In many cases, nonroutine contributions of a taxpayer to the relevant business activity may be contributions of intangible property. For purposes of paragraph (c)(3)(i)(B)(1) of this section, the relative value of nonroutine intangible property contributed by taxpayers may be measured by external market benchmarks that reflect the fair market value of such intangible property. Alternatively, the relative value of nonroutine intangible property contributions may be estimated by the capitalized cost of developing the intangible property and all related improvements and updates, less an appropriate amount of amortization based on the useful life of each intangible property. Finally, if the intangible property development expenditures of the parties are relatively constant over time and the useful life of the intangible property contributed by all parties is approximately the same, the amount of actual expenditures in recent years may be used to estimate the relative value of nonroutine intangible property contributions ... Read more

A restructuring that followed the acquisition of Timberland by VF Enterprises in 2011 resulted in an intra-group transfer of ownership to valuable intangibles to a Swiss corporation, TBL Investment Holdings. The IRS was of the opinion that gains from the transfer was taxable. Judgement of the US Tax Court The tax court upheld the assessment of the tax authorities. Excerpt: “we have concluded that petitioner’s constructive distribution to VF Enterprises of the TBL GmbH stock that petitioner constructively received in exchange for its intangible property was a “disposition” within the meaning of section 367(d)(2)(A)(ii)(II). We also conclude, for the reasons explained in this part IV, that no provision of the regulations allows petitioner to avoid the recognition of gain under that statutory provision.” “Because we do not “agree[] to reduce the adjustment to income for the trademarks based on a 20-year useful life limitation, pursuant to Temp. Treas. Reg. § 1.367(d)-1T,” we determine, in accordance with the parties’ stipulation, that ... Read more

In this ruling Bondo Tea Estates Ltd. challenged an adjustment made by the tax authorities to the price at which green leaf tea was supplied by the applicant to Kijura Tea Company Limited, a related party. The ruling also concerns disallowance of an assessed loss of Shs. 220,985,115. Bondo Tea Estates Ltd. is an out grower of tea which it supplies to an associated company, Kijura Tea Company Limited. In 2018, the tax authorities conducted an audit for FY 2016/2017 which purportedly revealed that the company had under declared its sales (price of 320 compared to range of 500-700) and that it had unreconciled retained earnings and current liabilities. On that basis the tax authorities adjusted the price of the related party transactions and issued an assessment of Shs. 544,409,110 of which Shs. 174,409,650 was principal income tax, Shs. 348,819,302 penalty and Shs. 20,929,158 interest. Bondo Tea Estates Ltd. did not agree with the assessment and filed an appeal with ... Read more

East African Breweries International Ltd (applicant) is a wholly owned subsidiary of East African Breweries Limited, and is incorporated in Kenya. East African Breweries International Ltd was involved in developing the markets of the companies in countries that did not have manufacturing operations. The company did not carry out marketing services in Uganda but was marketing Ugandan products outside Uganda. After sourcing customers, they pay to the applicant. A portion is remitted to Uganda Breweries Limited and East African Breweries International Ltd then adds a markup on the products obtained from Uganda Breweries Limited sold to customers in other countries. East African Breweries International Ltd would pay a markup of 7.5 % to Uganda Breweries and then sell the items at a markup of 70 to 90%. In July 2015 the tax authorities (respondent) audited Uganda Breweries Limited, also a subsidiary of East African Breweries Limited, and found information relating to transactions with the East African Breweries International Ltd for ... Read more

In the course of restructuring its European businesses in a way that would shift a substantial amount of income from U.S.-based entities to the European subsidiaries, appellee Amazon.com, Inc. entered into a cost sharing arrangement in which a holding company for the European subsidiaries made a “buy-in” payment for Amazon’s assets that met the regulatory definition of an “intangible.” See 26 U.S.C. § 482. Tax regulations required that the buy-in payment reflect the fair market value of Amazon’s pre-existing intangibles. After the Commissioner of Internal Revenue concluded that the buy-in payment had not been determined at arm’s length in accordance with the transfer pricing regulations, the Internal Revenue Service performed its own calculation, and Amazon filed a petition in the Tax Court challenging that valuation. At issue is the correct method for valuing the preexisting intangibles under the then-applicable transfer pricing regulations. The Commissioner sought to include all intangible assets of value, including “residual-business assets” such as Amazon’s culture of ... Read more

The Supreme Court of Canada ruled in the case of GlaxoSmithKline Inc. regarding the intercompany prices established for purchases of ranitidine, the active ingredient in the anti-ulcer drug Zantac, from a related party during the years 1990 to 1993. The Supreme Court partially reversed an earlier decision of the Tax Court and affirmed a decision of the Federal Court of Appeal in concluding that other transactions should be taken into account when determining whether transfer prices are reasonable. However, the Supreme Court did not determine whether the transfer pricing methodology used by GlaxoSmithKline Inc. was reasonable and instead remanded the matter to the Tax Court ... Read more

In this case, experts had utilized the relief-from-royalty method in the valuation of trademarks. On this method the Court noted: “In our view, the relief-from-royalty method necessarily undervalues trademarks. The fair market value of a trademark is the price a willing purchaser would have paid a willing seller to buy the mark…The relief-from-royalty model does not accurately estimate the value to a purchaser of a trademark. Royalty models are generally employed to estimate an infringer’s profit from its misuse of a patent or trademark… Resort to a royalty model may seem appropriate in such cases because it estimates fairly the cost of using a trademark… However, use of a royalty model in the case of a sale is not appropriate because it is the fair market value of a trademark, not the cost of its use, that is at issue. A relief-from-royalty model fails to capture the value of all of the rights of ownership, such as the power to ... Read more

This case is about valuation (not transfer pricing as such) and is commonly referred to in international valuation practice. In this decisions, the following 15 factors were relied upon to determine the type of monetary payments that would compensate for a patent infringement: 1. The royalties received by the licensor for licensing the intangible, proving or tending to prove an established royalty. 2. The rates paid by the licensee for the use of other similar intangibles. 3. The nature and scope of the license, such as whether it is exclusive or nonexclusive, restricted or non-restricted in terms of territory or customers. 4. The licensor’s policy of maintaining its intangible monopoly by licensing the use of the invention only under special conditions designed to preserve the monopoly. 5. The commercial relationship between the licensor and licensees, such as whether they are competitors in the same territory in the same line of business or whether they are inventor and promoter. 6. The ... Read more