Transfer Pricing Case Studies Workshop
San Jose
31 March – 4 April 2014
Case Study
A - Brand
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BACKGROUND
For more than 100 years the A - Group is a global leading provider of products in
the high technology field. The market for these products is very limited.
Ultimately, there are three suppliers for these products and only few specialized
customers.
The registered brand “A” is known all over the world. It is associated with a high
technological position, achieving high quality standards as well as the reliability
and efficiency of the products. Owner of the valuable brand is the parent
company A plc.
The parent company A plc. licensed the brand to their American (A U.S.) and
German (A Germany) subsidiaries. The subsidiaries are fully responsible for
certain sectors in the business. In the U.S. military projects and in Germany the
applications for small civil projects are managed. A plc. is responsible for large
civil projects. The license fee is 1% of the turnover from non-affiliated
companies.
The A Germany was founded in 1990. Business of the German company is the
development, manufacturing, marketing and the maintenance of products, which
are classified as product group 2. The product group 2 is exclusively for small
civil applications. The know-how of this technology is also available for the other
entities (A U.S. / A plc.). A Germany participates from developments of these
companies (Technology Transfer and Technology Cost Sharing Agreement).
A Germany developed its own product in the product group 2. The company
manufactures and distributes this product successfully on the world market.
Therefore 2002 A plc. recognized A Germany as a competence center for the
product group 2 in the A – Group. This means that the A Germany is responsible
for all tasks associated with the product group.
In this context A plc. transferred the manufacturing of products within the
product group 2 (developed before 1990 and until 2002 manufactured by A plc.)
to her German subsidiary.
Starting in 2005 A Germany develops a new product. The new product is
successfully placed in the market. A Germany acquired the product responsibility
for the product group 1 in 2005. Since then product-related strategic decisions
for product group 1 and 2 are made by A Germany. Risks are covered by the
German company.
A plc. is further responsible for general and global decisions for the product
group 1.
To document the license fee an evaluation based on the database Royalty Stat
was presented. As the result of this database analysis three license agreements
remain. The comparable companies belong to other industry sectors. The range
of licenses is of 0.75% to 3% of turnover. In addition, a reference was made by
the company on literature, where a range of royalty rates for trademarks of 1 to
5% is considered as appropriate.
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Due to the responsibilities of A Germany the audit states that there is a valuable
contribution to the brand value and considers that only a lower license rate
would be at arm’s length.
In several meetings A Germany referred that the significant value of the brand
was created by the A plc. It does not agree to the reduction of the trademark
license.
QUESTION
What do you think about the auditor’s proposal?
Which royalty rate could be at arm’s length?
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