Tuesday, November 5, 2019
Benjamin M. Satterthwaite (J.D. 2019, South Carolina; LL.M. (Tax) 2020, Florida), Nash Bargaining Theory and Intangible Property Transfer Pricing, 164 Tax Notes 2275 (Sept. 30, 2019):
This article was the winning entry in Tax Analysts’ annual student writing contest and received the 2019 Christopher E. Bergin Award for Excellence in Writing. [Honorable Mention: Daniel Pessar (Harvard)]
In this article, Satterthwaite proposes a transfer pricing framework for unique intangibles that integrates the economic fundamentals of John Nash’s bargaining theory with the “realistic alternatives” language of amended sections 367(d) and 482.
Conclusion As technology continues to improve and require more intangible property transfers between parents and subsidiaries, so too should the rules governing these transactions improve. Before the addition of the TCJA’s “realistic alternatives” language in sections 367(d) and 482, the code was plagued by incessant inconsistencies in application, brought on by an untenable mandate that controlled transactions be compared with uncontrolled transactions. The development of transfer pricing methods such as the profit-split method has alleviated some of this uncertainty, but taxpayers still lack a truly predictable measure of a transaction’s compliance, and tax authorities remain unable to police some potentially abusive transfer pricing arrangements. Nash bargaining theory can identify realistic alternatives and reliably score the adequacy of controlled transactions, providing taxpayers much-needed objective clarity.