Transfer Pricing Basics for IP Professionals

TaxTransfer pricing refers to the prices charged for goods, services, and intellectual property (IP) between or among legal entities of a corporation, including a parent company and its domestic and foreign subsidiaries and other controlled entities (each entity a “Taxpayer”). It is regulated by governmental tax regimes, such as the Internal Revenue Code in the United States, to prevent corporations from subverting tax laws by engaging in self-dealing across legal entities.

Typically, enterprises employ or retain transfer pricing experts to drive compliance with applicable laws. Areas within their purview include valuation of tangibles and intangibles, structuring of inter-entity transactions, and accounting and reporting activities. On occasion, these experts seek input from IP professionals with respect to the nature of relevant IP, its ownership and valuation, and other topics.

This article aims to equip IP professionals with basic knowledge of transfer pricing concepts so they can provide competent support to transfer pricing teams and flag issues for further analysis when appropriate.



The “Arm’s Length” Requirement

From a transfer pricing perspective, Taxpayers doing business within the corporation (i.e., “controlled” entities) must enter into arm’s length transactions with one another. A price charged one controlled entity by another must be fair—it must reasonably approximate a price negotiated by similarly situated companies outside the corporation (“uncontrolled” entities).

The “best method” rule for transfer pricing, which is followed by the U.S., requires that Taxpayers choose an approximation method that yields the most reliable measure of an arm’s length price. For instance, the comparable-uncontrolled-transaction (CUT) method compares the terms and conditions of a proposed controlled transaction to those of a similar uncontrolled transaction (a) between the Taxpayer and a third party (an “internal comparable”), or (b) between third parties (an “external comparable”). On the other hand, the comparable profits method (CPM) compares the net operating profits generated by a controlled transaction to profits garnered by third parties engaging in similar uncontrolled transactions. Often, a range of acceptable arm’s length prices is determined, and the Taxpayer chooses a transfer price that falls at or near the middle of the range.

Many transfer pricing analyses are nuanced in nature, relying upon datasets, models, computations, comparisons, assumptions, and interpretations. When controlled entities are domiciled in respective different jurisdictions, multiple transfer pricing systems may apply. Transfer pricing determinations may substantially impact Taxpayers’ tax burden and profitability. In other words, though challenging to perform, transfer pricing analyses offer opportunities to obtain more favorable tax treatment.

Taxpayers must furnish data to the relevant tax authority, such as the Internal Revenue Service (IRS), that evidences the Taxpayer’s rationale for the chosen transfer price. If it disputes the Taxpayer’s rationale, such tax authority may require additional evidence from, or impose additional tax liability on, the Taxpayer.

Example Transfer Pricing Scenarios That Involve IP

Intangible assets such as IP and software frequently are involved in inter-entity transactions within a corporation (i.e., controlled transactions). Arm’s length and other transfer pricing requirements thus apply. Example scenarios include:

  1. A controlled entity transfers IP assets (e.g., patents, trademarks, copyrights, or trade secrets) to another controlled entity (e.g., pursuant to (i) a rationalization or other reorganization of the business, (ii) a divestiture or transfer of assets to another controlled entity in preparation for an anticipated spinoff or sale to a third party, or (iii) the creation of a holding company for enterprise IP).
  2. A controlled entity licenses patents, trade secrets, or software to one or more controlled entities to support their research and development (R&D) operations.
  3. A controlled entity licenses IP to another controlled entity so it can manufacture components or products or perform a service for customers.
  4. A controlled entity licenses its trademarks (e.g., a flagship or house mark of the parent entity) and domain names to other controlled entities (e.g., company affiliates that distribute products or offer services branded with the mark of the parent).
  5. Multiple controlled entities collaborate to jointly develop technology, with the Taxpayers splitting R&D costs pursuant to a cost-sharing arrangement (CSA).
  6. A controlled entity holds enterprise IP to avail itself of a patent box tax regime and licenses such IP to other controlled entities.
  7. Any one of scenarios 1-6 above, where all controlled entities are domiciled in the same country.
  8. Any one of scenarios 1-6 above, where the controlled entities are domiciled in two or more different countries.
  9. A controlled entity in a foreign country (e.g., a subsidiary) forms a joint venture (JV) with a third party, where IP of a domestic controlled entity (e.g., a parent) is licensed to the JV.

