Transfer pricing treatment of acquired intangibles

Cross border acquisitions provide welcome access to new markets for cross–selling, customers, talent, and technologies. To maximize the synergistic benefits that prompted the acquisitions, executives at acquisitive companies must engage in post–merger integration to rationalize their workforce and integrate operations and acquired intangibles. If the acquisition of valuable intangibles was a material factor in the acquisition, the acquiring company may face complex tax and financial reporting issues, especially if the acquired intangibles are to be integrated with other intangibles owned by the acquiring company. Executives who understand the importance of transfer pricing valuations are better prepared to integrate acquired intangibles, manage tax risks, and avoid costly transfer pricing penalties.

Although an acquisition itself is an arm’s–length transaction between unrelated parties and therefore does not give rise to transfer pricing issues, transfer pricing risks often emerge immediately after the acquisition. Once the acquired company becomes part of a multinational group, any subsequent transfer or license of acquired intangibles among related affiliates may constitute a related–party transaction subject to Sec. 482.

This article addresses the transfer pricing treatment of acquired intangibles. It does not cover the valuation of acquired intangibles for financial reporting purposes, which occurs under different but interrelated rules. In addition, this article is not about purchase–price accounting and valuation matters, which would require a substantial discourse on acquisition type, structure, and valuation methodology. While determination of value at the point of acquisition informs the valuation of the intangible assets, those methodologies of valuation differ from the methodologies used to determine the value of an acquired intangible in the hands of the acquirer for the purpose of determining the best arm’s–length transfer price for the use of such intangibles among affiliates.

Cross-border M&A industry trends

Cross–border mergers and acquisitions (M&As) continue to be a common growth strategy for multinationals despite economic uncertainty from tariffs and inflationary pressures.¹ Deal volume is strongest in North America and Europe, which together made up approximately 75% of the midmarket cross–border global acquirer (and target) origins in 2024.² A key driver of cross–border deals is the acquisition of new products, innovative features, talent, and other strategic assets (collectively, “acquired intangibles”).³ This impetus occurs amid a shift by the IRS in enforcement of transfer pricing rules with respect to intangibles, resulting in more effective scrutiny in recent years.

IRS enforcement focus on intangibles

For decades before 2019, the IRS litigated and lost major transfer pricing cases, including a number of high–profile intangibles cases: e.g., DHL (2002)⁴ (valuation of trademarks) and Xilinx (2005)⁵ (stock–based compensation in a cost–sharing arrangement (CSA)). Veritas (2009)⁶ and Amazon (2019)⁷ both involved valuing buy–in payments for a CSA. In a remarkable turn, however, the IRS has since recently won or partially won material disputes that included the transfer pricing impact of intangibles: Altera (2019)⁸ (inclusion of stock–based compensation in CSA cost pools); Coca–Cola (2020)⁹ (comparable profits as the best method to split taxable profits); and Medtronic (2022)¹⁰ (best method for compensation of Puerto Rico manufacturing subsidiary). However, at the time of this writing, the Tax Court’s opinion in Coca–Cola is pending appeal in the Eleventh Circuit.¹¹

Transfer pricing for intangibles continues to be a focus of IRS enforcement in 2026. The IRS issued a generic legal advisory memorandum (GLAM) on the application of the commensurate–with–income (CWI) standard to intangible transfers.¹² In Facebook (2025),¹³ the Tax Court endorsed the IRS’s method for valuing platform contribution transactions (PCTs) in a CSA but disagreed with some inputs and assumptions. Amgen (2024)¹⁴ and Airbnb (2024)¹⁵ are both ongoing Tax Court cases with intangibles issues.

A nontax Supreme Court decision is also affecting transfer pricing for intangibles cases. In Loper Bright (2024), the Supreme Court overruled the “Chevron deference doctrine” under which, where a statute administered by an agency was ambiguous, courts would generally defer to the agency’s reasonable interpretation of the statute.¹⁶,¹⁷ Based on this change, the Eighth Circuit recently reversed the Tax Court’s decision in favor of the government in 3M Co.¹⁸ — a transfer pricing—related blocked income issue — holding that the IRS exceeded its authority in interpreting Sec. 482, citing Loper Bright. Also, relying on Loper Bright, taxpayers have contested the cost–sharing regulations that required the inclusion of stock–based compensation in Abbott Laboratories (2024)¹⁹ and McKesson Corp. (2025).²⁰

These developments highlight why it is important for executives to understand and comply with U.S. transfer pricing regulations, especially for intangibles, as tens of billions of dollars in taxes, penalties, and interest are at stake.²¹

Valuing acquired intangibles

Transfer pricing for acquired intangibles is an important subset of the larger category of transfer pricing for intangibles and presents unique challenges. Rather than a single intangible asset, most acquisitions include tangible assets, ongoing business operations, and intangibles unrelated to the activities of the acquiring company. Further, many acquired intangibles sought to be integrated — workforce in place, goodwill, synergies, customer relationships, technology, know–how, trade secrets, in–process research and development, etc. — are difficult to identify and quantify.²² An additional challenge is that the valuation of acquired intangibles for financial reporting differs substantially from the valuation for tax purposes.

