continues to defend its $3.3 billion transfer pricing of a royalty agreement. The company transferred IP value to subsidiaries in Africa, Europe, and South America between 2007 and 2009. The IRS and Coca-Cola continue to battle through litigation, and the case has yet to be resolved.

Ireland-based medical device maker Medtronic and the IRS met in court between June 14 and June 25, 2021, to try and settle a dispute worth $1.4 billion . Medtronic is accused of transferring intellectual property to low-tax havens globally. The transfer involves the value of intangible assets between Medtronic and its Puerto Rican manufacturing affiliate for the tax years 2005 and 2006. The court had initially sided with Medtronic, but the IRS filed an appeal. In mid-2022, the court found that Medtronic did not meet its burden of proof requirement, and the IRS abused its discretion by modifying the method it proposed Medtronic used.

What Are Commonly Used Methods of Transfer Pricing?

The Comparable Uncontrolled Price Method is one of the most commonly used transfer pricing methods.

What Are the Disadvantages of Transfer Pricing?

One of the key disadvantages is that the seller is at risk of selling for less, netting them less revenue. The practice also give multinational corporations a tax loophole.

What Is the Purpose for Transfer Pricing?

Transfer pricing acts to distribute earnings throughout an organization but is primarily used to skirt tax laws and reduce tax burdens by multinational companies.

Transfer pricing is a legal technique used by large businesses to move profits around from parent companies to subsidiaries and affiliates to ensure funds are evenly distributed. However, many multinational corporations use it as a tactic to lower their tax burdens and end up fighting the IRS in court.

Internal Revenue Service. " Transfer Pricing ."

ITR World Tax. " The Coca-Cola Company & Subsidiaries, Petitioner v Commissioner of Internal Revenue, Respondent ."

U.S. Securities and Exchange Commission. " Updated Information Related to Tax Audits ."

Medtronic Investor Relations. " Annual Report 2020 ," Page 30.

International Tax Review. " The IRS Takes Facebook to Court Over Its Irish Tax Structure ."

United States Courts. " United States Court of Appeals for the Eighth Circuit, No. 17-1866, Medtronic, Inc. & Consolidated Subsidiaries v. Commissioner of Internal Revenue ."

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9.9: Transfer Pricing

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Transfer prices

Profit centers and investment centers inside companies often exchange products with each other. The Pontiac, Buick, and other divisions of General Motors buy and sell automobile parts from each other, for example. No market exchange takes place, so the company sets transfer prices that represent revenue to the selling division and costs to the buying division.

A transfer price is an artificial price used when goods or services are transferred from one segment to another segment within the same company. Accountants record the transfer price as a revenue of the producing segment and as a cost, or expense, of the receiving segment. Usually no cash actually changes hands between the segments. Instead, the transfer price is an internal accounting transaction.

A YouTube element has been excluded from this version of the text. You can view it online here: pb.libretexts.org/llmanagerialaccounting/?p=214

Segments are generally evaluated based on some measure of profitability. The transfer price is important because it affects the profitability of the buying and selling segments. The higher the transfer price, the better for the seller. The lower the transfer price, the better for the buyer.

Ideally, a transfer price provides incentives for segment managers to make decisions not only in their best interests but also in the interests of the entire company. For example, if the selling segment can sell everything it produces for $100 per unit, the buying segment should pay the market price of $100 per unit. A seller with excess capacity, however, should be willing to transfer a product to the buying segment for any price at or above the differential cost of producing and transferring the product to the buying segment (typically all variable costs).

In practice, companies mostly base transfer prices on (1) the market price of the product, (2) the cost of the product, or (3) some amount negotiated by the buying and selling segment managers.

• Pricing - 6 Transfer Pricing. Authored by : Susan Crosson. Located at : youtu.be/0aB6L6kajCY. License : All Rights Reserved . License Terms : Standard YouTube License

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4 transfer pricing examples explained.

Posted by Valentiam Group on May 18, 2021

We’ve talked about transfer pricing methods before, but without detailed examples they can be difficult to put into perspective. In this blog post, we share examples of how three traditional transaction methods and one profit method may be applied: the comparable uncontrolled price (CUP) method, the cost plus method (CPLM), the resale price method (RPM), and the residual profit split method (RPSM).

Example #1: The Comparable Uncontrolled Price (CUP) Method

The method: The comparable uncontrolled price method looks at the terms and conditions of transactions made between related and unrelated organizations to ensure arm’s length pricing. To determine arm’s length transfer prices using the CUP method, a company must find examples of comparable transactions it has entered into with third parties, or transactions between two third parties, to use as a benchmark.

The scenario: An agriculture producer in the U.S. is planning to sell wheat to a related-party distributor in Australia for $5 per bushel, and needs to ensure fair pricing before moving forward with the transaction.

The application: Applying the CUP method, the wheat producer would compare the proposed price per bushel ($5) to the amount they’re charging third-party distributors. If the arm’s length range of prices per bushel charged to third parties ranges from $4 to $7, and the transactions are sufficiently comparable, then $5/bushel would be considered an arm’s length price.

The caveat here is that the CUP method requires transactions to be highly comparable ; therefore a number of factors must be examined to decide whether or not the CUP is acceptable for determining arm’s length pricing, including, but not limited to:

• Volume: If the wheat manufacturer is selling 100,000 products to related party distributors and 1,000 to third parties, pricing discounts might apply for bulk purchases, making the transactions not comparable.
• Industry: Wheat can easily be broken down to price per ton; there are very few variables that come into play in this type of transaction. On the other hand, it is more difficult for pharmaceutical products as there are so many variables that impact pricing. For instance, pills come in different doses and with a different number of pills per box, both of which may impact the end price.
• Geography: If the related-party distributor is in Australia and the third-party distributor is based in Europe, then there might be price differences to account for transportation costs, as well as market variances.

To the extent that there are transactions that are sufficiently comparable and meet the different requirements for the CUP method, then the manufacturer can create an inter-quartile range with the third-party distributor prices. After eliminating the outliers at the top and bottom of the range, the manufacturer can then use the resulting range to benchmark related-party prices.

Is your company using the best methods to calculate arm’s length prices? Learn all you need to know about transfer pricing methods in our free guide.

Example #2: the cost plus method.

The method: The cost plus method also looks at related-party and third-party transactions, but rather than looking at price per product, it measures the cost plus markup (the profit) earned on the sale of the products. This approach is broader than the CUP method, which may look at each individual product stock-keeping unit (SKU) rather than grouping all SKUs together.