Transfer pricing teams help enterprises select an optimal structure for a proposed controlled transaction—such as a royalty-bearing license of IP, an outright transfer of IP by sale, a CSA, or a service agreement that licenses the use of IP—and determine arm’s length pricing to govern the transaction. They also oversee Taxpayers’ accounting of expenses and profits associated with the transaction, including appropriate allocations between or among controlled entities.

Pricing determinations typically consider, among other things, the value of IP from the perspective of the controlled entity that is taking a license to, or buying, the IP (e.g., how the IP protects such entity’s products or services and how such entity plans to monetize the IP), as well as the impact goodwill has on the overall value of the IP. In the case of a CSA, one controlled entity often pays another controlled entity a buy-in payment at the outset of the entities’ joint development relationship. Such payment must fairly reflect the value of preexisting IP or other intangibles being transferred to the paying entity, including the anticipated return-on-investment (ROI) of the paying entity’s investment in the CSA relationship.

How IP Professionals Can Effectively Support Transfer Pricing Teams

IP professionals, including attorneys, consultants, strategists, and paralegals, can play an important role in facilitating enterprises’ compliance with transfer pricing laws and in ensuring that optimal transaction structures and pricing are selected. They can help in the following ways:

  1. By spotting potential transfer pricing issues. When a transaction is contemplated between controlled entities, such as one akin to the examples listed above, an IP professional should engage with the transfer pricing team as soon as possible. Transactions that seem straightforward from a legal or business perspective may not pass muster under transfer pricing laws, or may represent a suboptimal option among multiple legally acceptable options.
  2. By exercising sound IP stewardship. Transfer pricing professionals often consult with IP professionals regarding ownership, licensing, and scope of IP in order to drive transfer pricing strategy and compliance. Timelines to respond to requests for input may be tight. IP professionals can be well prepared by acting diligently in the ordinary course of business. This includes (a) assigning IP to the appropriate controlled entity and making necessary recordals in a timely manner to ensure that the chain of title is clean and fully documented, (b) storing relevant metadata in the IP asset management database (e.g., data that maps patents to products and technologies, and vice versa, for quick retrieval of relevant IP), and (c) archiving and cataloging copies of inter-company agreements.
  3. By acting strategically. IP practitioners should collaborate with tax and transfer pricing teams to architect a company-wide strategy regarding (a) IP ownership and licensing between and among controlled entities, (b) use of IP holding companies, and (c) use of patent box regimes. A proactive approach enables an enterprise to ensure transfer pricing and tax compliance while minimizing tax exposure, administrative complexity, and expenses.
  4. By keeping abreast of industry and legal norms related to IP and technology. Transfer pricing teams often query IP professionals regarding reasonable royalty rates, asset valuation, deal structures, and other benchmarks to inform the structuring of controlled transactions. IP professionals should stay educated on such matters in order to provide meaningful inputs, as well as cultivate contacts within and outside the enterprise who have pertinent knowledge and expertise.


IP professionals are well positioned to supply essential inputs to transfer pricing teams, both to drive compliance and optimize deal structures and pricing under applicable transfer pricing laws. Grounded in a basic understanding of relevant concepts, and cognizant of the nature and scope of company IP involved in a transaction, they can flag issues proactively and competently support queries of the transfer pricing team.

For further information on transfer pricing, see these helpful materials published by the Organisation for Economic Co-operation and Development.

This article reflects the authors’ current personal views and should not be necessarily attributed to their current or former employers, or their respective clients or customers.


Warning & Disclaimer: The pages, articles and comments on do not constitute legal advice, nor do they create any attorney-client relationship. The articles published express the personal opinion and views of the author as of the time of publication and should not be attributed to the author’s employer, clients or the sponsors of Read more.

Join the Discussion

2 comments so far.

  • [Avatar for Catherine Toppin]
    Catherine Toppin
    January 15, 2018 09:00 am

    Thanks Carlo. One question, what is a “patent box regime” as referenced in your article.

  • [Avatar for Greg Bollis]
    Greg Bollis
    January 11, 2018 12:34 pm

    Carlo, great article.