A purchase–price allocation (PPA) serves as a starting point to value acquired intangibles for financial reporting purposes. A PPA ensures transparency and post–deal compliance with accounting standards such as FASB Accounting Standards Codification Topic 805, Business Combinations, U.S. or local GAAP, and IFRS 3. A PPA allocates at fair value the purchase consideration in the deal to the assets acquired and the liabilities assumed. Fair value is the standard of value to be applied for financial reporting purposes — it is not the same as the arm’s–length standard for tax purposes.

Intercompany transactions involving acquired intangibles generally must satisfy the arm’s–length standard for all intercompany transactions and the CWI standard, which applies specifically to transactions involving the transfer or license of intangible property. The CWI may require periodic adjustments in certain cases if actual results differ substantially from projected results. In addition, the Tax Cuts and Jobs Act (TCJA), P.L. 115–97, amended Sec. 482, codifying the requirement on the valuation of transfers of intangible property: that such transfers be valued on an aggregate basis or on the basis of the realistic alternatives to the transfer if the IRS determines that such basis is the most reliable means of valuation of such transfers.²³

The regulations under Sec. 482 list three methods for valuations of intangibles in a non-cost–sharing context:

• Comparable uncontrolled transaction (CUT): This method compares whether the amount charged for a controlled transfer of intangible property was at arm’s length by reference to the amount charged in a comparable uncontrolled transaction. Internal CUTs (between the taxpayer and an unrelated party) and external CUTs (between two unrelated parties, neither of which is the taxpayer) may be used.²⁴
• Comparable-profits method (CPM): This method evaluates whether the amount charged in a controlled transaction is at arm’s length, based on objective measures of profitability derived from uncontrolled taxpayers that engage in similar business activities under similar circumstances.Typically, the CPM would apply to a licensing arrangement in an intangible property transaction, and the profitability comparison would be to the licensee.²⁵
• Profit-split method: This method evaluates whether the allocation of the combined operating profit or loss attributable to one or more controlled transactions is at arm’s length by reference to the relative value of each controlled taxpayer’s contribution to that combined operating profit or loss. It is typically used when all parties in a transaction make significant nonroutine contributions or the business is highly integrated.²⁶

Two additional methods that are considered specified methods in the context of cost sharing and unspecified methods outside cost sharing are frequently used in dealing with acquired intangibles: the acquisition–price method (APM) and the income method.

The APM is a market–based approach. It has the advantage of using the actual acquisition price in the aggregate. It is most often applied when (1) the acquisition date is contemporaneous with the subsequent intercompany transfer of the same intangibles and (2) most of the target’s assets are not routine. Adjustments can be made to add liabilities and subtract tangible assets and other assets that are not contributed to the intercompany transaction, such as operations with routine contributions or other intangible assets not being purchased or transferred. Adjustments that are specifically addressed in the U.S. transfer pricing regulations should be acceptable to the IRS, while adjustments that are not explicitly covered risk dispute.

Examples from the U.S. transfer pricing regulations illustrate how to treat goodwill when selecting and applying the APM.²⁷ In one example, acquiring a startup with only in–process technology and workforce led to a PPA for separately identifiable intangibles (50%) versus goodwill (50%), but the IRS recharacterizes goodwill as part of the economic compensation for intangibles in aggregate. In another example, acquiring a mature multinational company with a mix of existing software technology and brand value (50%), in–process technology and research workforce (25%), and goodwill (25%) shows that the APM may not be the best method when most of the goodwill is expected to be for contributions by and for the United States and there are other nonroutine contributions (e.g., make–or–sell rights) that are for the U.S. business but are hard to value. This example is an indication of the challenge of selecting and applying the APM. Carveouts of operations and other unsold assets require separate valuations, which are fact–dependent and can be difficult to value and/or contentious.

The income method values future economic benefits of transferred intangibles, using the best–realistic–alternatives principle. In the context of cost sharing, the income method determines the value of preexisting intangibles contributed to a CSA (a PCT payment), so it is well suited for determining the value of acquired intangibles through an M&A transaction. The income method calculates the intangible property value as the present value of residual profits associated with the transferred rights. “Residual” refers to profits after arm’s–length returns have been allocated to all routine functions associated with the exploitation of the intangible property by the other party to the CSA. In the context of valuing acquired intangible property, this method can corroborate results in the aggregate from other methods or serve as the primary method if others do not apply.

