Intangible assets are an increasingly important aspect of modern business, and they present unique challenges for taxation and transfer pricing. Under the Section 482 regulations, intangible assets include a wide range of intellectual property such as patents, designs, copyrights, trademarks, and licenses, as well as contractual rights to use intangibles. Intangible assets must have a value independent of the services of any individual and derive their value from intellectual content rather than physical attributes.
Transfer pricing rules apply to intangible property transferred between related parties, and compensation must be at arm’s length. The permitted transfer pricing methods are the comparable uncontrolled transaction (CUT) method, the comparable profits method (CPM), the profit split method, or unspecified methods. Compensation for intangible property transferred must be commensurate with the income attributable to the intangible. The IRS has the authority to specify the method for determining the value of intangible property, both in relation to outbound restructurings of U.S. operations under section 367 (d) and in relation to intercompany transfer pricing allocations under section 482.
For transfers in tax years beginning after 31 December 2017, the definition of intangible property in section 936(h)(3)(B) is amended by the US Tax Cuts and Jobs Act to include goodwill, going concern value, and workforce in place, including the composition of the workforce and the terms and conditions of its employment. The definition of intangible property also includes any similar item the value or potential value of which is not attributable to tangible property or the services of any individual. As a result of this change, transfers of goodwill, going concern value, or workforce in place are subject to the commensurate with income requirement.
The Tax Cuts and Jobs Act also introduced a new Section 951A requiring a US shareholder of a CFC to include in its income the global intangible low-taxed income (GILTI) of the CFC. A 50% deduction (37.5% from 2025) is permitted to US shareholders so that the income is taxed at a rate that is effectively half the US tax rate. Under this provision, the GILTI is defined as the excess of the US shareholder’s net CFC tested income over a net deemed tangible income return.
In December 2018, the IRS issued Form 8992 and Instructions for Form 8992 to calculate GILTI. In June 2019, the Treasury issued final and temporary regulations including guidance on establishing the amount of GILTI to be included in the gross income of certain US shareholders of foreign corporations, including US shareholders that are members of a consolidated group.
On 4 March 2019, the Treasury and IRS issued proposed regulations under section 250 aiming to neutralize the role of tax considerations in determining the location of intangible income attributable to foreign market activity. The proposed regulations set out a series of steps to calculate deemed intangible income (DII) of which the foreign derived portion becomes the foreign derived intangible income (FDII), a percentage of which would be the basis for a statutory deduction.
In conclusion, intangible assets are a valuable and increasingly important aspect of modern business. However, they present unique challenges for taxation and transfer pricing, and the IRS has introduced a range of regulations and methods to address these challenges. These regulations and methods provide guidance for businesses seeking to transfer intangible assets and for shareholders seeking to calculate GILTI.