Allocation of intangibles and risks within corporate groups – implications of BEPS

With a stronger focus on the taxation of economic activities at the place where value is effectively created, the OECD wants to counteract mainly tax-aggressive models of large corporate groups (shifting profits to low-tax rate countries). However, the aspects of intangibles assets discussed in the light of “Base Erosion and Profit Shifting” (BEPS) and the allocation of functions and risks within corporate groups relate to not only large companies but also SMEs and their international business models.  


International corporate groups are increasingly implementing global value chains. For example, R&D activities are also handled or operated by experienced employees of foreign group companies, rather than only from the German head office. Therefore, it is becoming more and more difficult to delineate at which location the value was effectively created and to whom the revenue flowing from the activity should be allocated. The OECD draft of BEPS Actions 8-10 provides guidance on tackling the delimitation difficulties in practice and provides, among other things, specific information on the allocation of intangible assets and risks among associates.

The draft of BEPS focuses especially on cases where intangibles are an essential element of value creation. Due to their nature, intangibles are easy to transfer between companies and profit potentials can be easily relocated. Revenue was previously allocated particularly based on which of the parties registered the property right for the intangible asset (e.g. marks, production know-how etc.) and was contractually authorised to exploit it. In future, the mere legal ownership will be no longer enough to determine the allocation of revenue based on the exploitation of intangibles. A more detailed functional analysis will have to be conducted. Accordingly, enterprises will have to receive adequate fees appropriate for the contributions they make when performing significant functions and assuming significant risks in the area of developing, enhancing, maintaining, protecting or exploiting the intangibles. In practice, the following aspects will increase in importance:

Risk allocation and shifting of profits

The targeted allocation of risks to individual group companies previously allowed shifting profits to countries with relatively low tax rates because the share of revenue was directly attributed to risks assumed. The more risks an enterprise assumed, the higher was its share in the resulting profit. Now, the OECD sets out to eliminate such structures as the contractual allocation of risks should be more intensively audited in terms of who controls and is financially able to cover the risk. When it comes to external audits, this topic has been on the agenda of enterprises for years now. The OECD has now provided more specific guidelines on how to structure risk allocation. According to these guidelines, decisive for the allocation of risks should be now the question which party controls the relevant risk and which party holds the financial means to cover the risk if it materialises. In the risk allocation analysis, 6 steps should be observed:

The draft of BEPS Actions 8-10 offers tax authorities an additional tool for auditing transactions between associated enterprises (controlled transactions) in more detail. An implementation of corresponding regulations into national legislation is probable. Therefore, companies should prepare early for a review of the functional and risk allocation of intra-Group structures and, if necessary, make adjustments. In addition, future transfer pricing documentation should take into account the current stance of the OECD and include a sufficient specification of value adding contributions associated with intangibles and of risk allocation.