RoyaltyStat Blog

Comparable Royalty Rates

Posted by Julia Vasconcellos

Transfer pricing based on comparables is the foundation of the U.S. Treasury Regulations (“Treas. Reg.”) § 1.482 (published in 1994, as amended), the OCED Transfer Pricing Guidelines (1995, 2010), and several other country-specific transfer pricing regulations around the world. 

In theory, the Treas. Reg. § 1.482 and the OECD Guidelines list five factors of comparability with a pretty nomenclature that read objective and reasonable.  They are characteristics of property or services, functions performed, contractual terms, risks assumed, and economic conditions (geographic market). 

In practice, comparability analysis (also referred to as benchmarking) is the hardest step in transfer pricing because each of the five comparability factors opens to an extensive list of items that need to be accounted for, and for which data are often not available. 

As an example, to determine functional comparability the Treas. Reg. § 1.482(d)(3)(i) requires the analyst to account for sufficiently similar research and development, marketing, managerial, legal, accounting and finance functions performed by the tested party and the comparables. These functions are often performed at different levels by every company, and information on how significant they are to a particular company is not part of a usual 10-K filing disclosure. Similar challenges apply to risks assumed.  Under Treas. Reg. § 1.482(d)(3)(iii), the analyst needs to verify risks associated with the success or failure of research and development, credit and collection risks, product liability risks, etc. But identifying specific risks and measuring their individual effects on the selected profit indicator is easier said than done. 

Extensive requirements together with lack of public information to perform credible comparability analysis create a limbo that is much larger then terra firma, and the consequence is that the selection of comparables depend a lot more on judgment calls then on objective criteria.  Tax administrators and multinational enterprises would benefit from a more objective comparability analysis standard, which should be constructed around the type of information publicly available, and not on ideal scenarios.

Published on Feb 23, 2016 9:03:53 AM

Ednaldo Silva (Ph.D.) is founder and managing director of RoyaltyStat. He helped draft the US transfer pricing regulations and developed the comparable profits method called TNNM by the OECD. He can be contacted at:

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Topics: Comparability Analysis