Transfer pricing is one of two principal areas of international taxation where valuation issues may arise. The second, customs valuation, will be discussed in Chapter 10. The Code attempts to coordinate the reported values of both tangible and intangible goods transferred between related entities for income tax and customs reporting purposes.2 Code Section 482 governs transfer pricing, and is designed to prevent related entities from artificially shifting income, expenses, or deductions between themselves to avoid federal income taxes.
Section 482 allows the Service to reapportion income between related entities to reflect the amount of tax that would have been paid had the entities been unrelated. To do so, the Service asserts the entities were subject to common control, and as a result the value of the transaction was different from the value of an uncontrolled, arm's-length transaction.
Section 482 applies to transactions involving the international transfer of tangible property, intangible property, loans, advances, and services. While we will focus on section 482's effect on valuation of intellectual property rights that are transferred internationally, the principles relating to valuation of intellectual property also apply to other types of section 482 property, since the basic arm's-length standard remains the same.
This chapter will give an overview of the four methods used to determine the appropriate arm's-length price in an uncontrolled ...