Eni Norge AS was a wholly owned subsidiary of Eni International B.V., a Dutch company. Both companies were part of the Eni Group, in which the Italian company Eni S.p.A was the HQ. Eni Norway had deducted costs related to the purchase of “technical services” from Eni S.p.A. Following an audit, the tax authorities reduced these deductions pursuant to section 13-1 of the Taxation Act (arm’s length provision). This meant that Eni Norway’s income was increased by NOK 32,673,457 in FY 2015 and NOK 16,752,728 in FY 2016. The tax assessment issued by the tax authorities was later confirmed by a decision of the Petroleum Tax Appeal Board. The Appeals Board considered that there were price deviations between the intra-group hourly rates for technical services and the external hourly rates. The price deviations could be due to errors in the cost base and/or a lack of arm’s length in the distribution of costs. There was thus a discretionary right pursuant ... Read more

Following an audit of Otis Servizi s.r.l. for FY 2007, 2008 and 2009 an assessment of additional taxable income was issued by the Italian tax authorities. The first part of the assessment related to interest received by OTIS in relation to the contract called “Cash management service for Group Treasury” (hereinafter “Cash Pooling Contract”) signed on 20 March 2001 between OTIS and the company United Technologies Intercompany Lending Ireland Limited (hereinafter “UTILI”) based in Ireland (hereinafter “Cash Pooling Relief”). In particular, the tax authorities reclassified the Cash Pooling Agreement as a financing contract and recalculated the rate of the interest income received by OTIS to be between 5.1 and 6.5 per cent (instead of the rate applied by the Company, which ranged between 3.5 and 4.8 per cent); The second part of the assessment related to of the royalty paid by OTIS to the American company Otis Elevator Company in relation to the “Licence Agreement relating to trademarks and company ... Read more

ERT Automotive Bohemia s.r.o. is active in the automotive industry. From 1 January 2013 to 30 November 2013, it provided the manufacture and repair of upholstery products for the automotive industry for its ‘sister’ company, Reiner Lasertec GmbH, established in Germany (both companies were owned at the time by the parent company Notos Beteiligungen GmbH, also established in Germany). ERT Automotive Bohemia s.r.o. provided ‘wage labour’ for Reiner Lasertec at a price of EUR 0,15 per minute of work. In December 2013, ERT Automotive Bohemia s.r.o. changed this business model. It no longer simply processed materials for Reiner Lasertec, but instead took over its former role. It was thus responsible for the production of the entire specific automotive part, which it then supplied as an independent manufacturer and final supplier. The Tax Office suspected that ERT Automotive Bohemia s.r.o. had supplied services to a related party from January to November 2013 at a lower price than would have been agreed ... Read more

An assessment had been issued by the tax authorites in regards of Auronext Pharma’s pricing of purchase and sales transactions with related parties. The tax authorities had rejected the CUP method applied by Auronext Pharma. “Since the comparable transactions were with related parties those transactions cannot be considered under CUP method for the purpose of benchmarking the taxpayers transactions.” Instead, the tax authorities used the Transactional Net Margin Method (TNMM). An appeal was filed by Auronext Pharma with the ITAT. Judgement of the Income Tax Appellate Tribunal The ITAT remanded the case to the tax authorities to examine afresh the data available with respect to un-related parties and find out whether the transaction of the assessee are at arm’s length or not by applying the CUP method. Excerpt ” (…) The sole basis of rejecting the method adopted by the assessee was the transactions were between the related parties and were not un-controlled transactions. A similar view was also expressed ... Read more

On 17 April 2015, “Loan Ltd” entered into a bond loan agreement with related parties. The effective interest rate charged to “Loan Ltd” (borrowing costs) in the years under consideration (2016 and 2017) was 8.1%. The interest rate had been determined based on the CUP method and external comparable data. The tax authorities determined the arm’s length interest rate for the loan to be 4,03% and issued an assessment of the additional taxable income resulting from the lower borrowing costs. A complaint was filed by “Loan Ltd” Decision of the Board The Board dismissed the complaint and upheld the assessment of the tax authorities. Excerpt “Because the applicant claims that the audit used inappropriate/non comparable data. Because, however, the audit chose the most reliable internal data in accordance with the OECD Guidelines, namely the interest rate agreed with a third independent bank for the provision of a credit facility (2.03%), which it adjusted by the percentage of the guarantee fee ... Read more