The income method relies on key assumptions that are highly sensitive and can materially impact a valuation. The IRS has challenged these assumptions in several prominent court cases. For example, it has questioned whether financial projections reflect the appropriate scope of the acquired intangibles transferred in question, whether routine returns are appropriately carved out and valued, whether the discount rate has been calculated correctly, and whether the useful life of transferred technology is finite or infinite.

Among acquired intangibles, goodwill is one of the most difficult and disputed in transfer pricing valuation issues, regardless of method. The crux of debate centers on different definitions for different purposes. Prior to the passage of the TCJA, the definition of “intangibles” in Sec. 482 mirrored Sec. 936(h)(3)(B), with no explicit mention of goodwill. In the TCJA, Congress specifically referenced Sec. 367(d)(4), which includes goodwill, going concern value, and workforce in place as compensable intangibles. This current definition of intangible property for transfer pricing purposes contrasts with financial reporting, where goodwill is the residual value after assigning fair value to separately identifiable assets. As a result, a transfer pricing analysis is needed to ascertain in each case to which asset the goodwill value should be allocated and how much goodwill should be allocated to transferred assets, based on the facts and circumstances.

Managing synergies and risks

As companies continue to engage in cross–border M&As to gain access to intangibles, executives are well advised to proactively consider ways to maximize synergies and mitigate tax risks and transfer pricing disputes. Understanding where key transfer pricing disputes may lie in the valuation of acquired intangibles during a business reorganization is an important and material consideration.

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Footnotes

¹Organisation for Economic Co-operation and Development (OECD), FDI in Figures, Figure 8, “Completed M&A Deals” (October 2025), p. 6.

²Fehre and Hu, “Cross-Border Mid-Market M&A Compass 2024,” Moore/Vlerick Business School (April 2025).

³OECD, “Reviewing Cross-Border Mergers in the Digital Age: Complexities and Emerging Approaches” (video of panel session) (February 2025).

⁴DHL Corporation, 285 F.3d 1210 (9th Cir. 2002).

⁵Xilinx, Inc.,598 F.3d 1191 (9th Cir. 2010).

⁶Veritas Software Corp.,133 T.C. 297 (2009).

⁷Amazon.com, Inc.,934 F.3d 976 (9th Cir. 2019).

⁸Altera Corporation,926 F.3d 1061 (9th Cir. 2019).

⁹The Coca-Cola Co., 155 T.C. 145 (2020).

¹⁰Medtronic, Inc.,153 F.4th 682 (8th Cir. 2025). In September 2025, the Eighth Circuit vacated a Tax Court decision in the long-running Medtronic, Inc. transfer pricing case, remanding it for the second time.

¹¹The Coca-Cola Co., No. 24-13470 (11th Cir. 10/24/24).

¹²Chief Counsel Advice, GLAM AM 2025-001 (January 2025).

¹³Facebook Inc.,164 T.C. No. 9 (2025).

¹⁴Amgen Inc.,T.C. Memo. 2024-38. The memorandum opinion granted partial summary judgment to the IRS, holding that the IRS met the requirement in Sec. 6751(b)(1) of timely supervisory approval for all penalties it asserted. However, the litigation over the transfer pricing issue continues in the case.

¹⁵Airbnb, Inc.,T.C. No. 12423-24 (7/31/24) (petition filed).

¹⁶Loper Bright Enterprises v. Raimondo, 603 U.S. 369 (2024).

¹⁷Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc.,467 U.S. 837 (1984).

¹⁸3M Co.,No. 23-3772 (8th Cir. 10/1/25), rev’g 160 T.C. 50 (2023).

¹⁹Abbott Laboratories, T.C. No. 15235-24 (9/19/24) (petition filed).

²⁰McKesson Corporation,No. 3:25-CV-01102 (N.D. Tex. 5/2/25) (complaint filed).

²¹Wrappe and Lee, “Increased U.S. Transfer-Pricing Enforcement: What’s At Stake?” 55-2 The Tax Adviser 24 (February 2024).

²²IRS, LB&I International Practice Service Transaction Unit, Pricing of Platform Contribution Transaction (PCT) in Cost Sharing Arrangements (CSA), Acquisition of Subsequent IP (Dec. 23, 2015).

²³Sec. 482.

²⁴Regs. Sec. 1.482-4(c).

²⁵Regs. Sec. 1.482-5.

²⁶Regs. Sec. 1.482-6.

²⁷Regs. Sec. 1.482-7(g)(2)(vii).

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Contributor

Steven C. Wrappe, J.D., LL.M., is the technical leader of transfer pricing in Grant Thornton Advisors LLC’s Washington National Tax Office; Chris Lee, M.Tax. is a transfer pricing senior manager with Grant Thornton in San José, Calif. For more information about this article, contact thetaxadviser@aicpa.org.

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