How do you manage the transfer pricing implications of intangible development and ownership arrangements?

1 What are the key transfer pricing issues of IDAs?

In order to determine the arm's length price for transactions involving intangibles, such as transfers, licenses, or cost-sharing arrangements, a robust transfer pricing analysis is required. This can be difficult as intangibles are often unique, hard to value, and subject to uncertainty and change. Moreover, intangibles may have synergies with other assets or functions, which can affect their contribution to the MNE's profits. The analysis should involve identifying the intangibles involved and their legal ownership, analyzing the functions performed, assets used, and risks assumed by each party in relation to the intangibles, selecting the most appropriate transfer pricing method and comparables considering the nature and availability of data, adjusting the prices or profits to account for any differences or specific factors affecting the value of the intangibles, and documenting the analysis and assumptions used - which should be updated regularly.

2 How do you allocate the returns from intangibles?

When it comes to allocating the returns from intangibles in IDAs, the economic substance of the IDA, not just the legal form, is a key transfer pricing issue. The OECD Transfer Pricing Guidelines state that the returns from intangibles should be allocated according to certain principles. Specifically, the legal owner of an intangible is only entitled to returns if they perform or control the functions related to the development, enhancement, maintenance, protection, and exploitation of the intangible and assume and bear associated risks. Additionally, those who perform or control the DEMPE functions and assume and bear the risks should receive an appropriate remuneration for their contributions, regardless of their legal ownership. Finally, those who provide funding for developing intangibles should receive a risk-adjusted return for their financial contribution, but no more than that.

3 How do you deal with hard-to-value intangibles?

Hard-to-value intangibles (HTVIs) pose a high risk of tax avoidance as multinational enterprises (MNEs) may understate or overstate their value to shift profits to low-tax jurisdictions. To prevent this, the OECD Transfer Pricing Guidelines introduce a special approach for HTVIs, which allows tax authorities to adjust the transfer price based on ex post outcomes, provided certain conditions are met. These include that the intangible is transferred between related parties, not traded on an open market, and projections or assumptions used to value the intangible are highly uncertain. Additionally, the ex post outcomes must be significantly different from the ex ante projections or assumptions. However, this approach does not apply if the taxpayer can demonstrate that the difference between the ex post outcomes and the ex ante projections or assumptions is due to unforeseeable events or risks that were not controlled by either party, that the transfer price was determined using reliable comparables or valuation techniques taking into account uncertainty and risk of the intangible, and that it was consistent with contractual terms and economic substance of the IDA.

4 How do you structure and document IDAs?

To manage the transfer pricing implications of IDAs, you need to ensure that they are structured and documented in a way that reflects the economic reality and the arm's length principle. This requires aligning the legal ownership of intangibles with the DEMPE functions and risks, and using clear and consistent contractual terms that define the rights and obligations of each party, pricing mechanism, payment terms, and dispute resolution process. Additionally, you must maintain contemporaneous and comprehensive documentation of the IDA and transfer pricing analysis, including identification and valuation of intangibles, selection and application of transfer pricing methods, sources of comparables, adjustments, assumptions, and projections. Moreover, you should review and update the IDA and transfer pricing analysis regularly to reflect any changes in facts, circumstances, market conditions, or tax rules.

5 How do you monitor and manage transfer pricing risks of IDAs?

Monitoring and managing the transfer pricing risks of IDAs is essential, as they may involve significant amounts of income or deductions, complex or subjective valuations, or aggressive tax planning strategies. To do this, you should conduct a self-assessment of your IDA and transfer pricing policies to identify any potential areas of inconsistency, weakness, or exposure. Additionally, it's important to implement internal controls and governance processes to ensure compliance with contractual terms, transfer pricing rules, and reporting and filing requirements. Proactive communication and cooperation with tax authorities is also key in providing timely and transparent information, clarifying doubts or queries, and resolving any disputes or controversies. Where possible, you should also seek advance certainty or guidance from tax authorities through mechanisms such as advance pricing agreements (APAs), mutual agreement procedures (MAPs), or safe harbors.

6 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?