SGL CARBON SPA paid interest on loans received from the German parent of the SGL Group. The tax authorities considered, that the interest rate applied to the intra-group loan was significantly higher than the average interest rate applied in the German market. The interest rate was therefore determined based on external CUPs SGL disagreed with the resulting assessment and brought the case before the Italien Courts. Judgement of the Supreme Court The Supreme Court ruled in favor of SGL. “The first plea is well founded. The Provincial Tax Commission, in fact, in its judgment at first instance held that the notice of assessment which is the subject of the present dispute was unlawful, on the basis of two distinct rationes decidendi. In particular, the Provincial Tax Commission pointed out, first of all, the erroneousness of the criterion (so-called external comparison) employed by the Revenue Agency for the identification of normal value and, conversely, the legitimacy of the criterion (so-called of ... Read more

The Argentinian company Materia Pampa S.A. exported products to a Brazilian company, Companhia De Bedidas Das Americas in Brazil (Ambev), via a related party in Uruguay, Maltería Uruguay S.A. There was a significant difference between the price declared on export to Uruguay and the price used for the subsequent final shipment to Brazil. An assessment was made by the tax/customs authorities, which resulted in an upward adjustment of the price received for the products from the related party in Uruguay, which in turn resulted in additional taxes and VAT. The price adjustment was based on the guidance provided in the OECD TPG, and in relation to the application of the arm’s length principle in determining prices for customs purposes, reference was made to the guidance provided in paragraph 1.137 of the 2017 TPG, which states. “The arm’s length principle is broadly applied by many customs administrations as a principle of comparison between the value attributable to goods imported by associated ... Read more

LAKUM KTL, a. s. had deducted from its taxable income costs for the purchase of advertising and promotional services from PRESSTEX MEDIA and PAMBROKE Media. Following an audit, the tax authorities concluded that LAKUM had entered into a legal relationship with PRESSTEX and PAMBROKE for the purpose of reducing the tax base. The tax authorities established reference prices on the basis that LAKUM could have entered into the contract for advertising and promotional services directly with the club concerned and, from the price range thus established, determined the arm’s length price for the services and increased the tax base accordingly. Decision of the Regional Court The Regional Court ruled in favour of the tax authorities on the pricing issue. Excerpts “37. The applicant first argued that the conditions for the application of the first sentence of Article 23(7) of the Income Tax Act were not met. According to that provision, if the prices agreed between related parties differ from the ... Read more

Sandakan Edible Oils SDN BHD principal activity is, amongst others, to carry out the refining and sale of edible oils and related products, and the packaging and sale of cooking oil. It applied the Comparable Uncontrolled Price (CUP) method as the transfer pricing methodology to determine the arm’s length pricing of its controlled transactions. Following an audit for FY 2010-2013 the tax authorities informed Sandakan Edible Oils SDN BHD that it would be invoking section 140A of the ITA to raise an additional assessment. The tax authorities rejected the CUP method and instead applied the Transactional Net Margin Method (TNMM). According to the benchmarking analysis, Sandakan Edible Oils SDN BHD’s financial results was within the interquartile range for all years, but for 2010 the results was below the median. On that basis the tax authorities held that the margin for 2010 should be adjusted up to the median. Sandakan Edible Oils SDN BHD filed a complaint with the Special Commissioners ... Read more

