Within one Group of Companies, it often happens that valuable and unique intangibles are generated in one of the member firms, while other member firms use those intangibles. For example, the parent company built a brand for decades and then founded subsidiaries in other countries, and those companies used the benefits of that brand.
The question is should we charge a fee for the use of intangibles or brands (royalty fee), to daughter companies and at what price?
The basis for generating profit inside the Group are intangibles, e.g. brand, licences, franchise, know-how, patent, software etc. Having that fact in mind, Group’s profit allocation among its members according to the ”arm’s length” principle is based on contributions of each member in creating Group’s intangible assets. Intercompany transactions of using and transferring intangibles are common, but they are rarely documented and valued in accordance with ”arm’s length” principle, which exposes tax payers to transfer pricing risks.
When analyzing these transactions, it is important to identify specific intangibles, costs and activities incurred during the process of creating them (analysis of contributions in creating intangibles), their impact on financial performances and benefits which will provide to their owner in future (valuation of intangibles).