David Jarczyk - Doing Business After BEPS - ktMINE

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Doing Business After BEPS:
Intangibles
Arm’s Length Pricing
Arm’s Length Deal Structures
David R. Jarczyk
Founder & CEO, ktMINE
www.ktmine.com

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Think About. . .
Intangibles, Arm’s Length
Pricing, and Arm’s Length
Deal Structures
Doing Business
After BEPS
RSM Romania
April 4, 2017
www.ktmine.com
2

®
Think About. . .
Intangibles, Arm’s Length
Pricing, and Arm’s Length
Deal Structures
Doing Business
After BEPS
RSM Romania
April 4, 2017
www.ktmine.com
3

®
Think About. . .
Intangibles, Arm’s Length
Pricing, and Arm’s Length
Deal Structures
Doing Business
After BEPS
RSM Romania
April 4, 2017
www.ktmine.com
4

®
Think About. . .
Intangibles, Arm’s Length
Pricing, and Arm’s Length
Deal Structures
Doing Business
After BEPS
RSM Romania
April 4, 2017
www.ktmine.com
5

®
Think About. . .
Intangibles, Arm’s Length
Pricing, and Arm’s Length
Deal Structures
Doing Business
After BEPS
RSM Romania
April 4, 2017
www.ktmine.com
6

®
Think About. . .
Intangibles, Arm’s Length
Pricing, and Arm’s Length
Deal Structures
Doing Business
After BEPS
RSM Romania
April 4, 2017
www.ktmine.com
7

®
Think About. . .
Intangibles, Arm’s Length
Pricing, and Arm’s Length
Deal Structures
Doing Business
After BEPS
RSM Romania
April 4, 2017
www.ktmine.com
8

®
Think About. . .
Intangibles, Arm’s Length
Pricing, and Arm’s Length
Deal Structures
Doing Business
After BEPS
RSM Romania
April 4, 2017
www.ktmine.com
9

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Types of Intangibles???
Intangibles, Arm’s Length
Pricing, and Arm’s Length
Deal Structures
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Patents
Trademarks
What is missing from this list?!?
Doing Business
After BEPS
RSM Romania
April 4, 2017
www.ktmine.com
10

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IP Inventory
Intangibles, Arm’s Length
Pricing, and Arm’s Length
Deal Structures
Doing Business
After BEPS
RSM Romania
April 4, 2017
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Manufacturing intangibles such as patents, inventions, formulations,
recipes, processes, technical information, designs, patterns, or knowhow
Marketing intangibles such as trademarks, trade names, trade dress,
brand names, or service marks
Copyrights and literary, musical, or artistic compositions
Franchises (or business systems)
Software or source code
Methods, programs, systems, procedures, campaigns, surveys,
studies, forecasts, estimates, customer lists, training materials, future
sales/order books, or use rights
Strategic and defensive patents, trademarks, etc. (patent trolls)
Intangible generating services such as research and development,
engineering, or marketing
www.ktmine.com
11

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About ktMINE
Intangibles, Arm’s Length
Pricing, and Arm’s Length
Deal Structures
▲ Royalty Rates & Market Rates
Factors of comparability can be used to determine the arm’s length pricing for
comparable transaction.
- Grants - Agreement Type - Filing Company
- Industry - Parties - Exclusivity
- Effective Date - Payments - Term
Doing Business
After BEPS
RSM Romania
April 4, 2017
▲ Independent Party Agreements
How would independent parties structure transactions involving intangibles? This
information is important to understand market deal structures and payment terms.
▲ IP Portfolios
Patent filings, trademark filings, licensing rights and other intangible rights are
numerous for any one entity. Determining the legal ownership is imperative to:
1. Inventorying the intangibles under analysis
2. Providing a starting point in determining economic ownership and benefit
www.ktmine.com
12

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Intercompany Movement of Intangibles
Intangibles, Arm’s Length
Pricing, and Arm’s Length
Deal Structures
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Market Intelligence:
• Tax auditors monitor the intercompany movement of intangibles
• Tax auditors research potential internal comparables
Doing Business
After BEPS
RSM Romania
April 4, 2017
www.ktmine.com
13