Dart Sudamericana S.A. (now Dart Sudamericana SRL) imported so-called EPS T601 pellets from related party abroad for use in its manufacturing activities. The controlled transactions had been priced using the CUP method. Following an audit the tax authorities made a transfer pricing adjustment where it had applied the transactional net margin method (TNMM). According to the tax authorities, the price paid for the pellets in the controlled transaction was higher than the arm’s length price. The adjustment resulted in an assessment of additional taxable income. Not satisfied with the assessment Dart Sudamericana filed a complaint. Tax Court Ruling The court upheld the assessment issued by the tax authorities and dismissed Dart Sudamericana’s appeal. Excerpts “In short, the appellant merely tried to prove the similarity of the product in order to carry out the price comparison, which is not sufficient for a proper study of the comparability of the transactions. At the risk of being reiterative, the transactions should be analysed, ... Read more

The tax authority, based on the results of an audit, found that the prices in controlled export transactions of goods, carried out between “LK Ukraine Group” and related parties, did not comply with the arm’s length principle, i.e. the selling prices of the goods were lower than the minimum values of the arm’s length range. Disagreeing with this conclusion, “LK Ukraine Group” stated that the the method applied by the tax authority during the audit of prices in controlled transactions was unlawful and inappropriate due to the lack of information on all possible costs. At the request of the supervisory authority, “LK Ukraine Group” provided evidence that when determining the prices of goods, the group was guided by information based on monitoring, in particular, prices on the Euronext exchange, namely, the average selling prices of agricultural products on the terms of delivery EXW-port, which refuted the assertion of the authority that the controlled transactions did not comply with the arm’s ... Read more

“Fertilizer B.V.” is part of a Norwegian group that produces, sells and distributes fertiliser (products). “Fertilizer B.V.” is the parent company of a several subsidiaries, including the intermediate holding company [C] BV and the production company [D] BV. The case before the Dutch Supreme Court involves two points of dispute: (i) is a factually highly effective hedge sufficient for mandatory connected valuation of USD receivables and payables? (ii) is the transfer prices according to the supply and distribution agreements between [D] and a Swiss group company (AG) at arm’s length? (i) Factual hedge of receivables and payables “Fertilizer B.V.” had receivables, forward foreign exchange contracts and liabilities in USD at the end of 2012 and 2013. It values those receivables and payables at acquisition price or lower value in use. It recognised currency gains as soon as they were realised and currency losses as soon as a receivable was valued lower or a debt higher. The court has measured dollar ... Read more

Pgnig Upstream Norway AS (PUN) sold dry gas to its sister company (PST). According to the tax authorities the price for the gas had not been determined at arm’s length, cf. Section 13-1, first paragraph, of the Tax Act, and an assessment of additional income was issued. Judgement of the Court The Court decided in favour of the tax authorities. It found that the tax authorities had correctly concluded that there was a reduction in PUN’s income, and that the reduction was due to parties being under common control. The key point for the Court was that there was an imbalance in the functional profiles of PUN and the sister company, PST. Through certain deductions in the purchase price, PUN had indirectly been charged for parts of the sister company’s downside risk, without being allowed a share in potential upside profits. Excerpts “(…)In any event, the Court of Appeal finds reason to note that the [text removed] agreement in any ... Read more

Innodis granted loans to five wholly-owned subsidiaries between 2002 and 2004. The loans were unsecured, interest-free and had a grace period of one year. The subsidiaries to which the loans were granted were either start-up companies with no assets or companies in financial difficulties. The tax authorities (MRA) had carried out an assessment of the tax liability of Innodis Ltd in respect of the assessment years 2002 – 2003 and 2003 – 2004. In the course of the exercise, a number of items were added to the taxable income, including income from interest-free loans to subsidiaries and overseas passage allowances to eligible employees, which had been earmarked but not paid. The tax authorities were of the opinion that the grant of the interest-free loans was not on arm’s length terms in accordance with section 75 of the Income Tax Act 1995 (ITA) and was clearly preferential treatment of the subsidiaries. An assumed interest rate of 13% was applied to the ... Read more

