RoyaltyStat Blog

Value of Intangibles Based on Historical Payroll

Posted by Ednaldo Silva on Apr 21, 2017 10:42:59 AM

We can utilize payroll and determine the value of intangibles. In David Ricardo (1772-1823), Principles of Political Economy, Cambridge University Press, 1951 [1817], the price of a commodity produced in period t is determined by a profit markup equation:

     (1)     Pt = (1 + r) w Lt

Arm’s Length Profit Margin

Posted by Ednaldo Silva on Apr 20, 2017 3:19:07 PM

We estimated the equilibrium OMAD [operating (profit) margin after depreciation] of certain U.S. retailers using an autoregressive (AR(1)) model built-in RoyaltyStat. RoyaltyStat uses the Gauss run-time engine, so the regression estimates are reliable.

Equilibrium Arm’s Length Profit Ratios

Posted by Ednaldo Silva on Mar 31, 2017 5:53:43 PM

In several blogs, we postulated that an autoregressive (AR) model can produce more reliable measures of comparable company profit ratios (operating margin over revenue or profit rate over assets) than the naive profit model prescribed by the OECD transfer pricing guidelines. We prefer to work with profit margins because they are pure numbers, unlike profit rates over assets of different vintages. Here, we show the fixed-point equilibrium and the variance of an AR(1) model allowing the computation of a comparable profit ratio interval to benchmark related party transfers of goods and services.

Company Profits in Transfer Pricing

Posted by Ednaldo Silva on Mar 24, 2017 5:09:38 PM

It's useful to model company profits using a first-order autoregressive AR(1) process. However, “duality” (invertibility) between an AR(1) model and a weighted sum of random errors tempers theoretical or long-term ambitions. Duality is a metamorphosis from one dynamic process to another such that an AR(1) model can be converted into a moving average of random errors model. Moving average models lack X-factors explanation.

Residual Profit Split is an Avoidable Cul-de-Sac

Posted by Ednaldo Silva on Feb 21, 2017 4:20:07 PM

The claim that it is impossible to find comparable royalty rates and that from the start we should use the residual profit split method for high-value intangibles needs revisiting. This claim is made prima facie without regard for the license agreements available in curated databases such as RoyaltyStat, which as of today contains over 17,875 unique and unredacted license agreements. Also, adopting the residual profit split method, when separate tested party methods such as the TNMM could suffice, creates unwarranted costs and audit management challenges for both the taxpayer and the tax administration.

Forecasting Profit Margin Under CWI

Posted by Ednaldo Silva on Nov 4, 2016 9:33:34 AM

We can consider a first-order autoregressive (AR(1)) model to determine an arm’s length profit margin of a “tested party” subject to transfer pricing audit compliance:

Properties of the AR(1) Model of the Profit Margin

Posted by Ednaldo Silva on Oct 31, 2016 10:13:44 AM

It’s useful to study the mean and variance of the first-order autoregressive model (AR(1)), which is postulated as univariate:

Determining Arm's Length Profit Margins Using the AR(1) Model

Posted by Ednaldo Silva on Oct 31, 2016 7:16:59 AM

We can determine an arm's length profit margin (expressed as operating profit divided by net sales) of a controlled taxpayer (“tested party”) by using a first-order autoregressive model, which we can show (like any stable first-order difference equation) to be equivalent to a range of comparable “routine” profit margins plus a weighted random error time series.

Operating Profit Margins Don't Obey the Normal Distribution

Posted by Ednaldo Silva on Oct 21, 2016 7:13:23 AM

The operating profit margin (measured after depreciation and amortization (OMAD)) of 23,151 companies listed in many countries, reflecting fiscal year-end 2015 accounting results, departs from the usually presumed normal distribution. In this sample, OMAD gets a better fit using the Gamma distribution.

Royalty Rates for Medical Devices

Posted by Ednaldo Silva on Sep 27, 2016 11:42:30 AM

Naive analysts use the normal (Gauss-Laplace) distribution to compute the mean and standard deviation, or quartiles, without verifying if the data are abiding. Double fault is committed when they propose a “broad and unconvincing” range of data, such as the interquartile range (IQR), which may become useless to determine arm’s length (or reasonable) royalty rates. In practice, the interquartile range of royalty rates is used to help settle licensing disputes in tax or intellectual property valuation.