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Intercompany Movement of Intangibles
Intangibles, Arm’s Length
Pricing, and Arm’s Length
Deal Structures
Doing Business
After BEPS
RSM Romania
April 4, 2017
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Market Intelligence:
• Tax auditors monitor the intercompany movement of intangibles
• Tax auditors research potential internal comparables
Data Facts:
• Data monitored: patents, trademarks, license agreements, M&A transactions, etc.
• Geography coverage: Global
• Companies coverage: Multi-millions, public and private
www.ktmine.com
14

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Intercompany Movement of Intangibles
Intangibles, Arm’s Length
Pricing, and Arm’s Length
Deal Structures
Doing Business
After BEPS
RSM Romania
April 4, 2017
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Market Intelligence:
• Tax auditors monitor the intercompany movement of intangibles
• Tax auditors research potential internal comparables
Data Facts:
• Data monitored: patents, trademarks, license agreements, M&A transactions, etc.
• Geography coverage: Global
• Companies coverage: Multi-millions, public and private
Implication:
• This information is used as the starting point of discussions regarding economic
ownership
• “Legal ownership is the start of the discussion regarding economic ownership”
• Protect yourself by monitoring your own intercompany movements of intangibles
www.ktmine.com
15

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Intercompany Movement of Intangibles
Intangibles, Arm’s Length
Pricing, and Arm’s Length
Deal Structures
Doing Business
After BEPS
RSM Romania
April 4, 2017
1/20/2017
SHARP LABORATORIES OF AMERICA
INC assigned 1 US Patent to SHARP
KABUSHIKI KAISHA
1/16/2015
NOKIA CORP assigned 25 US Patents to
NOKIA TECHNOLOGIES OY
3/10/2017
KONICA MINOLTA HOLDINGS INC
assigned 1 US Patent to KONICA
MINOLTA INC
www.ktmine.com
2/26/2015
Licensor: Wynn Resorts Holdings, LLC,
Wynn Resorts, Limited
Licensee: Wynn Las Vegas, LLC
Multi-exclusive Marketing Intangible
16

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Royalty Rates & Market Rates (Arm’s Length Pricing)
Intangibles, Arm’s Length
Pricing, and Arm’s Length
Deal Structures
▲
Market Intelligence:
• The CUP Method remains the preferred method, even if inexact comparables are used
• There is a misnomer that one must jump to using a profit-split method. (See recent ruling
on Amazon)
Doing Business
After BEPS
RSM Romania
April 4, 2017
▲
Data Facts:
• Geography coverage: Over 75% of observations are outside the U.S.
• Companies coverage: Millions of public and private companies
• Industry coverage: All industries, including agriculture, software, pharmaceutical,
telecommunications, semiconductors, consumer products, etc.
Manufacturing Services Research and Development Trademark Licensing Intangible Property
Technology Licensing Buying Agent Services Toll Manufacturing Contract Manufacturing
R&D Cost Sharing Marketing Distribution Franchise Administrative Services
Joint Development Software International Distributor &
Marketing Services
Commissionaire Services
Sub-License Asset Purchase Cross License Commission Agent
www.ktmine.com
▲
Implication:
• Protect your position by researching market rates
• You should at least know what is available in the public domain
17

®
Royalty Rates & Market Rates (Arm’s Length Pricing)
Intangibles, Arm’s Length
Pricing, and Arm’s Length
Deal Structures
▲
Market Intelligence:
• The CUP Method remains the preferred method, even if inexact comparables are used
• There is a misnomer that one must jump to using a profit-split method. (See recent ruling
on Amazon)
Doing Business
After BEPS
RSM Romania
April 4, 2017
▲
Data Facts:
• Geography coverage: Over 75% of observations are outside the U.S.
• Companies coverage: Millions of public and private companies
• Industry coverage: All industries, including agriculture, software, pharmaceutical,
telecommunications, semiconductors, consumer products, etc.
Manufacturing Services Research and Development Trademark Licensing Intangible Property
Technology Licensing Buying Agent Services Toll Manufacturing Contract Manufacturing
R&D Cost Sharing Marketing Distribution Franchise Administrative Services
Joint Development Software International Distributor &
Marketing Services
Commissionaire Services
Sub-License Asset Purchase Cross License Commission Agent
www.ktmine.com
▲
Implication:
• Protect your position by researching market rates
• You should at least know what is available in the public domain
18