The tax authority had conducted a tax audit of “KOR Oil Company” on transfer pricing issues for FY 2013-2015. Based on the results of the audit, a notice was issued on corporate income tax in the amount of 138 515 235 and penalties in the amount 34 807 179. In the decision the tax authorities had based the pricing of the controlled oil transactions on market data provided by Argus China Petroleum, whereas the company had based the pricing on Brent quotation. On appeal, the assessment of additional tax was later canceled by the tax court and the court of appeal. In an appeal to the Supreme Court the tax authorities asked the court to cancel the the decision of tax court and the court of appeal. The tax authorities does not “…agree that the Argus China Petroleum source used by the Department does not contain information about daily quotations for goods, which does not comply with the requirements of ... Read more

Prinoth S.p.A. is an Italian manufacturer of snow groomers and tracked vehicles. For a number of years the parent company had been suffering losses while the distribution subsidiaries in the group had substantial profits. Following an audit the tax authorities concluded that the transfer prices applied between the parent company and the distributors in the group had been incorrect. An assessment was issued where the transfer pricing method applied by the group (cost +) was rejected and replaced with a CUP/RPM approach based on the pricing applied when selling to independent distributors. An appeal was filed by Prinoth S.p.A. which was rejected by the Court of first instance. The Court considered “the assessment based on the price comparison method to be well-founded, from which it emerged that in the three-year period from 2006 to 2008 the company had sold to its subsidiaries with a constant mark-up of 11.11 per cent, while in direct sales to end customers it had applied ... Read more

Universal Pictures International Spain SL is a distributor of films on the Spanish Market. It distributes films both from related parties (Universal Pictures) and from unrelated parties. Following an audit, the Spanish tax authorities issued an assessment where the remuneration received for distribution of films from related parties had been compared to the remuneration received from distribution of films from unrelated parties and where the pricing of the controlled transactions had been adjusted accordingly . Not satisfied with the assessment of additional income a complaint was filed by Universal Pictures International Spain SL. Judgement of the Court The Court predominantly held in favor of Universal Pictures International Spain SL. The distribution activities performed in regards of films from related parties were limited risk whereas the activities performed in regards of distribution of films from unrelated parties were fully fledged. Hence the pricing of the controlled and uncontrolled transactions was not comparable. However, the comparables in the benchmark analysis on which ... Read more

Following an audit of “Tin Cup Ltd” for FY 2016 and 2017 an assessment was issued by the tax authorities regarding excessive amounts of waste materials and pricing of intra-group transactions. On the issue of excessive amounts of waste materials, tax deductions was denied by the authorities as the costs was not considered to have been held in the interest of the company, i.e. it did not take place with the purpose of increasing “Tin Cup Ltd” income. On the second issue, the tax authorities found that the most appropriate method for the transactions in question (sales to a related party) was the CUP method. Applying the CUP to the controlled transactions (instead of the TNMM) resulted in additional income of approximately 392.000 EUR in total for FY 2016 and 2017. A complaint was filed by “Tin Cup Ltd” with the Dispute Resolution Board. Decision of the Board The Board upheld the assessment of the tax authorities both in regards ... Read more

Following an audit the tax authorities issued an assessment of additional income resulting from an adjustment of the tax deductions related to marketing expenses. According to the tax authorities the price agreed between the related parties for advertising space was excessive and not determined in accordance with the arm’s length principle. ANITA B s.r.o. filed an appeal against the assessment. The Regional Court dismissed the appeal as unfounded by judgment of 26 October 2021, No. 62 Af 70/2019-48. The Court concluded that the tax authorities had established that the price agreed between ANITA B s.r.o. and its supplier (ELAPROMO) differed from the price that would have been agreed between unrelated parties. The Court upheld the method chosen by the tax authorities and concluded that ANITA B s.r.o. had failed to prove that the advertising costs claimed were justified in full. An appeal was then filed with the Supreme Administrative Court Judgement of the Supreme Administrative Court The court decided in ... Read more

