Contents - AL-Tax

36 3 Overview and Critique of Existing Transfer Pricing Methodsprojected cost-sharing payments, to (b) the discounted present value of the payee’sprojected sales of product incorporating the developed intangible property. (Theproposed regulations refer to this step as the “cost contribution adjustment.”) Stateddifferently, all cost-sharing participants other than the contributor of pre-existingintangible assets would pay a buy-in fee, structured as a running royalty, that isroughly equal, at the outset, to the prevailing arm’s length royalty rate for rightsto exploit the pre-existing intangible assets, reduced by the payee’s approximatecost-sharing contributions per dollar of sales. This is, in essence, a means of reimbursingthe cost-sharing participants for their projected contributions and convertingthe cost-sharing arrangement into a licensing arrangement.Consider next the income method applied in conjunction with the comparableprofits method. As with applications of the comparable profits method in othercontexts, one first establishes returns to the routine functions that participants notmaking external contributions to the cost-sharing arrangement perform. The presentvalue of total projected operating profits in these companies’ markets, reducedby the present value of their projected routine returns and divided by the presentvalue of their projected sales, constitutes the “alternative rate.” This alternative rate,reduced by the “cost contribution adjustment” (as defined above) and applied to realizedsales, is the amount paid to the contributor of pre-existing intellectual property.Equivalently, all other participants are reimbursed for their projected cost contributions,and pay over to the contributor all projected operating profits in excess of theirroutine returns.3.6.2 Acquisition Price MethodThe acquisition price method is a special case of the CUT method. It applies onlywhen an unaffiliated company is acquired at the outset or during the term of a costsharingagreement, and substantially all the target company’s non-routine assetsconstitute external contributions thereto. 32 It entails adjusting the acquisition priceupward for liabilities assumed and downward for tangible (and routine intangible)assets purchased. Additionally, the total adjusted value (that is, the buy-in chargein total) must be allocated among cost-sharing participants based on their relativeanticipated benefits.3.6.3 Market Capitalization MethodThe market capitalization method is similar to the acquisition price method inconcept, although it is applied to the controlled group establishing a cost-sharing32 As is evident in the CIP, the IRS anticipates that the acquisition price method will be usedprimarily, if not exclusively, to establish buy-in fees for assets contributed to an ongoing costsharingagreement.