It’s still the “arm’s length” standard that rules in transfer pricing transactions

Since 1935, the arm's length standard has been the fundamental principle behind Treas. Reg. Section 482: “[t]he standard to be applied in every case is that of an uncontrolled taxpayer dealing at arm's length with another uncontrolled taxpayer."

Regulations promulgated in 1968 reaffirmed the arm's length standard as the fundamental principle in transfer pricing transactions, adding “the standard to be applied is the amount that would have been paid by an unrelated party for the same intangible property under the same circumstances.” (A top resource for finding license agreements from unrelated parties is ktMINE.) Where no comparable unrelated party transactions are available, the regulations provide a list of factors to consider: prevailing rates in the industry, offers of competitors, the uniqueness of the property and its legal protection, prospective profits to be generated by the intangible asset, and required investments necessary to exploit the intangible. These regulations are today the guideposts for international transfer pricing.

Under Treas. Reg. §1.482‐2(d), intangible assets include: (1) patents, invention, secret processes and formulas, designs, patterns, and know‐how; (2) copyrights and literary, musical, or artistic compositions; (3) trademarks, trade names, and brand names; (4) franchises, licenses, and contracts; (5) methods, programs, systems, procedures, campaigns, surveys, studies, forecasts, estimates, customer lists, mailing lists, and technical data; (6) goodwill, related market position, customer acceptance, and distributing and servicing organizations; and (7) key employees.