“Gas-Trader KtF” – a subsidiary in the E.ON group – had entered into loan agreements with other group companies and the related parties had determined the interest rate by application of the CUP method using the Thomson Reuters LoanConnector database. Comparable transactions was extracted from the database by searching for credit rating, type of debtor party, date of loan, maturity, transactions with completed status, and spread/provision fee. An audit was conducted by the tax authorities for FY 2012-2013 and the interest rate determined by the group was found to be incompliant with the arm’s length principle. The tax authorities applied the same method as Gas-Trader but added further search criteria in the selection of comparable transactions – credit purpose and insurance coverage. This resulted in a different range and an assessment of additional taxable income was issued. An appeal was filed by Gas-Trader KtF with the National Tax and Customs Board of Appeal where a judgement in favor of the ... Read more

In February 2016 the Regional Tax Commission rejected an appeal filed by the Revenue Agency against the first instance judgment, which had upheld an appeal brought by Italian car manufacturer, Ferrari S.p.A. against a notice of assessment issued by the Revenue Agency in which the company was accused of having applied prices lower than the ‘normal value’ in transactions with its foreign subsidiaries, in particular with the US company Ferrari NA (North America). In determining the arm’s length price of the relevant controlled transactions Ferrari had applied the CUP method. The Revenue Agency considered the TNMM to be the most appropriate method. The Regional Tax Commission observed that “for verifying the “normal value”, the Revenue Agency itself, in Circular No. 32 of 22/09/1980, had suggested the use of the CUP method instead of the less reliable TNMM method “which is not advisable due to its considerable approximation and arbitrariness’ for which reason the Office’s objection must be considered inadmissible”. On ... Read more

Indirect evidence of comparable uncontrolled services price. (i) Company A is a United States insurance company. Company A’s wholly-owned Country X subsidiary, Company B, performs specialized risk analysis for Company A as well as for uncontrolled parties. In determining the price actually charged to uncontrolled entities for performing such risk analysis, Company B uses a proprietary, multi-factor computer program, which relies on the gross value of the policies in the customer’s portfolio, the relative composition of those policies, their location, and the estimated number of personnel hours necessary to complete the project. Uncontrolled companies that perform comparable risk analysis in the same industry or market-segment use similar proprietary computer programs to price transactions with uncontrolled customers (the competitors’ programs may incorporate different inputs, or may assign different weights or values to individual inputs, in arriving at the price). (ii) During the taxable year subject to audit, Company B performed risk analysis for uncontrolled parties as well as for Company A ... Read more

The following example illustrates this paragraph (c)(5): ... Read more

The price of a comparable uncontrolled services transaction may be derived based on indirect measures of the price charged in comparable uncontrolled services transactions, but only if – (A) The data are widely and routinely used in the ordinary course of business in the particular industry or market segment for purposes of determining prices actually charged in comparable uncontrolled services transactions; (B) The data are used to set prices in the controlled services transaction in the same way they are used to set prices in uncontrolled services transactions of the controlled taxpayer, or in the same way they are used by uncontrolled taxpayers to set prices in uncontrolled services transactions; and (C) The amount charged in the controlled services transaction may be reliably adjusted to reflect differences in quality of the services, contractual terms, market conditions, risks borne (including contingent-payment terms), duration or quantitative measure of services rendered, and other factors that may affect the price to which uncontrolled taxpayers would agree ... Read more

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Adjustments for differences. (i) The facts are the same as in Example 5, except that the engagement is undertaken with the client on a fixed fee basis. That is, prior to undertaking the engagement Company B and Company A estimate the resources required to undertake the engagement, and, based on hourly fee rates, charge the client a single fee for completion of the project. Company A’s portion of the engagement results in fees of $144,000. (ii) The engagement, once undertaken, requires 20% more hours by each of Companies A and B than originally estimated. Nevertheless, the unrelated client pays the fixed fee that was agreed upon at the start of the engagement. Company B pays Company A $144,000, in accordance with the fixed fee arrangement. (iii) Company A often enters into similar fixed fee engagements with clients. In addition, Company A’s records for similar engagements show that when it experiences cost overruns, it does not collect additional fees from the client for ... Read more

