When intangible assets are transferred and used within a group of related entities, determining “arm's length” royalty rates for tax purpose requires a search for comparable royalty rates.  For example,

• When contributing intangibles to a foreign subsidiary, I.R.C. §367(d) treats the foreign subsidiary as paying annual royalties to the U.S. parent in amounts “commensurate with the income” attributable to the intangibles.
• If a foreign subsidiary uses intangibles developed by a U.S. parent, Treas. Reg. §1.482-4 requires the foreign subsidiary to pay an “arm's length” royalty to the U.S. parent.
• When implementing a cost-sharing agreement under Treas. Reg. §1.482-7, participants must pay a “buy-in” amount for intangibles contributed by other participants.  The buy-in payment must reflect the present value of the stream of arm's length royalties generated by the contributed intangible.
• Allocating Class IV assets involving asset transfer or acquisition under IRS section 1060 (preparation of required Form 8594 - Asset Acquisition Statement).
• Many sections of the tax laws make reference to the fair value of intangible assets, particularly when corporate transactions trigger a gain recognition event.  In many of these transactions, a thorough analysis of the tax consequences will require the valuation of such intangible assets.

In addition, the Organization for Economic Cooperation and Development (OECD) requires its members to follow the arm's length standard when determining compensation between related entities for the use of intangible property.

Determining an arm's length range of royalty rates for the intercompany transfer of intangibles can be a difficult task.  By offering a database of arm's length royalty rates, RoyaltyStat® provides a valuable tax planning and compliance tool that can make your search easier and thus can provide relief from draconian penalties.