SFB 303 Discussion Paper No. A-458

Author: Broecker, Thorsten
Title: Lump Sum License Fee Arrangements Are The Arm's Length Equivalent of Cost Sharing Arrangements
Abstract: International tax law allows the use of cost sharing arrangements instead of licenses to transfer technology between affiliated companies. This article investigates under which circumstances cost sharing arrangements are arm's length, i.e. the outcome of negotiations between independent parties. It is shown that a dominant firm that can undertake a R&D program is indifferent in equilibrium between offering a cost sharing arrangement and a lump sum license fee arrangement to a second firm provided that both firms operate in exclusive geographic markets and that complete rent extraction through cost sharing is allowed - otherwise cost sharing is not arm's length.
Keywords: cost sharing, licensing, technology transfer, international transfer pricing, Section 482 of the US Internal Revenue Code
Creation-Date: October 1994
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