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Comparable License Agreements 
U.S. Treasury Regulations Section 1.482-4(a) provides that in determining comparability of intangible property transactions, the general “standard of comparability” provided by Section 1.482-1(d) applies. The standard to be applied is the amount that would have been paid by an unrelated party for the same intangible property under comparable circumstances. This standard requires similarity with respect to property or services, functions performed, contractual terms, risks assumed, and economic conditions. See Section 1.482-1(b)(1).

For the application of the comparable uncontrolled transaction (“CUT”) method, Section 1.482-4(c)(2)(iii)(A) requires a more stringent degree of comparability with respect to quality of intangible property transferred, including profit potential. If there are minor differences that have an ascertainable effect on price [royalty rate], adjustments must be made. If, however, reliable adjustments cannot be made, the CUT method cannot provide a reliable measure of an arm’s length result. Else, we can use one of the other three methods provided under Section 1.482-4(a): the comparable profits method; the profit split method, or “unspecified methods;” all of which require comparability under Section 1.482-1(d).

Since in most cases data to satisfy the similar profit potential requirement under the CUT method are not available, we can use comparable royalty rates under an unspecified method. Section 1.482-4(c)(4)(Example 3(iv)) illustrates a case in which the U.S. Internal Revenue Service (IRS) uses a database of license agreements filed with the SEC, such as RoyaltyStat, in order to identify comparable royalty rates to determine the value of intangibles.

Likewise, paragraphs 6.13 through 6.35 of the 2010 OECD Transfer Pricing Guidelines discuss the application of the arm’s length principle for the transfer of intangibles. Paragraph 6.13 provides that in determining comparability of intangible property transactions, the general comparability factors under paragraphs 1.19 through 1.35 apply, including characteristics of property or services; functional analysis; contractual terms; economic circumstances; and business strategies. Paragraph 1.15 provides that differences between the situations being compared must be immaterial, or it must be possible to make adjustments to render them immaterial. “Material differences” are not defined under Section 1.482 or the OECD Transfer Pricing Guidelines.


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Lump-Sum Royalty for the Transfer of Intangibles