Is it Time to Rethink What We Know About License Agreement Comparability?
For those of you fortunate enough to have attended the recent ITR conference in London, you had the opportunity to hear Exactera’s Chief Economist and RoyaltyStat General Manager, Mimi Song, speak on the topic of intangible property within transfer pricing. As part of her session, she examined how various factors—things such as exclusivity, territory, and time—affect the royalty rates within CUP agreements we use to benchmark intercompany transfers of intangible goods. At the conference, Mimi even asked the audience at one point whether they thought an exclusivity clause in the agreement would lead to a higher royalty rate. The vast majority of attendees—79% to be exact—answered yes.
Traditionally, we practitioners have always been taught that these factors are essential to comparability between the CUP agreements and our own intercompany transaction, since they can, and do, affect the royalty rates of the IP being licensed. But is this truly the case if we examine the universe of license agreement data? With the recent addition of RoyaltyStat to the Exactera family, I began diving deeper into the database and found an amazing statistical tool that allows me to examine the data for these and other factors directly. And for licensees of RoyaltyStat, the good news is that you can use this tool yourself! From the main dashboard when you log in, click on Tools > Royalty Rate Statistics. Additionally, on any search you run, you’re able to produce analytics of the results, showing a boxplot of the range.
If I had known about this years ago, while managing transfer pricing professionals producing IP benchmarks, I would have used it to rethink my perspective on which comparability factors are truly important, and which have no impact on the actual royalty rate, to make the team’s life so much easier. I absolutely encourage readers who license RoyaltyStat to make use of all the powerful data tools within the database, including the statistical data.
If these kinds of transfer pricing questions interest you, stay tuned as I explore some of these well-known CUP factors in individual blog posts to see what the data reveals. I can’t guarantee that we’ll debunk the traditional school of thought on what constitutes economic value in an agreement, but I can guarantee that the data will provide tremendous insights that traditionally were hard to capture.