Page 41 - Strategic Tax Planning for Global Commerce & Investment

Strategic Tax Planning for Global Commerce and Investment

2. Contract R&D Model

Another model consists for the R&D company to carry out
R&D on a “contract research” basis on behalf of another
company (group in the multinational network). Under this
model, the other company (the “IP company”) pays to the R&D
company a fee for the services provided by the R&D company,
namely the carrying out of research with the goal of creating IP.
The fee paid to the R&D company will generally be based on
the “cost incurred” by the service provider increased by an
“arm’s length mark-up” to satisfy transfer pricing
requirements. The R&D company takes no economic risk and
therefore, as a general rule, the margin it charges is small. The
IP company bears the risk that the R&D may ultimately be
unsuccessful, as well as the cost of financing its development
before the start of commercial exploitation, thus, the bulk of the
IP portion in the value added chain is allocated to the IP
company rather than the R&D company, as shown in the
following graph.

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