Intangible-Related Profit Allocation within MNEs based on Key DEMPE Functions

 

The OECD Guidelines provide that an entity within a MNE group is entitled to derive intangibles related returns to the extent that it performs and controls the key DEMPE (development, enhancement, maintenance, protection and exploitation) functions, controls the DEMPE-related risks and has the financial capacity to assume the relevant risks pertaining to the intangible. The OECD guidance aims at allocating the profit (or losses), as well as the costs and other burdens relating to the intangibles, to each entity belonging to the MNE group according to its actual contribution to the performance of the intangible value-creation functions.

 

Six-step framework to establish intangibles arm’s length pricing

 

Step 1

It pertains to the identification with specificity of the intangibles used or transferred in the transaction and the economically significant risks associated with the DEMPE activities pertaining to the intangibles.

 

Step 2

It requires the identification of all the relevant contractual arrangements. As  a starting point , the legal owner will be considered the owner for TP purposes. In cases in which it is not possible to identify a legal owner based on the contracts and available documentation, the legal owner will be the member of the MNE group that takes decisions concerning the exploitation of the intangible and has the practical capacity to restrict other members from using the intangible.

 

Step 3

It requires the carrying out of a deep functional analysis, identifying the parties performing functions, using assets, and managing risks involving the DEMPE activities. Essentially, this step requires establishing which parties control specific economically significant risks and which parties control any outsourced functions.

 

Step 4

It requires assessing the consistency between the terms of the relevant contractual arrangements and the actual conduct of the parties. This step consists of assessing whether the party assuming economically significant risks actually controls the risks and has the financial capacity to assume the risks in connection with the DEMPE activities related to the intangibles.

 

Step 5

In Step 5 an accurate delineation of the transaction that is to be priced is carried out. This step consists of delineating the actual controlled transactions involving the key DEMPE functions in light of the legal ownership of the intangibles, the other relevant contractual relationships under relevant registrations and contracts, and the conduct of the parties, including their relevant contributions of functions, assets, and risks, taking account of the allocation of risks.

 

Step 6

It concludes with the pricing of the accurately delineated transaction.  When possible, the arm’s length prices determined for these transactions should reflect each party’s contributions, including functions performed, assets used, and risks assumed. The OECD Guidelines suggest that  the best methods to be used in transactions involving transfers of intangibles or rights in intangibles will usually be the comparable uncontrolled price (CUP) method, the profit split method or income-based methods.

 

How can BDO help

Discover how BDO can assist your multinational enterprise (MNE) in navigating the complexities of transfer pricing. With our expertise in transfer pricing and international tax regulations, we provide tailored solutions and reliable guidance to ensure compliance with the arm's length principle. 

 

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