Internal comparable. (i) Company A, a United States corporation, and its subsidiaries render computer consulting services relating to systems integration and networking to business clients in various countries. Company A and its subsidiaries render only consulting services, and do not manufacture computer hardware or software nor distribute such products. The controlled group is organized according to industry specialization, with key industry specialists working for Company A. These personnel typically form the core consulting group that teams with consultants from the local-country subsidiaries to serve clients in the subsidiaries’ respective countries. (ii) Company A and its subsidiaries sometimes undertake engagements directly for clients, and sometimes work as subcontractors to unrelated parties on more extensive supply-chain consulting engagements for clients. In undertaking the latter engagements with third party consultants, Company A typically prices its services based on consulting hours worked multiplied by a rate determined for each category of employee. The company also charges, at no markup, for out-of-pocket expenses such as ... Read more

Use of valuable intangible property. (i) Company A, a United States corporation in the biotechnology sector, renders research and development services exclusively to its affiliates. Company B is Company A’s wholly-owned subsidiary in Country X. Company A renders research and development services to Company B. (ii) In performing its research and development services function, Company A uses proprietary software that it developed internally. Company A uses the software to evaluate certain genetically engineered compounds developed by Company B. Company A owns the copyright on this software and does not license it to uncontrolled parties. (iii) No uncontrolled parties can be identified that perform services identical or with a high degree of similarity to those performed by Company A. Because there are material differences for which reliable adjustments cannot be made, the comparable uncontrolled services price method is unlikely to provide a reliable measure of the arm’s length price. See paragraph (c)(2)(ii)(A) of this section ... Read more

External comparable uncontrolled services price. The facts are the same as in Example 2, except that uncontrolled parties in Country X render similar loading and stevedoring services, but only under contracts that have a minimum term of one year. If the difference in the duration of the services has a material effect on prices, adjustments to account for these differences must be made to the results of the uncontrolled transactions according to the provisions of § 1.482-1(d)(2), and such adjusted results may be used as a measure of the arm’s length result ... Read more

External comparable uncontrolled services price. (i) The facts are the same as in Example 1, except that Company A performs services for Company B, but not for uncontrolled parties. Based on information obtained from unrelated parties (which is determined to be reliable under the comparability standards set forth in paragraph (c)(2) of this section), it is determined that uncontrolled parties in Country X perform services comparable to those rendered by Company A to Company B, and that such parties charge $60 per cargo container. (ii) In evaluating the appropriate measure of an arm’s length price for the loading services that Company A renders to Company B, the $60 per cargo container charge is considered evidence of a comparable uncontrolled services price. See paragraph (c)(2)(ii)(A) of this section ... Read more

Internal comparable uncontrolled services price. Company A, a United States corporation, performs shipping, stevedoring, and related services for controlled and uncontrolled parties on a short-term or as-needed basis. Company A charges uncontrolled parties in Country X a uniform fee of $60 per container to place loaded cargo containers in Country X on oceangoing vessels for marine transportation. Company A also performs identical services in Country X for its wholly-owned subsidiary, Company B, and there are no substantial differences between the controlled and uncontrolled transactions. In evaluating the appropriate measure of the arm’s length price for the container-loading services performed for Company B, because Company A renders substantially identical services in Country X to both controlled and uncontrolled parties, it is determined that the comparable uncontrolled services price constitutes the best method for determining the arm’s length price for the controlled services transaction. Based on the reliable data provided by Company A concerning the price charged for services in comparable uncontrolled ... Read more

The principles of this paragraph (c) are illustrated by the following examples: ... Read more

See § 1.482-1(e)(2) for the determination of an arm’s length range ... Read more

The reliability of the results derived from the comparable uncontrolled services price method is affected by the completeness and accuracy of the data used and the reliability of the assumptions made to apply the method. See § 1.482-1(c) (best method rule) ... Read more

