Tag: Profit potential

Profit potential is the expected future profits (ex ante profit). In some cases it may encompass losses. The notion of “profit potential” is often used for valuation purposes, in the determination of an arm’s length compensation for a transfer of intangibles or of an ongoing concern, or in the determination of an arm’s length indemnification for the termination or substantial renegotiation of existing arrangements, once it is found that such compensation or indemnification would have taken place between independent parties in comparable circumstances.

US vs. Medtronic Inc. June 2016, US Tax Court

June 9, 2016 / CUT method, Intangibles, Intangibles - Goodwill Know-how Patents, Know-how, License, Pharmaceutical, Profit potential, Puerto Rico, Royalties, Royalty and License Payments, Transfer Pricing Methods

The IRS argued that Medtronic Inc failed to accurately account for the value of trade secrets and other intangibles owned by Medtronic Inc and used by Medtronic’s Puerto Rico manufacturing subsidiary in 2005 and 2006 when determening the royalty payments from the subsidiary. In 2016 the United States Tax Court found in favor of Medtronic, sustaining the use of the CUT method to analyze royalty payments. The Court also found that adjustments to the CUT were required. These included additional adjustments not initially applied by Medtronic Inc for know-how, profit potential and scope of product. The decision from the United States Tax Court has been appealed by the IRS in 2017. US-Memo-2016-112-Medtronic-v.-Commissioner ... Continue to full case

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