The scenario: A U.S. drug manufacturer makes an over-the-counter medication with a production cost of $150 per bottle. The manufacturer plans to sell the medication to a related-party distributor in Ireland for $200, which would represent a profit of $50 and a 53% markup on costs; however, they will need to apply a transfer pricing method to determine whether the transfer price is at arm’s length.

The application: To apply the cost plus method in this scenario, the pharmaceutical company must look for comparable transactions where they’ve sold the same medication to a third-party distributor. If the volume and other factors are sufficiently comparable, and the third-party transaction also has a cost plus 33%, or a group of transactions has an inter-quartile range of cost plus markups that includes 33% then the related party transaction is at arm’s length.

To apply the cost plus method, the transactions must be sufficiently comparable but do not have to be as exact as in the application of the CUP method. Comparability factors like volume, geography, and markets should all be taken into account; however, an exact match is not necessary because you're not looking at individual prices. Here, the prices for hundreds or thousands of SKUs are essentially bundled together to evaluate the markup a company earns on cost for a specific group of products.

Example #3: The Resale Price Method

The method: The resale price method in transfer pricing is primarily used by distributors to determine an appropriate resale price for tangible goods. Similar to the cost plus method, the RPM looks at groups of transactions rather than comparing individual transactions like the CUP method. Because it works in percentages, RPM can also be applied even when the underlying products are not identical.

The scenario: A distributor in Canada is purchasing T-shirts from a related-party manufacturer in the U.S. for $20 per shirt and needs to ensure a fair, arm’s length purchase price.

The application: In this scenario, the Canadian distributor would use the resale price method to determine the gross margin percentage (gross profit divided by net sales) earned on sales of T-shirts purchased from third parties. This is then compared to the gross margin earned on distributor sales of T-shirts purchased from related-party manufacturers to ensure fair pricing.

If the Canadian distributor purchases T-shirts from a third-party manufacturer for $20 and resells them for $40, they earn a 50% gross margin. Therefore, the distributor must also earn approximately a 50% margin (the RPM typically yields a range of acceptable gross margins rather than a single data point) on sales of products purchased from related parties to demonstrate the transactions are being carried out at arm’s length.

Example #4: The Residual Profit Split Method

The method: Our three previous examples all apply to tangible goods. The residual profit split method (RPSM) can be applied to intangibles. The RPSM divides profit based on the contribution of each related party involved in the transaction.

The scenario: A U.S. company acquires a German company with its own brand names. Post-acquisition, the German company initially sells co-branded products bearing their name and the name of the U.S. parent company. Eventually, all products sold by the German subsidiary will have the U.S. parent company’s branding.

The application: In this case, the parent company needs to determine the share of profits resulting from each party’s marketing and branding efforts. First, the total value of the IP is determined by eliminating profits arising from routine functions, such as manufacturing and distribution. After eliminating any non-routine profits resulting from technology intangibles, the remaining non-routine profit results from marketing activities.

This profit is assigned to the U.S. parent company or the German subsidiary according to each party’s contribution to marketing. In year one, most of that value has been developed in Germany, due to the subsidiary’s previous brand-building efforts. But over time, as the products sold in Germany by the subsidiary are co-branded and then transitioned to the parent company’s branding, most of the profit attributable to marketing will shift to the entity that owns and further exploits that parent company brand.

Another scenario: A U.S. company decides to establish manufacturing operations in Ireland to produce certain products.

The application: The U.S. company needs to determine how to split the profits attributable to intellectual property (IP) generated through sale of products manufactured by the Irish subsidiary. Unlike the previous example for the RPSM, in this case, the Irish manufacturing company is a new venture; there’s no history of IP-generating activities.

Initially, all of the value created and the residual profit would be assigned to the U.S. parent company. Over time, as the Irish company begins research and development and increases its manufacturing knowledge, a portion of that residual profit may be attributable to the Irish company. From a tax planning perspective, the new Irish venture may not be advantageous initially but may become so after time.

Put Your Transfer Pricing Strategy In Expert Hands

Transfer pricing is a complex area of business, but getting it right is crucial in order to comply with various international rules and legislation. (Tweet this!)

Valentiam ’s seasoned consultants are recognized as being among the “ World’s Leading Transfer Pricing Advisors ,” and have been named the “Best of the Best” in the U.S. If your company’s transfer pricing strategy could use a revamp, our expert guidance might be exactly what you need. Let’s talk about how we can work together to develop a strategy that meets the unique needs of your business.

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Why transfer prices are needed

Transfer prices are almost inevitably needed whenever a business is divided into more than one department or division. Usually, goods or services will flow between the divisions, and each will report its performance separately. The accounting system will record goods or services leaving one department and entering the next, and some monetary value must be used to record this. That monetary value is the transfer price.

Take the following scenario shown in  Table 1 , in which Division A makes components for a cost of $30, and these are transferred to Division B for $50. Division B buys the components in at $50, incurs own costs of $20, and then sells to outside customers for $90.

Table 1 Example 1

As things stand, each division makes a profit of $20/unit, and the company will make a profit of $40/unit. This can be calculated either by simply adding the two divisional profits together ($20 + $20 = $40) or subtracting both own costs from final revenue ($90 – $30 – $20 = $40).

It is important to see that for every $1 increase in the transfer price, Division A will make $1 more profit, and Division B will make $1 less. Mathematically, the company will make the same profit, but these changing profits can result in each division making different decisions, and as a result of those decisions, company profits might be affected.

The transfer price set should encourage divisions to trade in a way that maximises profits for the company as a whole.

A transfer price can be negotiated between the divisions or imposed by head office. In a Performance Management (PM) question, a requirement could be to calculate and discuss the impact of a head office imposed transfer price, or to suggest transfer prices which would be acceptable to each division.  

It is important to understand that there is no one right transfer price in a given scenario, but there will be alternative legitimate views with some values being more appropriate or more acceptable than others.

The impact of transfer prices

Transfer prices can seriously affect the reported divisional performance, the motivation of divisional managers and subsequent decisions made.

Performance evaluation

The transfer price affects the profit that a division makes. In turn, the profit is often a key figure used when assessing the performance of a division. This will certainly be the case if return on investment (ROI) or residual income (RI) is used to measure performance.

A higher transfer price will lead to lower profits in the buying division and make its performance look poorer than it would otherwise be. The selling division, on the other hand, will appear to be performing better. A lower transfer price on the other hand will favour the buying division.

