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ARTICLE · 08 MARCH 2006

Transfer Pricing for Intangible Development: Alternatives to Cost-Sharing

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Determining the locus of ownership of intangible property related to the development of new products and services is one of the principal challenges that tax managers in multinational enterprises (MNEs) face on an ongoing basis. Tax managers must balance non-tax corporate objectives, tax efficiency, tax risk management, and financial reporting considerations.

United StatesAccounting and Audit

By D. Clarke Norton and Paul B. Burns, FTI Consulting

Determining the locus of ownership of intangible property related to the development of new products and services is one of the principal challenges that tax managers in multinational enterprises (MNEs) face on an ongoing basis. Tax managers must balance non-tax corporate objectives, tax efficiency, tax risk management, and financial reporting considerations.

Since the mid-1990s, many MNEs have turned to cost-sharing (sometimes referred to as cost contribution) arrangements as a way to achieve these objectives. The cost-sharing rules (Treasury Regulations Section 1.482-7) adopted by the US Internal Revenue Service (IRS) in 1996, and the principles outlined in Chapter VIII of the 1995 OECD Guidelines, provide a flexible framework. MNEs used this framework to build corporate structures that located the ownership of highly valuable intangibles in tax-advantaged jurisdictions, in entities referred to as "intangible holding

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