Implied Discount rate - NABE

The 2011 temporary regulations• The preamble to the 2011 temporary regulations states that the IRS and Treasury“are aware” that some taxpayers have applied the income method by using anunrealistically low discount rate for the licensing alternative and an unrealisticallyhigh discount rate for the cost sharing alternative– The high discount rate spread between the two alternatives results in a lowerPCT Payment• The final regulations state that discount rate for the cost sharing alternative and thelicensing alternative are “closely related” because both are derived from the “singleprobability-weighted financial projections. That any differences in discount ratesshould only reflect:Incremental risk associated with developing cost shared intangibles and makingR&D cost contributions versus making licensing paymentsPayment forms of the licensing payments and the PCT payments (e.g., a royaltybased on sale vs. fixed PCT Payments)12