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Tax-Advantaged Transfer Pricing for Intellectual Property
Robert J. Misey, Jr., Reinhart Boerner Van Deuren s.c.
The IRS has 160 pages of transfer pricing regulations. They can appear intimidating, but they can also offer a powerful tool to lower the taxes of a multi-national corporation.
Although the IRS regulations provide a lengthy list of intellectual property for tax purposes, IP can be broken down into trade intangibles (i.e., patents, trademarks, designs, models), marketing intangibles (i.e., brands), and know-how (i.e., trade secrets).
Transfer pricing professionals consider IP as anything not tangible that provides a return in excess of routine.
The author explains several methods of transfer pricing and analyzes their relationship to the IRS methods for determining the royalty for IP. They involve inter-company transactions and focus on the tax impact of differentiating between the appropriate transfer pricing methodology for a royalty from licensing the IP, or in the alternative, entering a cost sharing arrangement that shares the ownership of the IP.
Multi-nationals may view the maze of IRS regulations with respect to the transfer pricing of IP as complex, but nonetheless they should consider taking advantage of them to save taxes.
First, the multi-national must identify the IP. Second, the multi-national has to determine whether one party will incur all the development costs and license the IP to the other party or whether the parties will enter a cost-sharing arrangement.
Third, and finally, the multi-national will have to plan the proper defense through the use of either contemporaneous documentation or an advance pricing agreement.