Contents - AL-Tax

186 13 Concluding Observationsjoin under the conditions imposed, and no incentive to exploit the developed intangibleseven if they did participate. Yet, third parties regularly enter into researchjoint ventures. A corrected version of the income method would substitute after-taxfree cash flows for operating profits, and systematically analyze feasible alternativesavailable to all participants. All such participants must be as well or better off underthe cost-sharing arrangement than they would be under all feasible alternatives, andthe net present value of participation should be positive for all entities.The other methods described in the proposed cost-sharing regulations are alsoproblematic. Both the acquisition price method and the market capitalizationmethod require valuing goodwill and going concern assets explicitly (unless, underthe acquisition price method, a target company was acquired solely to obtain accessto specific intellectual property, and ceased to be operated as a going concern). Thissimply cannot be done in a reliable way. In other valuation contexts, goodwill andgoing concern value are almost invariably determined as a residual. More broadly,where valuation issues arise, such as when firms are called upon to establishthe value of pre-existing intellectual property for cost-sharing purposes, standardvaluation principles and methods generally make a great deal more sense than themethods advocated in the proposed regulations and the Coordinated Issue Paper.Finally, the U.S. tax authorities’ unsubstantiated claim that third party researchjoint ventures are not comparable to intercompany cost-sharing arrangements needsto be revisited. In many respects, joint venture arrangements closely mimic therelationship between affiliated companies, albeit without the incentives for incomeshiftingthat may arise in an intra-group context. Moreover, unaffiliated researchjoint venture partners can and do participate solely by providing financing in someinstances, contrary to U.S. tax authorities’ preconceptions. Venture capitalists routinelydo so. As such, arm’s length research joint ventures should in principle beextensively utilized in structuring and evaluating intra-group cost-sharing arrangements,barring regulatory prohibitions.