On 6 June 2012, following a process which started in 2010, OECD
published an interim draft, Revision of the Special Considerations
for intangibles in Chapter VI of the OECD Transfer Pricing
Guidelines and Related Provisions, concerning the transfer pricing
aspects of intangibles. The purpose of the draft is to provide
guidance specially tailored to determining arm's length legal
conditions for transactions that involve the use or transfer of
intangibles. In a nutshell, when determining the arm's length
principle, a transaction is evaluated on the basis of whether it
conveys economic value from one associated enterprise to
another.
According to the draft, intangible is something that is capable of
being owned or controlled for use in commercial activities.
Intangible benefit can derive from a variety of items, including
but not limited to patents, know-how and trade secrets, trademarks,
trade names and brands. However, the definition of intangible is
open for interpretation and needs to be evaluated on a case-by-case
basis. For example, contractual rights and obligations may be
recognized as intangibles and thus a commitment to make available
the services of a particular group of uniquely qualified employees
may constitute an intangible.
Intangible transactions are either used by one or both parties in
connection with the sales of goods or performance of services
without the transfer of the intangibles; or they are transactions
whereby rights in intangibles or intangibles themselves are
transferred. Neither legal ownership nor the bearing of costs
related to intangible development entitles an entity within an MNE
group to retain the benefits or returns linked to intangibles as
such. Instead, a party should perform and control important
functions related to the development, enhancement, maintenance and
protection of the intangibles, and bear and control the associated
risks and costs.
The draft places considerable weight on finding the proper and
correct valuation technique and e.g. discourages the use of
financial valuation techniques based on the cost of intangible
development. These are valuation techniques which are used to
estimate the value of intangibles based on the cost of intangible
development plus a return, i.e. calculating and allotting
appropriate R&D costs and adding a certain mark-up.
The draft currently awaits written comments which are to be
provided by mid-September 2012. The draft is not a consensus draft
and has already caused debate among industry professionals. E.g.
the proposed accepted valuation techniques could affect a large
number of valuations and companies. A public consultation on the
draft is expected to be held during the week of 5 November
2012.
The draft is also incomplete in its scope and does not address
several key issues and topics related to intangibles such as
necessary modifications to cost contribution arrangements, transfer
pricing of e.g. market specific advantages, location-based
advantages and corporate synergies. These are anticipated in
future. Even in its current form, however, the draft highlights the
need for a detailed evaluation of the existing transfer pricing
valuation techniques. Similarly, a review of the definition of
intangible property for transfer pricing purposes is
recommended.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