This may lead to poor decisions being made by the company. The management of the company could interpret these measures as indicating that a division’s performance was unsatisfactory and could decide to reduce investment in that division, or even close it down.

Performance-related pay

If there is a system of performance-related pay, the remuneration of employees in each division will be linked to the performance of the division and this will be affected as profits change. If divisional performance is poor because of something that the manager and staff cannot control, such as being forced to trade internally or to use head office set transfer prices, and as a result they are consequently paid a smaller bonus for example, they are going to become unhappy and frustrated. This could seriously damage their morale and could lead to a lack of motivation to do the job well which could have a knock-on effect on the real performance of the division. As well as being seen not to do well because of the impact of high transfer prices on ROI and RI, the division really will perform less well.

In a PM question it is important to be able to discuss how transfer prices can affect performance assessment of divisions, motivation and decision making. Further impacts of transfer prices will be considered in Advanced Performance Management (APM), but these points are sufficient for the level of understanding needed for the PM exam.

The characteristics of a good transfer price

Although not easy to attain simultaneously, a good transfer price should:

Preserve divisional autonomy : almost inevitably, divisionalisation is accompanied by a degree of decentralisation in decision making so that specific managers and teams are put in charge of each division and must run it to the best of their ability.

If divisional managers have the objective of maximising divisional profit, they are likely to resent being told by head office that they must trade internally at an imposed price when they could generate higher profits by buying or selling externally.

However, allowing divisions to be totally autonomous, could reduce the company profit at the expense of the divisional profit.

Encourage divisions to make decisions which maximise group profits : the transfer price will achieve this if the decisions which maximise divisional profit also happen to maximise group profit – this is known as goal congruence. Furthermore, all divisions must want to do the same thing. There’s no point in transferring divisions being very keen on transferring out if the next division doesn’t want to transfer in.

Permit each division to make a profit : profits are motivating and allow divisional performance to be measured using positive ROI or positive RI. Some transfer prices, however, can favour one division over another and can make it difficult for divisions to earn a profit. This is unfair if divisional performance and bonuses are based on profit measurements.

Setting a transfer price

Let us now consider the general principles of setting a transfer price. There are several approaches which should be recognised.

Cost based approaches

In the following examples, assume that Division A can sell only to Division B, and that Division B can only buy from Division A.  Example 1  has been reproduced but with costs split between variable and fixed. At the transfer price of $50 given, this allows each division to make a profit of $20.  

Table 1 Example 2

Variable cost A transfer price set equal to the variable (marginal) cost of the transferring division produces very good economic decisions. If the transfer price is $18, Division B’s marginal costs would be $28 (each unit costs $18 to buy in then incurs another $10 of variable cost). The company’s marginal costs are also $28, so there will be goal congruence between Division B’s wish to maximise its profits and the company maximising its profits. If marginal revenue exceeds marginal costs for Division B, it will also do so for the company.

Although good economic decisions are likely to result, a transfer price equal to marginal cost has certain drawbacks:

Division A will make a loss as its fixed costs cannot be covered. This is demotivating for Division A’s management.

Performance measurement is also distorted. Division A will make a loss while Division B is in more fortunate position as it is not charged enough to cover all costs of manufacture. This effect can also distort investment decisions made in each division. For example, Division B will enjoy inflated cash inflows.

There is little incentive for Division A to be efficient if all marginal costs are covered by the transfer price. Inefficiencies in Division A will be passed on to Division B.  

Table 1 Example 3

Full cost/Full cost plus/Variable cost plus

A transfer price set at full cost, as shown in Table 3 is slightly more satisfactory for Division A as it means that it can aim to break even. Its big drawback, however, is that it can lead to dysfunctional decisions because Division B can make decisions that maximise its profits, but which will not maximise company profits.  For example, if the final market price fell to $35, Division B would not trade because its marginal cost would be $40 (transfer-in price of $30 plus own marginal costs of $10). However, from a group perspective, the marginal cost is only $28 ($18 + $10) and a positive contribution would be made even at a selling price of only $35. Head office could, of course, instruct Division B to trade but then divisional autonomy is compromised, and Division B managers will resent being instructed to make negative contributions which will impact on their reported performance.

The full cost  plus  approach would increase the transfer price by allowing division A to add a mark-up. This would now motivate Division A, as profits can be made there and may also allow profits to be made by Division B. However, again this can lead to dysfunctional decisions as the final selling price falls.

Once you move away from a transfer price equal to the variable cost in the transferring division, there is always the risk of dysfunctional decisions being made unless an upper limit – equal to the net marginal revenue in the receiving division – is also imposed.

Where there is a market for the intermediate product

The setting of a transfer price is complicated where there is an external market for the product – ie where the selling division can sell the product externally, and, or the buying division can buy the product externally. Always read the scenario carefully in a transfer pricing question to find out if the product being transferred can be sold or bought externally as this can affect the transfer price which should be set.

Consider  Example 1  again, where the transfer price had been set at $50, but this time assume that the intermediate product can be sold to, or bought from, the market at a price of $40.

Division A would rather transfer internally to Division B, because receiving $50 is better than receiving $40. However, Division B would rather buy externally at the cheaper price of $40. If Division B buys externally, this would be bad for the company because there is now a marginal cost to the company of $40 instead of only $18 (the variable cost of production in Division A).

In an exam question, it is important to be able to discuss this type of situation. It can be useful to consider the minimum and maximum transfer prices that each division would accept. In discussing transfer prices, think about:

• What would the selling division prefer to do and how would this affect the buying division and the company?
• What would the buying division prefer to do and how would this affect the selling division and the company?

Minimum transfer price When considering the minimum transfer price, look at transfer pricing from the point of view of the selling division. The question we ask is: what is the minimum selling price that the selling division would be prepared to sell for? Note that this will not necessarily be the same as the price that the selling division would be happy to sell for, although, as you will see, if it does not have spare capacity, it is the same.

The minimum transfer price that should be set if the selling division is to be happy is:

marginal cost + opportunity cost.

Opportunity cost is defined as the 'value of the best alternative that is foregone when a particular course of action is undertaken'. Given that there will only be an opportunity cost if the seller does not have any spare capacity, the first question to ask is therefore: does the seller have spare capacity? 

