A U.S. person transferring intangible property to a foreign corporation in a transaction that would otherwise qualify for non-recognition treatment is generally treated as having sold the intangible property in exchange for payments contingent on the property’s productivity, use, or disposition. In these situations the US transferor should include an amount in its taxable income each year over the useful life of the intangible property. The amounts of these imputed payments are calculated using US transfer pricing principles, under which the imputed payment must be commensurate with the income attributable to the intangible property.
The Tax Cuts and Jobs Act proposes to amend the definition of intangible property in section 936(h)(3)(B) to include within the definition of intangible property goodwill, going concern value, and workforce in place (including its composition and the terms and conditions of its employment). The definition of intangible property also includes as residual category 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, as transfers of intangible property, subject to the commensurate with income requirement.
Under the Tax Cuts and Jobs Act the IRS has the authority to specify the method to be used to determine the value of intangible property, both in relation to outbound restructurings of U.S. operations under section 367 (d) and in relation to intercompany pricing allocations under section 482.
For transfers of intangible property, including where the intangible property is transferred with other property or services, aggregate-basis valuation is allowed for purposes of section 367 (d) if it results in a more reliable valuation than an asset-by-asset valuation. The IRS may also value transferred intangible property on the basis of the realistic alternatives to the transfer if this method achieves a more reliable result than an asset-by-asset approach. This is consistent with the position that the additional value that results from the interrelation of intangible assets (e.g., goodwill and going concern value) can be properly attributed to the aggregate underlying intangible assets when it yields a more reliable result. It is also consistent with the rules governing cost-sharing arrangements under the transfer pricing regulations.
For purposes of the section 482 allocations the IRS should issue regulations requiring the valuation of transfers of intangible property (including intangible property transferred together with other property or services) on an aggregate basis; or on the basis of the realistic alternatives to the transfer if it determines that this method is the most reliable means of valuation. Realistic alternative principles can therefore be applied to arrive at valuations for intangible property transactions.
This provision is effective for transfers in tax years beginning after 31 December 2017.
