Selecting Uncontrolled Patent Licensing Agreements for Transfer Pricing Benchmarks
Filter uncontrolled patent licenses by independence, adjust rates for local DEMPE functions, and register contracts with MOFCOM before remitting royalties.
IP Valuation
Meaning
Financial appraisal process used to determine the fair market value of intangible assets such as patents, trademarks, copyrights and proprietary software establishes the basis for intercompany charges. This calculation relies on future economic benefits and the remaining legal life of the asset. It stops applying once the asset enters the public domain or loses its commercial utility.
Valuation Methodology
Chinese regulations recognize the income approach, market approach, cost approach and replacement method for establishing the worth of intangible assets. During an ip valuation, the appraiser must justify the discount rate and the projected cash flows. This calculation provides the basis for capital contributions and licensing deals.
Regulatory Filing
State owned assets require a formal evaluation report approved by the state owned assets supervision and administration commission. For private cross border transactions, the filing provides the basis for calculating withholding tax on royalty payments. The tax bureau may challenge a valuation that deviates from industry benchmarks.
This scrutiny ensures that the transfer of intangible rights is not used as a vehicle for capital flight.
Economic Life
The duration of the legal protection and the speed of technological obsolescence define the period of the asset value. Most assessments assume a finite lifecycle for technical patents. If the technology becomes standard, the value drops regardless of the legal term remaining.