Royalty Rate Determination: Approaches and Pitfalls

Charging a royalty or licensing fee by one related party to another within a multinational setting for the use of valuable know-how, technology processes, trade names, or other intangible property, may be one of transfer pricing's most significant and contentious issues. Transfer pricing analysts routinely grapple with a number of issues related to royalty determination, from determining the appropriate royalty rate, to defending such a rate when and if tax authorities challenge the royalty rate. Determining the appropriate arm's length price for the use of intangible assets within a multinational setting is often difficult to ascertain. Finding "comparable" royalty rates are difficult, as the business and economic environments that the related party finds itself in relative to comparable companies are often vastly different.