If there are differences between the controlled and uncontrolled transactions that would affect price, adjustments should be made to the price of the uncontrolled transaction according to the comparability provisions of § 1.482-1(d)(2). Specific examples of factors that may be particularly relevant to application of this method include – (1) Quality of the services rendered; (2) Contractual terms (for example, scope and terms of warranties or guarantees regarding the services, volume, credit and payment terms, allocation of risks, including any contingent-payment terms and whether costs were incurred without a provision for current reimbursement); (3) Intangible property (if any) used in rendering the services; (4) Geographic market in which the services are rendered or received; (5) Risks borne (for example, costs incurred to render the services, without provision for current reimbursement); (6) Duration or quantitative measure of services rendered; (7) Collateral transactions or ongoing business relationships between the renderer and the recipient, including arrangement for the provision of tangible property in connection with the services; and (8) Alternatives realistically ... Read more

The degree of comparability between controlled and uncontrolled transactions is determined by applying the provisions of § 1.482-1(d). Although all of the factors described in § 1.482-1(d)(3) must be considered, similarity of the services rendered, and of the intangible property (if any) used in performing the services, generally will have the greatest effects on comparability under this method. In addition, because even minor differences in contractual terms or economic conditions could materially affect the amount charged in an uncontrolled transaction, comparability under this method depends on close similarity with respect to these factors, or adjustments to account for any differences. The results derived from applying the comparable uncontrolled services price method generally will be the most direct and reliable measure of an arm’s length price for the controlled transaction if an uncontrolled transaction has no differences from the controlled transaction that would affect the price, or if there are only minor differences that have a definite and reasonably ascertainable effect ... Read more

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Whether results derived from application of this method are the most reliable measure of the arm’s length result must be determined using the factors described under the best method rule in § 1.482-1(c). The application of these factors under the comparable uncontrolled services price method is discussed in paragraphs (c)(2)(ii) and (iii) of this section ... Read more

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The comparable uncontrolled services price method evaluates whether the amount charged in a controlled services transaction is arm’s length by reference to the amount charged in a comparable uncontrolled services transaction ... Read more

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Preference for comparable uncontrolled transaction method. (i) USpharm, a U.S. pharmaceutical company, develops a new drug Z that is a safe and effective treatment for the disease zeezee. USpharm has obtained patents covering drug Z in the United States and in various foreign countries. USpharm has also obtained the regulatory authorizations necessary to market drug Z in the United States and in foreign countries. (ii) USpharm licenses its subsidiary in country X, Xpharm, to produce and sell drug Z in country X. At the same time, it licenses an unrelated company, Ydrug, to produce and sell drug Z in country Y, a neighboring country. Prior to licensing the drug, USpharm had obtained patent protection and regulatory approvals in both countries and both countries provide similar protection for intellectual property rights. Country X and country Y are similar countries in terms of population, per capita income and the incidence of disease zeezee. Consequently, drug Z is expected to sell in similar ... Read more

Preference for comparable uncontrolled price method. Company A is the U.S. distribution subsidiary of Company B, a foreign manufacturer of consumer electrical appliances. Company A purchases toaster ovens from Company B for resale in the U.S. market. To exploit other outlets for its toaster ovens, Company B also sells its toaster ovens to Company C, an unrelated U.S. distributor of toaster ovens. The products sold to Company A and Company C are identical in every respect and there are no material differences between the transactions. In this case application of the CUP method, using the sales of toaster ovens to Company C, generally will provide a more reliable measure of an arm’s length result for the controlled sale of toaster ovens to Company A than the application of any other method. See §§ 1.482-1(c)(2)(i) and -3(b)(2)(ii)(A) ... Read more

The present value of the PCT Payor’s licensing alternative may be determined using the comparable uncontrolled transaction method, as described in § 1.482-4(c)(1) and (2). In this case, the present value of the PCT Payor’s licensing alternative is the present value of the stream, over what would be the duration of the CSA Activity under the cost sharing alternative, of the reasonably anticipated residuals of the divisional profits or losses that would be achieved under the cost sharing alternative, minus operating cost contributions that would be made under the cost sharing alternative, minus the licensing payments as determined under the comparable uncontrolled transaction method ... Read more

