The Arm's Length Standard vs the Commensurate with Income Standard: Transfer Pricing Issues in the Valuation of Intangible Assets

AuthorBibiana A. Cruz Martínez
PositionCertified Public Account
Pages302-313
THE ARMS LENGT H STANDARD VS THE COMMENSURATE WITH
INCOME STANDARD:
TRANSFER PRICING ISSU ES IN THE VALU ATI ON OF INTANGIBLE
ASSETS
NOTE
BIBIANA A. CRUZ MARTÍNEZ*
I. Introduction ...................................................................................................................................... 302
II. Intangibles and their valuation ................................................................................................ 303
III. The beginnings of Section 482................................................................................................ 303
IV. Arm’s Length Standard and some Case Law Interpretations .................................... 306
V. Commensurate with Income Standard of the 1986 regulations ................................ 308
VI. Arm’s Length v. Commensurate With Income .................................................................. 309
VII. The Xilinix v. Commissioner Case and its meaning ...................................................... 311
VIII. Conclusion .................................................................................................................................... 313
I. INTRODUCTION
Transfer prices are “prices required to be reported in related-party
transactions for tax purposes.”1 During the past several decades,
globalization has provoked multinational enterprises (hereinafter MNEs) to
use or misuse transfer pricing rules in their international transactions. Even
more, international transfer pricing rules for intangibles have represented a
significant concern for both MNEs and tax authorities worldwide.
In light of recent developments, intangibles have been one of the main
reasons for litigation and disputes between United States Congress, the
United States Treasury Department and taxpayers. Moreover, the enactment
of the commensurate with income standard has raised some serious issues
with regard to its relationship with the arm’s length standard; the basic
principle that permeates transfer pricing.
In this work, the connection between these two standards will be
studied. First, we will describe briefly the importance of how intangibles are
defined within the United States Treasury Department Regulations
(hereinafter Treasury Regulations) and why their valuation is of outmost
importance. Next, an analysis of section 482 of the Internal Revenue Code
(hereinafter I.R.C.) and its regulations will be presented. Afterwards, the two
* Certified Public Account; J.D. University of Puerto Rico Law School, 2011.
1 Yariv Brauner, Value in the Eye of the Beholder: The Valuation of Intangib les for Transfer
Pricing Purposes, 28 VA. TAX REV. 79, 81 (2008).

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