The importance of intangibles for multinationals

The legal, accounting and tax definitions of intangibles are different. In fact, the definition of IP for corporate income tax, customs and transfer pricing purposes is often different. As per the definition provided by the OECD, the word “intangible” addresses something that is not physical or financial asset, it is capable of being owned or controlled for use in commercial activities and whose use or transfer would be compensated had it occurred in a transaction between independent parties in comparable circumstances. 

The application of the arm’s length principle in the case of use and transfer of intangibles plays a key role in international tax law, as it determines how profits generated by multinationals through the use of valuable intangible property in their value chains are allocated among the jurisdictions, they do business. Pricing the use and transfer of intangibles in accordance with the arm’s length principles is imperative in today’s world as Tax Administrations focus a lot on the pricing thereof. The reason for it is very simple – unlike fixed assets and people, intangibles are easy to move (especially to low-tax jurisdictions) and the amounts concerned are always high.
 

OECD's 6-step approach 

The OECD Transfer Pricing Guidelines provide for a 6-step approach to determine the arm’s length remuneration for transactions relating to intangible assets between associated enterprises, as described below:

• Step 1: Identify the intangibles and economically significant risks associated with the development, enhancement, maintenance, protection and exploitation (DEMPE) of the intangibles;
• Step 2: Identify the full contractual arrangements and determine the legal ownership of the intangibles;
• Step 3: Carry out functional analysis to identify the parties performing the functions, using the assets and managing the risks related to DEMPE;
• Step 4: Confirm the consistency between the terms of the relevant contractual arrangements and the conduct of the parties;
• Step 5: Delineate the actual controlled transactions related to the DEMPE of intangibles;
• Step 6: Determine the arm’s length process for the transactions consistent with each party’s contributions. 

Concluding remarks

The selection of the most appropriate transfer pricing method should be based on the functional analysis and should take into account all of the relevant factors materially contributing to the creation of value. In line with the OECD Guidelines, the transfer pricing methods, that would be most appropriate for intangibles are typically the Comparable Uncontrolled Price (CUP) method and the transactional profit split method. Considering the frequently changing tax environment, multinational organisations need to monitor on a regular basis their intangible assets from a transfer pricing perspective to ensure compliance with local legislation and most importantly that any intra-group arrangements concerning the pricing of intangibles are at an arm’s length.

 

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