RoyaltyStat Blog

Adecco Intercompany Royalty Litigation: CUP v. TNMM

Posted by Harold McClure

Swiss multinational employment service provider Adecco recently prevailed in a case brought by the Danish tax authority (Skattestyrelsen or SKAT) challenging the 2% sales royalty paid by Adecco affiliate in Denmark for the use of various intangible assets, including trademarks and know-how.

The arguments put forth by the taxpayer and SKAT represented the classic tension between market versus profits-based approaches to evaluating arm’s length royalties. The 3-2 split decision and SKAT’s less-than-comprehensive analysis in its argument also may have left room for the possibility that a more robust analysis could have led to a different result.

The Limited Risk Transfer Pricing Canard During a Pandemic

Posted by Harold McClure

Transfer pricing practitioners fell in love with the concept of a “limited risk distribution” (LRD) on the hope that they could convince tax authorities in high tax jurisdictions to accept the premise that the local distribution affiliate should be happy with a low operating margin. This pandemic, however, has generated a lot of new transfer pricing advice that appears to contradict the original LRD argument.

The CAPM is Misapplied in Transfer Pricing

Posted by Ednaldo Silva

The capital asset pricing model (CAPM) is widely used to calculate the expected return of equity shares, considering their risk relative to a stock market portfolio. The CAPM is ill-suited to valuing assets that lack stock’s spot market price volatility. Thus, we argue that the CAPM should not be used to determine the arm’s length remuneration for the intra-group transfer of intangibles.

The CAPM is postulated in a simple linear fashion:

     (1)     R = μ + β (M – μ)

where R denotes the one-period return of the selected company stock and M denotes the one-period return of the reference (benchmark) stock market index, such as the Standard & Poor’s 500 Index. The intercept μ denotes a country specific default risk-free sovereign interest rate, and the slope β is regarded as an equity risk-coefficient.

The (“capital gain”) stock price return R = LN(P/P(−1)), where P is the selected company stock price; and the market index return M is defined in similar logarithm calculation.

Controversy Aside, IKEA on Solid Economic Footing in Royalty Dispute

Posted by Harold McClure

European affiliates of multinationals such as IKEA face scrutiny from a variety of agencies including the European Union (EU), which issued EU Council Directive 2011/16 also known as DAC6. The stated purpose of DAC6, which became effective on June 25, 2018, is to provide transparency and fairness in taxation. DAC6 applies to cross-border tax arrangements between EU affiliates and tax havens. One of these cross-border tax arrangements is intercompany royalty payments from EU affiliates to affiliate in tax havens such as Liechtenstein. Such intercompany payments by European affiliates of IKEA are being challenged by the European Commission in a State Aid inquiry, which was initiated on December 18, 2017, according to an EC press release:

Creating Defensible Transfer Pricing Reports

Posted by Ednaldo Silva

“We shall renounce . . . the subterfuges.”

Translating Credit Ratings into Credit Spreads in Intercompany Financing

Posted by Harold McClure

The Organization for Economic Cooperation and Development (OECD) released its Transfer Pricing Guidance on Financial Transactions on February 11, 2020 just before the COVID-19 crisis mushroomed. Some commentators have noted that U.S. affiliates may have to rely on intercompany financing from their foreign parents just as tax authorities and multinationals are reviewing what this new guidance implies in terms of the pricing of intercompany loans.

Return on Assets When Assets are Exogenous

Posted by Ednaldo Silva

We suggested on prior blogs that operating assets (measured by property, plant & equipment) are endogenous and that structural equation estimates of return on assets produce biased coefficients. Here, we provide another alternative from biased estimates of return on assets than using exotic algorithms like two-stage least squares.

The Standard Measure of Return on Assets is Biased

Posted by Ednaldo Silva

Economic models must have mathematical beauty; they must be parsimonious!

Paraphrasing Paul Dirac (1955), Physical laws should have mathematical beauty, quoted in Abraham País, Maurice Jacob, David Olive, Michael Atiyah, Paul Dirac (The Man and his Work), Cambridge University Press, 1998, p. 46.

Safe Harbors for U.S. Retailers

Posted by Ednaldo Silva

Después de tanto soportar la pena de sentir tu olvido … y si pretendes remover las ruinas que tú mismo hiciste

Cenizas in the poignant voice of Toña La Negra. Classic bolero lyrics by Wello Rivas (1913-1990).

Transfer Prices Based on EBITDA, not EBIT

Posted by Ednaldo Silva

In applying the comparable profits method (CPM) in the U.S. or the “transactional” net margin method (TNMM) in other OECD countries, many transfer pricing analysts assume that the depreciation rate of property, plant, and equipment is the same among the individual comparables and the tested party.