Spare capacity If there is spare capacity, then, for any sales that are made by using that spare capacity, the opportunity cost is zero. This is because workers and machines are not fully utilised. So, where a selling division has spare capacity the minimum transfer price is effectively just marginal cost. However, this minimum transfer price is probably not going to be one that will make the managers happy as they will want to earn additional profits. So, you would expect them to try and negotiate a higher price that incorporates an element of profit.

No spare capacity If the seller doesn’t have any spare capacity, or it does not have enough spare capacity to meet all external demand and internal demand, then the next question to consider is: how can the opportunity cost be calculated? Given that opportunity cost represents contribution foregone, it will be the amount required in order to put the selling division in the same position as they would have been in had they sold outside of the group.

Logically, the buying division must be charged the same price as the external buyer would pay, less any reduction for cost savings that result from supplying internally. These reductions might reflect, for example, packaging and delivery costs that are not incurred if the product is supplied internally to another division.

It is not really necessary to start breaking the transfer price down into marginal cost and opportunity cost in this situation, it can simply be calculated as the external market price less any internal cost savings.

At this transfer price, the selling division would make just as much profit from selling internally as selling externally. Therefore, it reflects the price that they would actually be happy to sell at. They should not expect to make higher profits on internal sales than on external sales.

Maximum transfer price When we consider the maximum transfer price, we are looking at transfer pricing from the point of view of the buying division. The question we are asking is: what is the maximum price that the buying division would be prepared to pay for the product? The answer to this question is very simple and the maximum price will be one that the buying division is also happy to pay.

The maximum price that the buying division will want to pay is the market price for the product – ie whatever they would have to pay an external supplier. If this is the same as the selling division sells the product externally for, the buyer might reasonably expect a reduction to reflect costs saved by trading internally.

In an exam answer, be willing to discuss the minimum and maximum transfer prices and how each division would react to them.

The level of detail given in this article reflects the level of knowledge required for Performance Management. It is important to understand the purpose of transfer pricing, its impact on performance measurement, motivation and decision making and to be able to work out a reasonable transfer price/range of transfer prices.

Written by a member of the Performance Management examining team

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Transfer Pricing: A Case Study (Methods and Documentation) (Portfolio 6912)

This Portfolio uses a case study involving a fictional company to provide a practical background on how to prepare a transfer pricing study to meet the regulatory and administrative documentation requirements in the United States and under the OECD Guidelines.

Description

Tax Management Portfolio No. 6912,  Transfer Pricing: A Case Study (Methods and Documentation) , uses a case study involving a fictional company to provide a practical background on how to prepare a transfer pricing study to meet the regulatory and administrative documentation requirements in the United States and under the OECD Guidelines. The Portfolio uses this fictional example, explanatory text, numerous tables, and sample documents in the Worksheets to take the reader step-by-step through a transfer pricing study. Worksheets also provide an illustrative documentation report, prepared under § 6662(e),  regarding the intercompany transactions presented in the case study. Similar studies are used by taxpayers to ensure that their transfer prices with related entities will meet the requirements of taxing authorities and fiduciary standards.

This Portfolio may be cited as Levey, Carmichael, Gerdes, and Arthur, 6912 T.M.,  Transfer Pricing: A Case Study (Methods and Documentation) .

Table of Contents

I. Introduction II. Documentation Rules III. Use of Case Study Format IV. Functional Analysis V. Application of Functional Analysis to CPC Organization VI. Financial Results VII. Transfer Pricing Methodology VIII. Comparables Analysis IX. Summary and Conclusions

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Understanding Transfer Pricing and its Impact on Taxation in International Finance

In the intricate web of international finance, the concept of transfer pricing emerges as a critical factor influencing the fiscal landscape of multinational corporations. Transfer pricing refers to the pricing strategies employed when transactions occur between entities within the same corporate group but operate in different countries. This practice is not merely an accounting exercise; rather, it is a strategic maneuver that profoundly impacts taxation. At its core lies the Arm's Length Principle (ALP), which asserts that related entities should transact at prices equivalent to those negotiated between unrelated parties. This principle seeks to curb the potential for profit manipulation and the strategic shifting of income to jurisdictions with more favorable tax regimes, ensuring a fair distribution of tax liabilities across borders. If you need assistance with your International Finance assignment , understanding the intricacies of transfer pricing and its implications in multinational finance can provide valuable insights and support to tackle your assignments effectively.

The impact of transfer pricing on taxation in international finance is multifaceted. It introduces a complex interplay of regulatory frameworks, compliance challenges, and strategic considerations for businesses operating on a global scale. As companies expand their operations across borders, the intricacies of complying with the Arm's Length Principle become increasingly pronounced. The significance of transfer pricing is further magnified by its role in Base Erosion and Profit Shifting (BEPS), a practice that raises concerns about the erosion of tax bases in high-tax jurisdictions. This necessitates a nuanced understanding of transfer pricing methods, compliance requirements, and the evolving global tax landscape to navigate the complexities of international finance successfully.

Deciphering Transfer Pricing: A Fundamental Overview

Transfer pricing is a fundamental aspect of international finance that revolves around the pricing dynamics of transactions within multinational corporations. At its core, transfer pricing addresses the challenge of establishing fair market values for goods, services, and intellectual property exchanged between related entities operating in different countries. The primary objective is to emulate the conditions that would prevail in transactions between unrelated parties, preventing the artificial shifting of profits across borders. The significance of transfer pricing becomes evident as it not only influences the financial performance of individual entities but also holds broader implications for the global taxation landscape.

Navigating the intricacies of transfer pricing requires a foundational understanding of the Arm's Length Principle (ALP), which serves as the bedrock for determining fair and equitable pricing. The ALP stipulates that transactions between related entities should mirror those between unrelated entities in similar circumstances, fostering a level playing field in international commerce. As multinational corporations engage in diverse business activities across borders, the choice of transfer pricing methods becomes crucial. Whether employing the Comparable Uncontrolled Price (CUP) method, Cost Plus method, Resale Price method, or Transactional Net Margin method, businesses must carefully assess each method's suitability based on the nature of their transactions and the data available. Deciphering transfer pricing is, therefore, an essential undertaking for corporations navigating the complex landscape of international finance.

The Arm's Length Principle: Foundation of Fair Transfer Pricing

The Arm's Length Principle (ALP) serves as the bedrock for establishing fair and equitable transfer pricing in international finance. At its core, the ALP seeks to emulate the conditions that would prevail in transactions between unrelated entities in a free and open market. By requiring related parties to transact as if they were independent entities, the ALP aims to prevent artificial distortions in profit allocation and maintain a level playing field. This principle recognizes that economic decisions within a corporate group should mirror those made by independent entities, ensuring that prices for goods, services, or intellectual property are determined objectively rather than influenced by internal affiliations.

