November 18, 2014 | Best Buy | Richfield, MN Your Trusted Tax Counsel ® Baker & McKenzie International is a Swiss Verein with member law firms around the world. In accordance with the common terminology used in professional service organizations, reference within the organization to a “partner” means a person who is a partner, or equivalent, in a member firm or its affiliate. Similarly, reference to an “office” means an office of any such law firm. Baker & McKenzie Consulting LLC provides tax advisory and economic services and does not provide legal advice or services. Baker & McKenzie Consulting LLC is a subsidiary of Baker & McKenzie LLP, a member firm of Baker & McKenzie International. Minnesota Chapter – TEI International Tax Committee Intangibles: Evolving and Conflicting Definitions and Valuation Techniques Lisa Parker Gates (Chicago) Holly Glenn (Washington, D.C.) Russ Young (Chicago)
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November 18, 2014 | Best Buy | Richfield, MN Your Trusted Tax Counsel ® Baker & McKenzie International is a Swiss Verein with member law firms around the.
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November 18, 2014 | Best Buy | Richfield, MN
Your Trusted Tax Counsel®
Baker & McKenzie International is a Swiss Verein with member law firms around the world. In accordance with the common terminology used in professional service organizations, reference within the organization to a “partner” means a person who is a partner, or equivalent, in a member firm or its affiliate. Similarly, reference to an “office” means an office of any such law firm. Baker & McKenzie Consulting LLC provides tax advisory and economic services and does not provide legal advice or services. Baker & McKenzie Consulting LLC is a subsidiary of Baker & McKenzie LLP, a member firm of Baker & McKenzie International.
Minnesota Chapter – TEI International Tax Committee
Intangibles: Evolving and Conflicting Definitions and Valuation Techniques
Lisa Parker Gates (Chicago)Holly Glenn (Washington, D.C.)Russ Young (Chicago)
– copyright, literary, musical, or artistic composition;
– trademark, trade name, or brand name;
– franchise, license, or contract;
– method, program, system, procedure, campaign, survey, study, forecast, estimate, customer list, or technical data; or
– any similar item, which has substantial value independent of the services of any individual– “Any similar item” is clarified only under the §482 regs as an item
that derives its value not from its physical attributes but from its intellectual content or other intangible properties
– Under US rules, unless the transferred property falls within the intangibles definition, no royalty or other compensation required under the rules. What’s not compensable as IP under current law: – Business opportunity. Hospital Corp. of America, 81 T.C. 520 (1984)
– Advantage resulting from operating within an affiliated group. Merck
– Goodwill or going concern value (“GW/GCV”). VERITAS, 133 T.C. 297 (2009)
– Workforce in place. VERITAS; Newark Morning Ledger, 507 U.S. 546 (1993)
– Most other jurisdictions & OECD rules do not provide a list of what is an intangible– “Non-compensable” is a largely US concept
– Exempted from royalty imputation (Treas. Reg. §1.367(d)-1T(b))
– Definition: “the residual value of a business operation conducted outside the US after all other tangible and intangibles assets have been identified and valued”
– §367(d) targets abuse of taking R&D deductions by a US taxpayer in creating the IP without recognizing any income attributable to such IP before outbound transfer (e.g., Darvon in Eli Lilly)
– GW/GCV presumed to be attributable to a branch’s earning income on which US taxpayer would have paid US income tax
– Again, this level of specificity is unique to the US rules
‒ Minimum IP value vs. maximized value‒ Economic/beneficial ownership vs. legal title/ownership‒ Multiple beneficial owners vs. multiple legal owners‒ Goodwill: Can it be separated from IP?‒ Tax treaties and IP treaties
“Something which is not a physical asset or a financial asset, which is capable of being owned or controlled for use in commercial activities, and whose use or transfer would be compensated had it occurred in a transaction between independent
parties in comparable circumstances.”
The OECD wanted to avoid making a list, because they have seen the outcome in the US, which is to exempt certain intangibles from compensation. They wanted a definition broad enough to encompass “goodwill,” whatever it means. They did not accept input suggesting IP be limited to what can be legally owned or protected.
‒ Ch. VI includes the use of appraisal/valuation methods largely based on the use of discounted cash flows (DCF) Purchase price allocations or valuations for accounting
purposes may be a “useful starting point,” but are not controlling for TP purposes
‒ Ownership of intangibles: profits of IP owner / role of contracts / funding / risk versus people functions (Sections B.1 and B.2) (Legal ownership and contractual arrangements are the “starting point” for TP analysis)
‒ Interaction with work on risk and recharacterisation “particularly pronounced”
‒ Providing tax administrations with authority in appropriate instances to apply rules based on actual results to price transfers of hard to value intangibles and potentially other assets “Look-back” rules
‒ Requiring contingent payment terms and/or the application of profit split methods for certain transfers of hard to value intangibles
‒ Limiting the return to entities whose activities are limited to providing funding for the development of intangibles, and potentially other activities, for example by treating such entities as lenders rather than equity investors under some circumstances Like the “income method” in US cost-sharing
‒ Requiring application of rules analogous to those applied under Article 7 and the Authorised OECD Approach to certain situations involving excessive capitalisation of low function entities “Fat cap” rules
Issues Raised‒ OECD wants to avoid the US situation in which taxpayers have a
legal basis to argue that GW/GCV, along with certain other IP, is exempted from compensation when transferred IRS likes OECD position, but how can the current US rules be
reconciled?‒ OECD has embraced the IRS notion of “platform intangibles” that
may underlie next-generation IP and be entitled to compensation‒ Key issue is what profit is attributed to legal or economic
ownership (ownership or funding of IP without major strategic functions) Tide has turned against allowing the legal and/or economic owner to
earn the residual Fundamental challenge to “one-sided methods” that set the profit of
Pursuant to requirements relating to practice before the Internal Revenue Service, any tax advice in this communication (including any attachments) is not intended to be used, and cannot be used, for the purpose of (i) avoiding penalties imposed under the United States Internal Revenue Code, or (ii) promoting, marketing, or recommending to another person any tax-related matter.