Richard C. Sansing

Evaluating the Commensurate with Income Standard

  • Finance
  • Accounting
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ABSTRACT This study analyzes a model in which intellectual property (IP) that generates uncertain future cash flows is sold by a U.S. parent to a foreign subsidiary. The parent has private, imperfect information regarding the value of the IP. The study compares the firm’s expected tax and penalty payments under the commensurate with income (CWI) standard to the payments under the fair value method, in which the transfer price is the expected value of the IP using all the facts publicly available after the value is realized. It compares payments under both methods to the payments using the fair private price, which is the value of the IP on the date of sale given the parent’s private information. Expected tax and penalty payments using the fair private price are strictly less than expected payments under the CWI standard and are strictly greater than expected payments under the fair value method. JEL Classifications: H25; H26; H32.

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