Don’t be fooled by the title, this post is about tax and intellectual property and how it affects the need for well-recognised and reliable valuation methods.  If that bores you to tears, then, by all means, please stop reading now.

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Now, for those who are left – Transfer Pricing is always a hot topic in intellectual property.  It’s the price paid in an IP transatcion which occurs within an organisation.

If you have a presence in two countries, one of which taxes you more heavily on revenue generated by IP – then the logical thing to do is transfer it to the more tax effective country – right?

Right.

Except – that you have to transfer at the right price – an arm’s length price – one that would have occurred if the sale had been to unrelated entities.  Sound easy?

It’s not.  

How do we value the IP so we can make it an arm’s length transaction?  There are thousands of economists, accountants and others all trying to figure this out at the moment, and ISO has recently announced plans to develop an International Standard.

So, I’m a little intrigued by the Australian Tax Office’s recent murmurings about cracking down on IP transfer pricing.  How will the police it?

I suspect that until an international standard is developed, tax authorities around the world will continue to struggle with where to draw the line between what is and is not an appropriate transfer price.