Ensuring compliance with the ALP involves a meticulous analysis of comparable transactions in the open market, considering factors such as product specifications, market conditions, and risks involved. This methodological approach promotes transparency and fairness, preventing businesses from exploiting relationships within a corporate group to gain unwarranted tax advantages. The Arm's Length Principle not only acts as a safeguard against profit manipulation but also fosters international tax equity, fostering a global economic environment where businesses are encouraged to compete based on merit rather than artificial pricing strategies.

Transfer Pricing Methods: Choosing the Right Approach

Determining the most suitable transfer pricing method is a critical decision for multinational corporations engaged in cross-border transactions. Each method brings its unique perspective to the valuation of intercompany transactions, and the choice depends on the nature of the goods, services, or intellectual property being transferred. The Comparable Uncontrolled Price (CUP) method, for instance, relies on comparing the prices of transactions between related parties with those between unrelated parties. This method is particularly effective when reliable comparable data is available. On the other hand, the Cost Plus method involves adding a predetermined profit margin to the cost of production, making it a preferred choice for tangible goods with clear cost structures. The Resale Price method, meanwhile, focuses on the resale price of goods, allowing for a fair allocation of profits based on the resale value. Lastly, the Transactional Net Margin method evaluates the net profit relative to an appropriate base, considering factors such as operating expenses and the value of assets employed. The selection of the most appropriate method requires a careful analysis of the specific circumstances surrounding each transaction.

In addition to the nature of the transaction, the availability and reliability of data play a crucial role in determining the right transfer pricing approach. Some methods may be more data-intensive and require a comprehensive set of comparable transactions, while others may be more suitable in situations where such data is scarce. Striking a balance between precision and practicality is paramount, ensuring that the chosen method not only aligns with the company's business model but is also supported by accurate and relevant data. Moreover, businesses should be mindful of the need for consistency in their transfer pricing methods across different jurisdictions to maintain coherence and compliance in an increasingly interconnected global economy. As the landscape of international finance continues to evolve, staying informed about emerging best practices in transfer pricing methods is essential for businesses to make informed decisions and mitigate the risk of disputes with tax authorities.

Compliance Challenges in International Transfer Pricing

Navigating the realm of international transfer pricing presents businesses with a myriad of compliance challenges. Firstly, the divergence in transfer pricing regulations and documentation requirements across jurisdictions introduces a complex web of rules that corporations must unravel. Each country has its own set of guidelines, making it imperative for businesses to meticulously tailor their transfer pricing strategies to align with the specific regulations of the jurisdictions in which they operate. This not only demands a deep understanding of local tax laws but also requires a proactive approach in adapting to changes, as tax authorities worldwide continuously refine their regulations to address emerging issues and counteract potential abuses.

Secondly, the sheer volume of data and documentation needed for transfer pricing compliance poses a substantial challenge. Multinational corporations engaged in cross-border transactions must compile comprehensive records that justify the arm's length nature of their pricing arrangements. This involves analyzing financial data, market conditions, and other relevant factors to demonstrate that the prices charged are consistent with what would be agreed upon between unrelated parties. The meticulousness required in preparing such documentation is resource-intensive, necessitating robust systems and processes to ensure accuracy and completeness. Failure to meet these documentation requirements can expose businesses to increased scrutiny, potential audits, and the risk of adjustments by tax authorities, leading to financial repercussions and reputational damage. In essence, staying compliant in the intricate landscape of international transfer pricing demands not only a thorough understanding of diverse tax regulations but also a commitment to maintaining meticulous documentation practices.

Transfer Pricing and Its Impact on Global Taxation

The impact of transfer pricing on global taxation cannot be overstated, as it directly influences the distribution of taxable profits among different jurisdictions. Multinational corporations often exploit the flexibility in pricing intra-group transactions to strategically allocate profits to regions with lower tax rates, leading to a phenomenon known as Base Erosion and Profit Shifting (BEPS). BEPS poses a significant challenge for tax authorities worldwide, as it erodes their tax bases and undermines the principle of fair taxation. In response, countries and international organizations, including the Organization for Economic Co-operation and Development (OECD), have implemented measures to counteract BEPS and ensure that companies pay their fair share of taxes in the jurisdictions where economic activities occur.

The dynamic nature of transfer pricing also introduces complexities for tax administrations, as they seek to adapt their regulatory frameworks to address emerging challenges. The heightened scrutiny on transfer pricing practices has led to increased transparency requirements and reporting obligations for businesses engaged in cross-border transactions. Tax authorities are now more proactive in examining transfer pricing documentation to assess the adherence to the Arm's Length Principle and identify any attempts to manipulate prices for tax advantage. This evolution in global taxation reflects a concerted effort to create a level playing field, prevent profit shifting, and foster a fair and equitable distribution of tax revenues among countries participating in the global economy.

Double Taxation and the Role of Tax Treaties

Double taxation, the imposition of taxes on the same income by more than one jurisdiction, poses a significant challenge for businesses engaged in international transactions. To address this issue and encourage cross-border trade and investment, countries often enter into bilateral or multilateral tax treaties. These treaties play a crucial role in determining the taxing rights of each jurisdiction involved and provide mechanisms to avoid or relieve instances of double taxation.

Tax treaties typically follow the principles outlined by the Organisation for Economic Co-operation and Development (OECD) and the United Nations, offering guidance on issues such as residency, permanent establishment, and the allocation of taxing rights over various types of income. They often include provisions for the elimination of double taxation through methods like the exemption or credit method. The exemption method excludes foreign-sourced income from taxation in the home country, while the credit method allows a taxpayer to offset taxes paid in one country against the tax liability in another. By establishing clear rules and mechanisms to resolve potential conflicts, tax treaties contribute to a more predictable and stable international tax environment, fostering economic cooperation and reducing the administrative burden on businesses operating across borders.

Transfer Pricing Documentation: A Shield Against Disputes

Transfer pricing documentation serves as a crucial shield against potential disputes with tax authorities. In an era where tax authorities globally are increasingly vigilant, maintaining comprehensive documentation is not just a best practice but a necessity for multinational corporations engaged in cross-border transactions. Robust documentation provides a transparent record of the methodologies used to determine transfer prices, the economic analyses supporting these methodologies, and the factors considered in aligning prices with the Arm's Length Principle. This documentation not only demonstrates a commitment to compliance but also equips companies with a defense mechanism in the event of a tax audit or dispute. By proactively preparing and maintaining detailed transfer pricing documentation, businesses can present a clear and well-substantiated case, reducing the risk of adjustments and penalties while fostering a cooperative relationship with tax authorities.

