Switch pricing for AI-generated mental property – taxes

United States:

Transfer pricing for AI generated intellectual property

March 25, 2021

Mayer Brown

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Consider the following hypothesis: Researchers at a US-based pharmaceutical company are developing an artificial intelligence (“AI”) system that can identify new therapeutic targets with minimal human intervention. The pharmaceutical company sells the system to its overseas subsidiary in a country with lower taxes. What is the appropriate rating of the system for this outbound transmission (e.g. based on the cost of creation or based on the value of the IP that is likely to be generated)? And if the AI ​​system later successfully creates a new therapeutic, which company is entitled to the non-routine income from the sale of the therapeutic: the U.S. parent company that developed the system, the foreign subsidiary that owns the system that created the Therapeutic agent, or a combination of both?

As in general with transfer pricing, the answer to these questions will of course depend on the facts and circumstances of the individual case.

These questions are even more complicated as they depend in large part on intellectual property law, which is struggling to keep up with advances in AI technology. Recently, the U.S. Patent Office rejected an argument that the sole inventor of two inventions was an AI tool. Although the patent office has determined that the inventor listed in the patent applications must be human, the controversy in this area is likely to continue and Congress may be forced to intervene in the future. If ever it were found that the inventor could be the AI ​​program, it would support an argument that the AI ​​program should be treated as if it had done the IP development (i.e. the “D” in the DEMPE) for transfer pricing purposes Functions of the company)? In this case, the affiliate that owns the AI ​​system should presumably be entitled to a significant portion of the income from the invention.

In recent years, the practical uses for AI have multiplied, and the above hypothesis no longer seems like something that came out of a science fiction movie. AI systems invariably blur the line between the inventor, the inventor’s toolkit, and the invention, raising questions about IP ownership and related transfer pricing. The presence and use of AI systems can also offer significant tax planning opportunities.

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This article by Mayer Brown contains information and commentary on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject under discussion and is not intended to provide legal advice. Readers should seek specific legal advice prior to taking any action in relation to the matters discussed here.

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