Contents - AL-Tax

3.3 Comparable Uncontrolled Price Method 23if they are used in connection with similar products or processes within the samegeneral industry or market and have similar profit potential. In comparing controlledand arm’s length transfers of intangible assets, one should also consider the termsand circumstances of the transfers, the assets’ respective stages of development, thelicensees’ rights to receive updates, the duration of the license, liability risks andcollateral transactions. As applied to services transactions, one should consider thesimilarity of services, the intangible assets used in providing them (if any), contractualterms, and the economic conditions in which the transactions take place. 133.3.2 Underlying Economic RationaleWith regard to tangible property and services, the (exact) CUP method presupposesthat competitive pressures will cause prices and services fees to be equalized. Withregard to intangible property, the comparable uncontrolled transactions method presupposesthat an individual licensor will generally charge independent licensees thesame royalty rate for the same rights to identical property, as will two licensorsof comparable intangible property. This reasoning, in turn, implies one of severaleconomic backdrops:1. Different licensees value the intellectual property available from a single licensorequally, and have similar bargaining power in relation to the licensor (that is, theyhave similar alternatives available to them);2. An individual licensor cannot effectively price discriminate in establishing itslicense terms and royalty fees, whether due to the costs of ascertaining the valueof the intellectual property to different prospective licensees or because it is precludedfrom price discriminating as a practical or legal matter; or,3. Two unaffiliated licensors of comparable intellectual property, dealing with separatelicensees, will either independently negotiate precisely the same contractualterms and royalty rates or be forced to charge a uniform royalty rate and offerstandardized terms by some unarticulated competitive dynamic.3.3.3 Critique of Economic ReasoningWith regard to tangible property and services, prices and fees may or may not beequalized, depending on the degree to which the market at issue is competitive. Inthis context, the OECD Guidelines’ and Draft Issue Notes’ emphasis on comparabilityanalyses, beginning with a broad-based analysis encompassing the industry,value-drivers, the nature of competition, and economic and regulatory factors, iswell placed.13 See Treas. Reg. Section 1.482-9T(c)(2).