®
Royalty Rates & Market Rates (Arm’s Length Pricing)
Intangibles, Arm’s Length
Pricing, and Arm’s Length
Deal Structures
▲
Market Intelligence:
• The CUP Method remains the preferred method, even if inexact comparables are used
• There is a misnomer that one must jump to using a profit-split method. (See recent ruling
on Amazon)
Doing Business
After BEPS
RSM Romania
April 4, 2017
▲
Data Facts:
• Geography coverage: Over 75% of observations are outside the U.S.
• Companies coverage: Millions of public and private companies
• Industry coverage: All industries, including agriculture, software, pharmaceutical,
telecommunications, semiconductors, consumer products, etc.
Manufacturing Services Research and Development Trademark Licensing Intangible Property
Technology Licensing Buying Agent Services Toll Manufacturing Contract Manufacturing
R&D Cost Sharing Marketing Distribution Franchise Administrative Services
Joint Development Software International Distributor &
Marketing Services
Commissionaire Services
Sub-License Asset Purchase Cross License Commission Agent
www.ktmine.com
▲
Implication:
• Protect your position by researching market rates
• You should at least know what is available in the public domain
19

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Royalty Rates & Market Rates (Arm’s Length Pricing)
Next door?
Wood floors?
Intangibles, Arm’s Length
Pricing, and Arm’s Length
Deal Structures
Doing Business
After BEPS
RSM Romania
April 4, 2017
Better schools?
Updated kitchen?
www.ktmine.com
20

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Royalty Rates & Market Rates (Arm’s Length Pricing)
Next door?
Wood floors?
Same technology?
Similar payment?
Intangibles, Arm’s Length
Pricing, and Arm’s Length
Deal Structures
Doing Business
After BEPS
RSM Romania
April 4, 2017
www.ktmine.com
Better schools?
Updated kitchen?
Same functions
and risks?
Same industry?
21

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Royalty Rates & Market Rates (Arm’s Length Pricing)
Intangibles, Arm’s Length
Pricing, and Arm’s Length
Deal Structures
Doing Business
After BEPS
RSM Romania
April 4, 2017
US$234 million
www.ktmine.com
22

®
Intangibles, Arm’s Length
Pricing, and Arm’s Length
Deal Structures
Doing Business
After BEPS
RSM Romania
April 4, 2017
Intercompany Deal Structures
▲
▲
Market Intelligence:
• Per BEPS: It is important to emphasize that comparability analyses are not always primarily
focused on the actual price of the transaction. In many instances, transfer pricing rules operate
to consider whether a transaction has … occurred in a way that is substantively different from
that which is described in contracts or documentation; in ways that are substantively different
from those which would occur at arm’s length; or are not commercially rational.
• This represents the true arm’s length standard
Data Facts:
• Geography coverage: Over 75% of observations are outside the U.S.
• Companies coverage: Millions of public and private companies
• Industry coverage: All industries, including agriculture, software, pharmaceutical,
telecommunications, semiconductors, consumer products, etc.
Manufacturing Services Research and Development Trademark Licensing Intangible Property
Technology Licensing Buying Agent Services Toll Manufacturing Contract Manufacturing
R&D Cost Sharing Marketing Distribution Franchise Administrative Services
Joint Development Software International Distributor &
Marketing Services
Commissionaire Services
Sub-License Asset Purchase Cross License Commission Agent
www.ktmine.com
▲
Implication:
• To protect your position, research market transaction structures (a.k.a. arm’s length)
• Should your transaction be structured differently than those in the market, be prepared to
discuss the reasons for inconsistencies 23