Moreover, transfer pricing documentation acts as an internal management tool, offering valuable insights into the company's intercompany transactions and financial performance. Beyond its role in compliance, such documentation aids in strategic decision-making by providing a comprehensive understanding of the financial impact of transfer pricing policies. It enables businesses to assess the effectiveness of their current pricing strategies, identify areas for improvement, and align intercompany transactions with broader business objectives. In essence, transfer pricing documentation not only shields against disputes but also empowers companies to navigate the complexities of international finance with a proactive and informed approach.

Evolving Landscape: Future Trends in Transfer Pricing

The landscape of transfer pricing is on the cusp of significant transformation, driven by emerging trends that reshape the dynamics of international finance. One noteworthy trend is the digitalization of business operations, which has given rise to new challenges in determining the value of digital assets and intangible property. As businesses increasingly rely on digital platforms and technologies, tax authorities worldwide are grappling with the need for updated frameworks to address the unique complexities associated with these transactions. Transfer pricing methodologies will likely evolve to incorporate innovative approaches that accurately reflect the value contributed by intangible assets, ensuring a fair and equitable distribution of profits across jurisdictions.

Furthermore, the intensifying focus on environmental, social, and governance (ESG) factors is poised to influence transfer pricing strategies. Governments and stakeholders are becoming more attuned to the broader societal impact of corporate activities. Transfer pricing frameworks may adapt to incorporate ESG considerations, potentially influencing how businesses allocate profits and demonstrate their commitment to sustainable practices. As transparency becomes a key value in the international business arena, transfer pricing will not only be a tool for tax optimization but also a mechanism for aligning corporate strategies with global expectations for responsible and sustainable business conduct. The future of transfer pricing lies in its ability to harmonize economic realities with ethical and environmental imperatives, creating a more holistic and equitable approach to international taxation.

Conclusion:

In navigating the intricate landscape of transfer pricing in international finance, businesses must recognize the pivotal role it plays in shaping global taxation and corporate strategies. The Arm's Length Principle remains the lodestar, guiding companies toward fair and transparent practices in their cross-border transactions. The selection of appropriate transfer pricing methods, coupled with meticulous documentation, becomes not just a compliance necessity but a strategic imperative. As the business world continually adapts to technological advancements and changing economic dynamics, staying ahead of transfer pricing trends is paramount for sustained success.

In this era of increased scrutiny and collaboration among tax authorities globally, companies need to view transfer pricing not merely as a regulatory obligation but as a dynamic aspect of their global operations. By proactively addressing compliance challenges, understanding the impact of transfer pricing on global taxation, and embracing future trends, businesses can position themselves to thrive in an environment where the boundaries of international finance are constantly expanding. In doing so, they not only safeguard against disputes and double taxation but also lay the foundation for a resilient and adaptive global business strategy that maximizes value and fosters sustainable growth.

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Intellectual Property: The complete guide for transfer pricing, valuation, licensing and litigation professionals

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When you are setting transfer prices, carrying out a transfer pricing analysis, valuing intellectual property assets, conducting a business valuation, drafting a licensing agreement or dealing with an infringement case, you need to understand intellectual property. In this guide, we cover everything from what intellectual property is and how it’s protected to how to value it for transfer pricing, valuation, licensing and litigation purposes. We also explain how you can use a royalty rates database to find market data and set benchmarks on the latest intellectual property licenses.

What is intellectual property?

Intellectual property definition: ‘Intellectual property’ refers to intangible assets that are products of the mind. E.g. inventions, brand names, and artistic or technological designs. Intellectual property assets themselves are not physical in nature. Rather, they are the ideas, knowledge and creativity that go into making a product, service, process or business. ‘Intellectual property’ also refers to the legal protection given to these intangible assets to stop others using and damaging them.

Intellectual property is incredibly valuable for businesses as it gives them a competitive edge. That’s why organizations protect intellectual property assets with legal safeguards.

Types of intellectual property protection

There are four main types of intellectual property:

• Trade secrets

These are the intellectual property types that can be legally protected. Having legal protections in place means that the assets can only be used by the party that owns the intellectual property rights – or by parties that have intellectual property rights assigned to them (e.g. in a licensing deal). You can find out more about ownership of intellectual property rights in the next section.

Intellectual property rights definition

The term ‘intellectual property rights’ refers to the right to use an intellectual property asset. If an asset is protected by intellectual property rights, it can only be used by those parties who hold the rights to the intellectual property. This could be the individual or organization that created the intellectual property, or it could be a different party that has been assigned the rights to it. Intellectual property rights are often sold or transferred to other parties in licensing agreements.

The purpose of intellectual property rights is to stop intellectual property being taken and used by other parties. They offer legal protection to the assets and the party that holds the rights to them.

Intellectual property transfer pricing

Intellectual property is a complex issue in transfer pricing. When an intellectual property transfer is carried out between two related entities within an organization, an arm’s length price must be set for taxation purposes. (Being at ‘arm’s length’ means that the rate charged in the transaction is the same as what it would have been if the transaction had occurred between two unrelated parties.)

The difficulty with calculating the cost of intellectual property for transfer pricing is that there are many different variables that affect what should be charged. For example, the intellectual property’s stage of development, the tax regulations in each entity’s country (for multinational enterprises (MNEs)), inflation, the nature of the transaction, and the impact on the various parties.

Transfer pricing methods for intellectual property

There are multiple transfer pricing methods that organizations can use to calculate fair transfer prices for their intellectual property. These include the comparable uncontrolled price (CUP) method , the resale price method, the cost plus method, the transactional net margin method and the transactional profit split method. The most suitable method depends on the circumstances of the transaction and the availability of data. (The Organization for Economic Co-operation and Development (OECD) offers guidance on selecting the most appropriate transfer pricing method .)

The CUP method

According to the OECD, the CUP method is the most direct and reliable transfer pricing method – as long as high-quality comparables data is available. The CUP method involves comparing the cost of the controlled transaction in question with the price charged in a comparable uncontrolled transaction between two unrelated parties. Essentially, it involves using recent market data to determine arm’s length prices for the transfer of intellectual property assets within organizations.