The comparable uncontrolled transaction (CUT) method described in § 1.482-4(c), and the comparable uncontrolled services price (CUSP) method described in § 1.482-9(c), may be applied to evaluate whether the amount charged in a PCT is arm’s length by reference to the amount charged in a comparable uncontrolled transaction. Although all of the factors entering into a best method analysis described in § 1.482-1(c) and (d) must be considered, comparability and reliability under this method are particularly dependent on similarity of contractual terms, degree to which allocation of risks is proportional to reasonably anticipated benefits from exploiting the results of intangible development, similar period of commitment as to the sharing of intangible development risks, and similar scope, uncertainty, and profit potential of the subject intangible development, including a similar allocation of the risks of any existing resources, capabilities, or rights, as well as of the risks of developing other resources, capabilities, or rights that would be reasonably anticipated to contribute to exploitation within ... Read more

If the arm’s length result is derived from the application of the comparable uncontrolled transaction method based on the transfer of a comparable intangible under comparable circumstances to those of the controlled transaction, no allocation will be made under paragraph (f)(2)(i) of this section if each of the following facts is established – (1) The controlled taxpayers entered into a written agreement (controlled agreement) that provided for an amount of consideration with respect to each taxable year subject to such agreement, such consideration was an arm’s length amount for the first taxable year in which substantial periodic consideration was required to be paid under the agreement, and such agreement remained in effect for the taxable year under review; (2) There is a written agreement setting forth the terms of the comparable uncontrolled transaction relied upon to establish the arm’s length consideration (uncontrolled agreement), which contains no provisions that would permit any change to the amount of consideration, a renegotiation, or a termination of the ... Read more

If the same intangible was transferred to an uncontrolled taxpayer under substantially the same circumstances as those of the controlled transaction; this transaction serves as the basis for the application of the comparable uncontrolled transaction method in the first taxable year in which substantial periodic consideration was required to be paid; and the amount paid in that year was an arm’s length amount, then no allocation in a subsequent year will be made under paragraph (f)(2)(i) of this paragraph for a controlled transfer of intangible property ... Read more

(i) USdrug, a U.S. pharmaceutical company, has developed a new drug, Nosplit, that is useful in treating migraine headaches and produces no significant side effects. Nosplit replaces another drug, Lessplit, that USdrug had previously produced and marketed as a treatment for migraine headaches. A number of other drugs for treating migraine headaches are already on the market, but Nosplit can be expected rapidly to dominate the worldwide market for such treatments and to command a premium price since all other treatments produce side effects. Thus, USdrug projects that extraordinary profits will be derived from Nosplit in the U.S. market and other markets. (ii) USdrug licenses its newly established European subsidiary, Eurodrug, the rights to produce and market Nosplit in the European market. In setting the royalty rate for this license, USdrug considers the royalty that it established previously when it licensed the right to produce and market Lessplit in the European market to an unrelated European pharmaceutical company. In many ... Read more

(i) FP, is a foreign company that designs, manufactures and sells industrial equipment. FP has developed proprietary components that are incorporated in its products. These components are important in the operation of FP’s equipment and some of them have distinctive features, but other companies produce similar components and none of these components by itself accounts for a substantial part of the value of FP’s products. (ii) FP licenses its U.S. subsidiary, USSub, exclusive North American rights to use the patented technology for producing component X, a heat exchanger used for cooling operating mechanisms in industrial equipment. Component X incorporates proven technology that makes it somewhat more efficient than the heat exchangers commonly used in industrial equipment. FP also agrees to provide technical support to help adapt component X to USSub’s products and to assist with initial production. Under the terms of the license agreement USSub pays FP a royalty equal to 3 percent of sales of USSub equipment incorporating component ... Read more

The facts are the same as in Example 1, except that the incidence of the disease zeezee in Country Y is much higher than in Country X. In this case, the profit potential from exploitation of the right to make and sell drug Z is likely to be much higher in country Y than it is in Country X. Consequently, the Ydrug license agreement is unlikely to provide a reliable measure of the arm’s length royalty rate for the Xpharm license ... Read more