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Intangibles, Arm’s Length
Pricing, and Arm’s Length
Deal Structures
Doing Business
After BEPS
RSM Romania
April 4, 2017
Intercompany Deal Structures
▲
▲
Market Intelligence:
• Per BEPS: It is important to emphasize that comparability analyses are not always primarily
focused on the actual price of the transaction. In many instances, transfer pricing rules operate
to consider whether a transaction has … occurred in a way that is substantively different from
that which is described in contracts or documentation; in ways that are substantively different
from those which would occur at arm’s length; or are not commercially rational.
• This represents the true arm’s length standard
Data Facts:
• Geography coverage: Over 75% of observations are outside the U.S.
• Companies coverage: Millions of public and private companies
• Industry coverage: All industries, including agriculture, software, pharmaceutical,
telecommunications, semiconductors, consumer products, etc.
Manufacturing Services Research and Development Trademark Licensing Intangible Property
Technology Licensing Buying Agent Services Toll Manufacturing Contract Manufacturing
R&D Cost Sharing Marketing Distribution Franchise Administrative Services
Joint Development Software International Distributor &
Marketing Services
Commissionaire Services
Sub-License Asset Purchase Cross License Commission Agent
www.ktmine.com
▲
Implication:
• To protect your position, research market transaction structures (a.k.a. arm’s length)
• Should your transaction be structured differently than those in the market, be prepared to
discuss the reasons for inconsistencies 24

®
Intangibles, Arm’s Length
Pricing, and Arm’s Length
Deal Structures
Doing Business
After BEPS
RSM Romania
April 4, 2017
Intercompany Deal Structures
▲
▲
Market Intelligence:
• Per BEPS: It is important to emphasize that comparability analyses are not always primarily
focused on the actual price of the transaction. In many instances, transfer pricing rules operate
to consider whether a transaction has … occurred in a way that is substantively different from
that which is described in contracts or documentation; in ways that are substantively different
from those which would occur at arm’s length; or are not commercially rational.
• This represents the true arm’s length standard
Data Facts:
• Geography coverage: Over 75% of observations are outside the U.S.
• Companies coverage: Millions of public and private companies
• Industry coverage: All industries, including agriculture, software, pharmaceutical,
telecommunications, semiconductors, consumer products, etc.
Manufacturing Services Research and Development Trademark Licensing Intangible Property
Technology Licensing Buying Agent Services Toll Manufacturing Contract Manufacturing
R&D Cost Sharing Marketing Distribution Franchise Administrative Services
Joint Development Software International Distributor &
Marketing Services
Commissionaire Services
Sub-License Asset Purchase Cross License Commission Agent
www.ktmine.com
▲
Implication:
• To protect your position, research market transaction structures (a.k.a. arm’s length)
• Should your transaction be structured differently than those in the market, be prepared to
discuss the reasons for inconsistencies 25

®
Intercompany Deal Structures
Intangibles, Arm’s Length
Pricing, and Arm’s Length
Deal Structures
Doing Business
After BEPS
RSM Romania
April 4, 2017
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How do third parties agree to fund R&D and how is ownership of any
existing and subsequent intellectual property treated?
How is a true contract manufacturing agreements structured?
What type of compensation terms are found in third party distribution
agreements?
Would a payment structure differ when engaging in a transaction with
a developing country versus a developed one?
Do licensors or licensees bear the cost of advertising expenditures?
Is the licensor or licensee assuming the risk?
www.ktmine.com
26

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Intercompany Deal Structures
Intangibles, Arm’s Length
Pricing, and Arm’s Length
Deal Structures
Doing Business
After BEPS
RSM Romania
April 4, 2017
US$3.4 Billion
US$105.7 Million
US$106 Million
www.ktmine.com
27

®
About ktMINE
Intangibles, Arm’s Length
Pricing, and Arm’s Length
Deal Structures
▲ Royalty Rates & Market Rates
Factors of comparability can be used to determine the arm’s length pricing for
comparable transaction.
- Grants - Agreement Type - Filing Company
- Industry - Parties - Exclusivity
- Effective Date - Payments - Term
Doing Business
After BEPS
RSM Romania
April 4, 2017
▲ Independent Party Agreements
How would independent parties structure transactions involving intangibles? This
information is important to understand market deal structures and payment terms.
▲ IP Portfolios
Patent filings, trademark filings, licensing rights and other intangible rights are
numerous for any one entity. Determining the legal ownership is imperative to:
1. Inventorying the intangibles under analysis
2. Providing a starting point in determining economic ownership and benefit
www.ktmine.com
28