TPG2022 Chapter VIII Annex example 4

« | »

17. Company A and Company B are members of an MNE group and decide to undertake the development of an intangible through a CCA. The intangible is anticipated to be highly profitable based on Company B’s existing intangibles, its track record and its experienced research and development staff. Company A performs, through its own personnel, all the functions expected of a participant in a development CCA obtaining an independent right to exploit the resulting intangible, including functions required to exercise control over the risks it contractually assumes in accordance with the principles outlined in paragraphs 8.14 to 8.18. The particular intangible in this example is expected to take five years to develop before possible commercial exploitation and if successful, is anticipated to have value for ten years after initial Exploitation.

18. Under the CCA, Company A will contribute to funding associated with the development of the intangible (its share of the development costs are anticipated to be USD 100 million per year for five years). Company B will contribute the development rights associated with its existing intangibles, to which Company A is granted rights under the CCA irrespective of the outcome of the CCA’s objectives, and will perform all activities related to the development, maintenance, and exploitation of the intangible. The value of Company B’s contributions (encompassing the performance of activities as well as the use of the pre-existing intangibles) would need to be determined in accordance with the guidance in Chapter VI and would likely be based on the anticipated value of the intangible expected to be produced under the CCA, less the value of the funding contribution by Company A.

19. Once developed, the intangible is anticipated to result in global profits of USD 550 million per year (Years 6 to 15). The CCA provides that Company B will have exclusive rights to exploit the resulting intangible in country B (anticipated to result in profits of USD 220 million per year in Years 6 to 15) and Company A will have exclusive rights to exploit the intangible in the rest of the  world  (anticipated  to  result  in  profits  of  USD 330 million per year).

20. Taking into account the realistic alternatives of Company A and Company B it is determined that the value of Company A’s contribution is equivalent to a risk-adjusted return on its R&D funding commitment. Assume that this is determined to be USD 110 million per year (for Years 6 to 15). However, under the CCA Company A is anticipated to reap benefits amounting to USD 330 million of profits per year in Years 6 to 15 (rather than USD 110 million). This additional anticipated value in the rights Company A obtains (that is, the anticipated value above and beyond the value of Company A’s funding investment) reflects the contribution of Company B’s pre-existing contributions of intangibles and R&D commitment to the CCA. Company A needs to pay for this additional value it receives. Accordingly, balancing payments from Company A to  Company B to account for the difference are required. In effect, Company A would need to make a balancing payment associated with those contributions to Company B equal in present value, taking into account the risk associated with this future income, to USD 220 million per year anticipated in Years 6 to 15.

Related Guidelines