Intangibles in Transfer Pricing in Action

The transfer of intangibles, living up to their name, is the linchpin of transfer pricing (as it had always been for corporate valuation), most controversies arise from their definition, ascertaining their ownership, and pricing/valuation when they are transferred.  In our book, both MSell and its advisors struggle to define the intangibles.  They end up visiting this issue many times throughout the book. While we understand that this may be a bit frustrating for our readers, it is in fact the reality of transfer pricing for intangibles – nothing comes easy, yesteryear’s clear answer muddles up with a few twists and turns of the business.

With the European expansion, comes the question of what should be charged to the European affiliates.  In Chapter 6, Bruce Balaban, another one of MSell’s transfer pricing advisors, together with Jay, the Tax Director, put together this chart to lay out different things that MSell, Inc. will provide for the European companies.

Real World Box 6.2 What Europe should pay for

When they get into further details in Chapter 12, their advisor Bruce Balaban introduces a further distinction between global (centralized) and local/regional intangibles:

“Here, we show MSell-PRC with the global IP ownership of all central intangibles (product designs, trademarks, and vendor relationships), excluding regional intangibles, and perhaps more, such as the store trademarks and layouts. As I had explained, MSell-PRC will need to fund and control all the development of these intangibles. As Karen Wu is located there, we presume she can oversee these efforts. So we do not expect any concerns about MSell-PRC controlling the IP development process.”

For example, a relatively well-defined and legally protected intangible as “trademark” ends up being sliced and diced.  They realize that trademark rights may need to be split by field of use: as the store name versus as the product brand. Here is a key moment where Jay and Bruce are interviewing Karen Wu and Erik on this matter:


Jay hurried to ask the next question about whether store brand lettering, coloring, and logos may differ from those on the merchandise. Karen Wu, uncharacteristically punted, “Erik, you are closer to this than I am, I mean with the stores. On the merchandise, I am thinking that we may have a consistent font, but then depending on the shape and type of merchandise, we may put the trademark on in a number of different styles.” “And, of course, we can’t do that with our store names. They will be consistent, at least in each territory. Moreover, the trademark on our merchandise will be part of the overall product design. We will end up playing with the mark and logo to fit it, say, on a sunglass frame, which may be different than how we put it on a wrist watch band. Or a retro-lighter may have a brass heavier trademark plate, but the one on a Bluetooth earpiece may be sleeker. I think the brand name, other than its distinctive font, will look different on each piece of merchandise. Erik, do you agree?” “Completely,” Erik replied.

 Following the call, both Erik and Bruce were content, exclaiming in unison, “Yes, we should bifurcate the trademark rights.”

 As MSell retired its old, toothless brand, “MSell,” in favor of the new Epsilon brand, an intractable issue came to fore: did Epsilon benefit from the “MSell” brand? Or rather, MSell, Inc. by retiring its old brand and licensing the new Epsilon brand from its Chinese subsidiary, was making an unreasonable business decision? This question becomes a key contention. Here is the cross examination of MSell’s transfer pricing advisor, Corrine Rogers, by the IRS litigator:

 “Ms. Rogers, did not you indicate on page 2 of your report that, ‘Transfer pricing

analyses evaluate what-if scenarios under the hypothetical construct that each legal

entity in a group operates as an independent business, narrowly seeking its own profit

maximization goals?’”

“Yes, but …”

“Sorry, I have to cut you off to move forward here with our questioning. Wouldn’t you

consider MSell-US to be carrying on with its business as it had done for so long as a

what-if analysis?”

“You may consider doing so, but …”

“Can you please be more specific, yes, or no?”

“I want to qualify my answer.”

“Please provide your yes or no answer and provide an explanation.”

“No. In this case, we need not use that as an alternative because MSell-US’s Board had

evaluated alternatives and had decided to pursue the brand development route. They

had internally concluded that carrying on with the MSell brand was an inferior strategy

for the company. Therefore, in my analysis, all alternatives I had considered were

alternatives involving the development of the new trademark.”

“Does your report contain any of the comparative analyses performed by MSell in

making their decision about branding?”


“Did you analyze post-2006 financial results of MSell-US?”

“Again, I did not study them in detail, but I know that their policy was to target a specific

level of income for MSell-US. My report did not cover that specific margin, but addressed

only the buy-in issue.”

“You are correct, Ms. Rogers, starting with 2008, MSell-US’s profit margins declined to

about 6 to 7 percent of net sales.” IRS counsel then provided Corrine Rogers with a copy

of an exhibit that showed MSell-US’s net sales and profits from its inception through


“Dr. Rogers, would not you agree with me that MSell-US would have been much better off

if it had continued its old business model, with its old trademark?”

“No, because that old business model was not viable and that is why it was replaced.”

“Yet, you do not have any projections, or cost benefit analyses confirming that fact.”

“No. I have …”

“Ms. Rogers, if you had access to such an analysis, would not that analysis look at the

consolidated profits of MSell group rather than MSell-US?”

“I do not know. I cannot speculate.”

“I am sorry. Did not you indicate earlier that your reason for excluding the alternative of MSell-US continuing its pre-existing business model as a potential what-if scenario was the fact that its Board decided to pursue the new business model with the new trademark?”


“For purposes of your report, would not you then need to know the basis on which MSell

Board made that decision?”

“It is a business decision. It is not my job to second guess business decisions.”

“But did not your report’s introduction suggest that transfer pricing analyses should consider scenarios consistent with each legal entity, like MSell-US, pursuing all alternatives to maximize its profits?”

“I am sorry. My report did not include that particular scenario you have been suggesting. Can we move on, please?”

“One last question, Ms. Rogers, would not such an omission render your report’s conclusions unreliable?”


“No further questions for this witness, your Honor.”

 This was not a comfortable exchange for Corrine Rogers and she came across as evasive. Ultimately, though, Karen Wu made a strong case that MSell was an un-promoted brand, and perhaps more of a non-brand than anything.

Besides defining them, another challenging aspect of intangibles is to establish their ownership. Companies, for better legal protection or just for legal convenience, prefer to have a single legal registrant for their IP, while the transfer pricing model may require a more decentralized ownership structure. While it may not yet be universally valid, most countries recognize the bifurcation of legal registration and beneficial ownership within a multinational enterprise. In the book, Bruce Balaban, one of the transfer pricing advisors, introduces the indicia of beneficial ownership of IP, discusses it with MSell, and they implement their structures with these indicia in mind.

Indicia of Beneficial Ownership of IP