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Explain how the methods contained in the cost sharing regulation (§1.482-7) differ from those in the intangible property transfer regulation (§1.482-4). Use the examples to demonstrate your findings?
Sample Answer
The methods contained in the cost sharing regulation (§1.482-7) and the intangible property transfer regulation (§1.482-4) differ in their approach and focus. Here are the key differences between the methods in these regulations, illustrated with examples:
Cost Sharing Regulation (§1.482-7):
The cost sharing regulation primarily addresses the sharing of costs related to the development of intangible property among related parties.
The focus is on the allocation of costs and the sharing of risks and benefits associated with the development of intangibles.
Example: Company A and Company B are related parties engaged in the development of a new software product. They enter into a cost sharing arrangement to share the costs of research and development. The cost sharing regulation provides methods for determining the appropriate allocation of costs and sharing of benefits between the two companies.
Methods in the Cost Sharing Regulation: a. Income Method: This method allocates income based on the relative value of contributions made by each party. b. Residual Profit Split Method (RPSM): The RPSM allocates residual profits based on the relative contributions of each party after accounting for routine returns.
Intangible Property Transfer Regulation (§1.482-4):
The intangible property transfer regulation focuses on the transfer of intangible property between related parties.
The methods in this regulation determine the appropriate pricing of intangibles and ensure that related party transactions are conducted at arm’s length.
Example: Company X, a multinational enterprise, transfers a patent to its subsidiary, Company Y, for use in manufacturing a product. The intangible property transfer regulation provides methods for determining the appropriate pricing of the patent to ensure it is transferred at arm’s length.
Methods in the Intangible Property Transfer Regulation: a. Comparable Uncontrolled Transaction (CUT) Method: The CUT method compares the pricing of the controlled transaction with uncontrolled transactions between unrelated parties. b. Comparable Profits Method (CPM): The CPM compares the profitability of the controlled transaction with comparable transactions. c. Profit Split Method (PSM): The PSM allocates profits based on the relative contributions of each party. d. Comparable Uncontrolled Price (CUP) Method: The CUP method compares the pricing of the controlled transaction with similar uncontrolled transactions.
In summary, the cost sharing regulation (§1.482-7) focuses specifically on the sharing of costs related to the development of intangible property, while the intangible property transfer regulation (§1.482-4) addresses the pricing and transfer of intangibles between related parties. The methods in each regulation are tailored to their respective purposes, with the cost sharing regulation emphasizing the allocation of costs and the intangible property transfer regulation focusing on determining arm’s length pricing.
