March 18, 2019
On the occasion of their 50th anniversary, Willamette Management Associates present a special issue of Insight, their quarterly publication on thought leadership in valuation issues. This special issue reprints various groundbreaking contributions from the last 50 years. Two of these contributions relate to transfer pricing issues, and illustrate how the availability of comparable data to value IP has grown at an exponential rate over the last 20 years.
In a 1991 article, Willamette’s managing partner Robert Reilly discusses Determining the Appropriate Transfer Price for Interstate Intangible Asset Transfer Programs. Back then, the discussion was rather conceptual, describing methods and approaches to a relatively young phenomenon in theory. Beyond Regulation 1.482(c)(2) of the Internal Revenue Code (“Data based on the results of transactions between unrelated parties provides the most objective basis for determining whether the results of a controlled transaction are at arm’s length.”), no other guidance is provided regarding the selection of comparable uncontrolled transactions. No data vendor existed, no structured data was available in the public domain.
This situation of the transfer pricing industry changed very much during the next 20 years. Royalty Source was launched in 1997, RoyaltyStat in 2000, ktMine in 2007, RoyaltyRange in 2013, and MARKABLES in 2014, all of them making new contributions to the availability of data.
The second groundbreaking article on transfer pricing by Aaron Rotkowski and Scott Miller was originally published 20 years later, in the Spring 2012 issue of Insights, and titled “Overcoming Obstacles in the Intellectual Property Transfer Price Analysis”. Here, the authors describe practical examples, case studies and the use of databases.
One of the case studies is about the valuation of the “Wonderful Widget” trademark. Its owner, taxpayer “Multinational Corporation” (MNC) manufactures widgets that are used in the manufacture and remodeling of both residential and commercial buildings. The trademark is used by controlled subsidiaries in various foreign countries. [In a later publication in 2013, the “Guide to Intangible Asset Valuation” textbook by Robert Reilly and Robert Schweihs, the same case study was used under the code name “Omicron”. Here, Omicron was described as a leading supplier of doors and windows. Presumably, Omicron relates to JELD-WEN, one of the world’s largest door and window manufacturers].
In the Wonderful Widget case study, the analyst searched the Royalty Source and the ktMine databases for comparable uncontrolled transactions (CUTs) and ended up with 100 potential CUTs which was narrowed down to twelve potential CUTs which was further refined to a final list of four CUTs.
However, the authors of the Wonderful Widget case study confessed: “None of the (four) CUTs involved a widget manufacturer.“ As revealed in the 2013 publication, the 4 CUT license agreements involved:
In both versions of the case study (2012, 2013), none of the CUTs came anywhere close to building products, let alone to doors and windows.
Again, this changed substantially in later years. In 2017, only five years after the Wonderful Widget case study was shared with the public, the MARKABLES database lists 20 different entries (CUTs) in the sector “doors, windows and their frames and thresholds for doors”. In 2019, this number has increased to 26. The number of cases in the building products sector runs into the hundreds. Certainly a large and robust selection to choose from today.
Back in the 90s, supporting the valuation if IP with market-based data was like getting lost in the fog. Today, valuation professionals have ample selection of comparable data to choose from. Since the incidence of the first vendor of IP related data – Royalty Source 1997 – other players have entered the market and contributed to an exponential growth of data availability and comparability for professionals involved in transfer pricing.