The most important aspect of the CUP method is identifying suitably comparable intellectual property license agreements to analyze. With a royalty rates database like RoyaltyRange , this step is easy. Organizations are able to enter their search criteria and comparability requirements, and RoyaltyRange’s transfer pricing experts will create a detailed report of the most suitable recent license agreements between unrelated parties. Using a database takes away a big chunk of the work and gives organizations confidence that they are analyzing the most reliable data.

CUP analyses and benchmarking studies

If organizations do not have the time, expertise or resources to conduct a CUP analysis themselves, RoyaltyRange can do it for them. A RoyaltyRange benchmarking study provides a full comparison of the most relevant licensing agreements in the database to give organizations a market analysis of their intellectual property. It includes a calculation of the average royalty rate (median) and a market royalty rate range (interquartile range). This provides organizations with an accurate benchmark that they can use to calculate the value of their intellectual property.

Another factor that MNEs must consider when assigning transfer prices for intellectual property is DEMPE. The term ‘DEMPE’ means the development, enhancement, maintenance, protection and exploitation of intangibles. DEMPE was introduced by the OECD in the final Actions 8–10 report of the Transfer Pricing Aspects of Intangibles, which was released on October 5 th 2015.

Under DEMPE, organizations must consider how returns are allocated when revenue is generated by an intangible – e.g. an intellectual property asset like a patent. It cannot be assumed that the legal owner of the intellectual property is entitled to the returns in full. Rather, the returns must be allocated according to which parties contributed to the value of the intellectual property. That is, which parties performed functions, used assets and assumed risks in the development, enhancement, maintenance, protection and exploitation of the intangibles or intellectual property.

If you’d like to find out more about DEMPE, discover our DEMPE insights series:

• The DEMPE functional analysis
• DEMPE: Six steps for analyzing transactions involving intangibles

Value of intellectual property

Understanding the value of intellectual property is essential for any transaction or analysis involving intellectual property assets. From transfer pricing and business valuations to drafting license deals and dealing with intellectual property rights breaches, knowing the value of an intellectual property asset ensures that organizations receive reasonable compensation for its use. Organizations may also need to know the value of their intellectual property if they are seeking funding, entering into a merger or acquisition, or considering a joint venture arrangement.

Factors affecting the value of intellectual property

The value of intellectual property depends largely on its context, such as the market it will be used in and the age of the asset. An asset’s value is not fixed – it can change in line with a variety of factors. For example, if a brand name has been around for a long time, it may be more valuable than when it first entered the market – especially if it has a good reputation. Alternatively, if the brand has been undergoing hardships in the market, its value may decrease. Activities like marketing can significantly boost the value of an intellectual property asset over time.

Intellectual property valuation methods

There are a number of valuation approaches available for valuing intellectual property. The most suitable method depends on the circumstances of the intellectual property being valued. It can be useful to conduct analyses using multiple methods and cross-checking the results from each.

The most common intellectual property valuation methods are:

• The cost method
• The market value method
• The income method

The cost method of valuing intellectual property

Using a cost-based approach for valuing intellectual property involves basing the asset’s value on the cost of creating or developing it, or the cost of creating or developing a similar asset. These costs may include research and development, materials, labor, testing, trials, overheads, and the cost of protecting the intellectual property. Under this method, the asset’s value comes from the time and money a buyer will save (through not having to develop their own intellectual property), the right to use the protected asset without infringing, and the success of the intellectual property.

The downside of the cost method is that it does not take into account the market potential of the intellectual property, or the asset’s future value. However, it can be a useful way of valuing assets that are in an early stage of development, and that do not currently have market experience.

The market method of valuing intellectual property

The market-based valuation method is similar to the CUP method of transfer pricing. It involves analyzing similar assets that have been licensed in the market, and using this data as a valuation benchmark. The most common difficulty with a market method is finding recent license agreements for similar assets (although this is easy with a royalty rates database like RoyaltyRange ).

In order to use this method, organizations need to have access to third-party license agreements that have a high level of comparability. They need to be able to find agreements that are similar in terms of exclusivity, payment structure, territory and market conditions. This is because factors like this can significantly affect the royalty rate charged, which can confuse the valuation analysis.

The easiest and most reliable way to find comparable license agreements is to search the RoyaltyRange database . By applying the search filters for intellectual property type, keywords, exclusivity, territory and date, organizations can ensure that they only see license agreements that are relevant to their valuation requirements. The RoyaltyRange database contains the latest license agreements (with royalty rates) between unrelated parties, gathered from public sources.

The income method of valuing intellectual property

The income method involves valuing intellectual property by considering how much income it could generate in the future (factoring in associated risks and costs). It is important to remember that the income method bases an asset’s value on potential future income, not its past performance. It can be difficult to estimate the intellectual property’s economic life and income over many years.

When carrying out an income-based valuation, organizations need to take into account factors including competition, market and the strength of the intellectual property protection.

Licensing intellectual property

If you are entering into a licensing deal or drafting a license agreement, you will need to determine fair royalty rates for the intellectual property being licensed. This ensures that both parties benefit fairly from the intellectual property rights being granted to the licensee. If the royalty rate is too high, the licensee will be paying too much for the intellectual property, and may reject the licensing deal. If the royalty rate is too low, the licensor will not be fairly compensated for the expertise and time that went into developing the intellectual property. The rate must be calculated accurately.

Royalty rates for intellectual property are usually set as a percentage of revenue. For example, the royalty rate could be 6%, based on net sales and paid on a quarterly basis. This means that, each quarter, the licensee must pay the licensor 6% of the net sales generated by the intellectual property that quarter. Intellectual property royalties can also be set as fixed fees. This means that the licensee must pay the licensor a set amount on a regular basis, regardless of how much income the intellectual property has generated. Royalty percentages are the more common option.

Calculating royalty rates for licensing intellectual property

There are a number of ways to determine fair royalty rates for intellectual property licensing. To get an accurate idea of an asset’s value, it can be useful to look at both market value and development costs. Just as with the valuation and transfer pricing analyses, the most suitable royalty calculation method depends on the individual circumstances of the intellectual property licensing agreement. It is a good idea (but not essential) to try multiple calculation methods and corroborate the results.

A market approach is an effective way of calculating fair royalty rates for intellectual property licensing. This involves looking at the royalty rates charged in comparable licensing agreements, and using these as a basis for your calculation. The most important element of this approach is ensuring that you have access to up-to-date licensing agreements that are comparable to the license agreement that you are drafting – otherwise, the calculation may not be accurate.

