22.2Existence
– When
a company demonstrates a higher than average rate of return on assets or higher
than average profits for a given level of physical assets over a period
of time, it indicates the likely presence of intangibles.
22.1 Type:-
a.
Trade intangibles – patents, R&D, know-how, designs and models
b.
Marketing intangibles - trademarks and trade name
22.3 Parties entitled to Intangible related returns
- The
parties entitled to intangible related returns must be identified once
- e
party that has developed the property, the developer of the intangible
property would be expected to have received an arm‟s length
consideration for its development services.
- If the
owner of an intangible property chooses to transfer somthe existence of
the intangible has been determined
- Where
the legal ownership of an intangible property does not vest with the or all of the rights to
exploit the property, an arm‟s length charge should be imposed
for the transfer of those rights
- Concerning
of terms of agreement indication:-
o
Whether the transfer is an outright sale or licensing agreement
for royalties to be paid;
o
If royalty is to be paid, the basis of payment;
o
Whether the price of product transferred has included compensation
for use of the intangible property; and if so, whether other payments such as
royalties or payment for provision of technology are made in relation to the
same product;
o
If it involves a marketing intangible where a party that is not the
legal owner undertakes marketing activities: how the marketer is compensated.
22.4 Payment for the transfer of intangible property (Form
of Payment):-
- an outright sale
(lump sum payment); or
- a licensing agreement
for royalties to be paid.
22.5 Marketing Intangibles
- The
value of marketing intangibles depends on many factors including the reputation
and credibility of the trade name or trademark fostered by the quality of
the goods or services provided under the trade name or trademark in the
past
- The
distributor will be expected to obtain a share of the intangible related
returns from the owner of the trademark or related intangibles to cover
cost of its marketing activities
22.6 Application of Arm’s Length Principle
Consideration
- Transferor
shall recover the costs associated with developing an intangible and earn
a reasonable return
- Understanding
the type and the characteristics of intangible properties
- Other
factors:-
a.
Expected benefits and usefulness of the intangible property;
b.
Prevailing industry rates;
c.
Terms of the agreement including geographic limitations, duration
of the license, any termination or negotiation rights and exclusivity rights;
d.
Benefits to the licensor, arising from sharing of information on
the experience of the licensee contributing towards further developments of the
property;
e.
Possibility of sub-licensing;
f.
The extent of any capital investment, start-up expenses or
development work required;
g.
Rights to receive update, revisions or modifications of the
intangibles; or
h.
Technical assistance, trademarks and know-how provided along with
access to any patent.
22.6.4 Transfer Pricing Methodologies for Intangible Property
- CUP
Method is recommended
- Following
issues may need to be considered:-
i.
Perform a functional analysis which covers:
a.
the type of intangible involved;
b.
the value of the intangible;
c.
the opinion of industry experts on the value of the intangible, if
necessary;
d.
the duration that the intangible is expected to maintain its
value.
ii.
Determine the rate of return that commensurate with the amount of
royalty paid by performing a financial analysis;
iii.
Ensure that the amount of consideration paid make economic sense
and the person is better off with utilizing an associated person‟s intangible property.
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