Royalties for Intracompany Sales of Fancy Trademarked Cheese

The United States is currently considering issuing new guidance on the allocation of taxable income from marketing intangibles among related entities of multinationals. With this guidance, policymakers hope to settle an ongoing debate between advocates of the arm’s length principle and proponents of the principle of legal ownership. The purpose of this paper is to propose the net present value method be used to allocate income among related taxpayers. With this method, affiliates that market an intangible that they do not own are compensated as advocated by proponents of the arm’s length principle. Legal owners are also compensated for their opportunity costs.