Benchmarking royalty rates for intellectual property licensing

If you want to find arms-length royalty rates for your intellectual property in a specific market, the easiest and most reliable option is to invest in a benchmarking study . This calculates a market royalty rate range based on real licensing agreements and your specific search criteria. It is an accurate way to find out what other organizations are charging in similar deals.

When you have a benchmark for your intellectual property, you are able to better understand what would be a fair royalty rate to charge. A benchmarking report also provides you with clear market evidence that will strengthen your position when you begin negotiating royalty rates for the deal.

Intellectual property infringement cases

Intellectual property infringement occurs when a party uses another party’s intellectual property without permission. If a party has not been granted intellectual property rights, they are not allowed to use it in any way. Similarly, intellectual property infringement can occur within licensing agreements. For example, if a licensee uses the intellectual property in a way that was not defined in the scope of the intellectual property licensing agreement, they are in breach of that deal.

In such intellectual property cases, litigation professionals are required to calculate damages for the intellectual property owner. This involves the professional valuing the intellectual property to understand the financial damages caused to the licensor or intellectual property owner.

In patent infringement cases, professionals often calculate a ‘reasonable royalty rate’. This is the royalty that a licensee would pay for the rights to the patented invention in a hypothetical negotiation. If you’d like to find out more about reasonable royalty rates for intellectual property and patent infringement cases, read our article on 3 quick facts about reasonable royalty rates .

Find the latest intellectual property license agreements and royalty rates

Whether you’re setting transfer prices, valuing intangible assets, drafting a licensing agreement or dealing with an infringement case, you can use the RoyaltyRange database to find the latest intellectual property licensing data. To get started, search the database using One Search (and get a full royalty rates report) or order a benchmarking study (including a royalties average and range).

Request royalty rate search

We will perform the search and deliver the initial results within hours, at no cost., finalize your request, within hours, you will receive a detailed list of reports from our search at no cost. if you are happy with the results of our search, you can then choose to pay for and download the data for a fee of . the fee for an optional write-up is ., your contact information.

Assignment on Transfer Pricing

Transfer price policy is generally aimed at  evaluating financial performance of different business units (profit centers) of a conglomerate, and/or to shift earnings from a high tax jurisdiction to a low-tax one. Tax authorities usually frown upon transfer pricing aimed at tax avoidance and insist that each internal part of the firm deals with the other on ‘arm’s length’ (market price) basis. Also called transfer cost.

Transfer pricing

Transfer Pricing Associates approach transfer pricing from a multi-disciplinary perspective covering management control, economics, legal, tax, finance and cost accounting. Transfer Pricing Associates offers all of those elements globally – in a mix that suits your needs and circumstances.

Transfer Pricing Associates developed the Transfer Pricing Process , a methodology that allows you to manage your transfer pricing system yourself in a more focused and cost efficient way. The Transfer Pricing Process also allows you to make an assessment of your transfer pricing risks.

Although a large number of multinationals have devoted time and efforts to transfer pricing documentation and controversy, few have made an explicit connection between their business and operational model and the transfer pricing system they apply. Making such a connection allows a multinational – based on sound economic arguments – to align its transfer pricing system with its (new) business model and at the same time develop the arguments needed to justify and defend the transfer pricing policy towards internal and external stakeholders, e.g. subsidiary companies, internal and external auditors, potential investors, and the tax authorities in all the countries where you operate your business. The Transfer Pricing Process enables you to make a complete transfer pricing risk assessment. It will assess your current and/or future transfer pricing system against ‘best practices’ of designing, documenting and defending a transfer pricing system in multiple countries.

Transfer Pricing Associates

Assignments undertaken around the world by the Transfer Pricing Associates group cover the following broad areas:

• Design of transfer pricing systems – assistance to multinational clients in the design of global transfer pricing systems and pricing policies, to meet their commercial needs and to reduce the group’s global transfer pricing risk.
• Global/Regional (Masterfile) and country-specific transfer pricing documentation – preparation of docu¬mentation (with expert economic analysis and appropriate benchmarking) in respect of the pricing of all types of international related party transactions, in accordance with the OECD Guidelines and the local tax requirements.
• Provision of advanced transfer pricing documentation and compliance process management software (Vantage).
• Performance of global benchmarking services (via the Global Benchmarking Platform) and advanced economic and financial analysis.
• Advance pricing arrangements (APAs) – preparation of all types of APA applications supported by expert financial and economic analyses, negotiation with the relevant tax authorities and strategic management of the application process to ensure the best possible outcome.
• Transfer pricing risk assessment and contingency evaluation, including FIN 48 reviews – conduct of prudential reviews of transfer pricing systems, utilizing our in-depth knowledge and experience of the practical approach taken by tax authorities in order to advise clients of their key transfer pricing exposures, and the impact on the calculation of tax contingencies for accounting disclosure purposes.
• Strategic audit defence – adopting a proactive and strategic approach to the conduct of transfer pricing reviews and/or audits, to minimize disruption to the day-to-day business of the company, and with the ultimate objective to reduce the risk and amount of transfer pricing adjustments, interest and penalties by the relevant tax authority.
• Transfer pricing and value chain planning – devising global and regional transfer pricing policies and value chain strategies, and assisting multinational clients with the implementation of those strategies, to manage their transfer pricing risks more effectively and/or to minimize as far as possible their overall effective tax rate.

Transfer Pricing | Service

The services of Transfer Pricing Associates are structured so as to help you enhance your transfer pricing management and set priorities in the field of transfer pricing issues. Examples of our service offering include:

• Design of global transfer pricing systems based on sound economics
• Preparing and managing global transfer pricing documentation, including defining disclosure policies
• Implementation of all intra-group service charges, whether cost based or value based, e.g. for high value adding centralized procurement services
• Management of international transfer pricing risks
• Design, implementation and documentation of transfer pricing systems for treasury departments
• Design and implementation of research and development cost sharing arrangements
• Management of transfer pricing controversy
• Advance Pricing Agreements
• A “coaching model”  which allows multinationals with their own transfer pricing professionals to use Transfer Pricing Associates to discuss ideas and for the exchange of best practice

Transfer Pricing Associates provides specific services designed to address the particular needs of selected industries.

The TPA Global group is an independent and specialist provider of expert transfer pricing, tax valuation and customs services, headquartered in Amsterdam and with our own offices and coverage in over 30 countries around the world.

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