The A – Brand

Value contribution to a brand by the licensee – background information

Markus VolkmannFederal Central Tax Office / Federal Audit Department

OECD Transfer Pricing Case Studies WorkshopSan Jose, 31 March – 4 April 2014

Problem

• Well known brand• More than 100 years old

• Value contribution of a licensee• R&D and marketing activities

• Does it effect in the royalty rate?

Background

• A – Group:– British parent company: A plc.– Sector: high technology field (engines for

aircrafts)– Trademark licence agreement: 1% of turnover

• Turnover from non affiliated companies

– German subsidiary: A Germany• Licensee• Other Licensee is an American subsidiary

Background: Sector

• Limited market situation– Three suppliers for these products, one of

them is the A – Group– Some specialized manufacturers (air craft

manufacturer)– Some customers (airlines)

• High quality and safety standards

Background: Trademark

• Registered brand “A”– known all over the world– General use: The “A” of ….

• “A” is associated with– High technological position– Achieving high quality standards– Reliability and efficiency of the products

Background: A Germany

• Founded in 1990• Business:

– Responsible for the small and regional product group

– Fully fledged (research & development, distribution, after sales)

– Marketing activities (special maintenance agreements with airlines to get the profitable maintenance service)

Background: A Germany

• Technology Transfer and Cost Sharing Agreement– A plc. / A U.S. / A Germany– Available technology in the A - Group

• the range of responsibilities and functions grows– Transfer of products developed before 1990

from UK– Responsibility for product-related strategic

decisions

Background: License fee

• Documentation provided by A Germany– ALP of the license rate

• Royalty Stat: – Range: 0.75% - 1.5% - 3%– three “comparables”– Other industry sectors

• Literature:– Range: 1% - 5%

German Transfer Pricing Audit

• Significant value contribution to the brand by A Germany– Responsibilities, risks and functions

• A lower license rate would be at arm’s length.– A rate has not yet been discussed.

• A Germany: Significant value of the brand was created by A plc. – No reduction!

Questions

What do you think about the auditor’s proposal?

Which royalty rate could be at arm’s length?