These days, licensing between affiliate members of a multinational corporate family is prevalent. While reaching agreement between friendly parties on licensing terms may be easier than it normally would be between arms-length parties from an economic perspective, these transactions are likely to come under intense scrutiny from the relevant tax authorities worldwide.
Understanding the value of not just the assets at issue in the license, but the intangible assets that each party to the license brings to the table, is essential not only for determining arm’s-length licensing terms but also for defending those terms in court. Medtronic Inc. successfully convinced the U.S. Tax Court that the manufacturing trade secrets and know how held by its Puerto Rican subsidiary were incredibly valuable to not only the production, but also the development, of its Class III medical devices. Indeed, the intangible assets of Medtronic’s subsidiary were so important the court attributed to it more than half of intercompany sales revenue in arriving at a fair market value royalty rate.
Original publisher; Bloomberg BNA, Tax Management Transfer Pricing Report™, Vol. 25 No. 7, August 11 2016. Reproduced with permission from Copyright 2016 The Bureau of National Affairs, inc. (800-372-1033) http://www.bna.com/