A recent Norwegian case highlighted a potential issue that may arise when valuing intellectual property transfers. Dynamic Rock Support AS, a company that produced bolts used in mining operations, and also having sales subsidiaries in Australia and Canada, was later acquired by Normet, a Swiss company. As part of the post-integration reorganization, Dynamic Rock transferred its IP to a Swiss company. This transfer included both the value of existing patents and copyrights. As part of this transaction, the two sales subsidiaries were also transferred to Normet for about €10 billion.
Dynamic Rock valued its IP using a relief-from-royalty approach, a common methodology especially when good market comparables exist for similar patents and copyrights. The Norwegian tax office argued that the relief-from-royalty approach undervalued the IP and instead it used a Comparable Uncontrolled Price approach (“CUP”). The Norwegian tax office argued that the relief-from-royalty approach did not apply in this case because the entirety of Dynamic Rock Support’s intellectual property was transferred, including the operations of the subsidiaries. Because of this, Dynamic Rock Support was essentially left without any assets, tangible or intangible, including any goodwill. Thus, the Tax Office argued, a relief-from-royalty analysis would undervalue the intellectual property.
While the case holds no precedence in Canadian or American courts, it is instructive for situations where IP transfers occur leaving the transferor with no discernible assets, tangible or otherwise. In such cases, it may be prudent for transfer pricing and valuation practitioners to consider performing alternative analysis to corroborate any relief-from-royalty approach, and if alternative valuations provide higher values, consideration should also be given to the transfer of non-identifiable intangibles such as goodwill.