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BEPS Action 8 – Transfer Pricing: Intangibles

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​Definition of Intangibles

The OECD defines intangibles as follows:
  • Patents;
  • Know-how and trade secret;
  • Trademark, trade names and brand;
  • Rights under contracts and government licenses;
  • Licenses and similar limited rights in intangibles; and
  • Goodwill and ongoing concern value. 

On the other hand, group synergies and market specific characteristics are not recognized as intangibles as they cannot be controlled by any party of the group.

 

 

OECD further stresses that a price for a transaction involving intangibles can often be identified that is consistent with the realistically available options of each of the parties. The existence of such prices is consistent with the assumption that MNE groups seek to optimize resource allocations. If situations arise in which the minimum price acceptable to the transferor, based on its realistically available options, exceeds the maximum price acceptable to the transferee, based on its realistically available options, it may be necessary to consider whether the actual transaction should be disregarded under the criterion for non-recognition, or whether the conditions of the transaction should otherwise be adjusted.

     

    OECD states that tax authorities should recognize the mechanism which independent taxpayers might also adopt for evaluating intangibles that is of highly uncertainty at the time of the transaction, which include:
  • Adopt shorter-term agreements;
  • Include price adjustment clauses in the terms of the agreement;
  • Adopt a payment structure involving contingent payments to protect against subsequent developments that might not be sufficiently predictable; and
  • Re-negotiation of the pricing arrangements when there is changes on fundamental assumptions for the pricing.

 

OECD defines Hard-to-value Intangibles as those intangibles for which (i) no reliable comparables exist, and (ii) at the time the transactions was entered into, the projections of future cash flows or income expected to be derived from the transferred intangible, or the assumptions used in valuing the intangible are highly uncertain, making it difficult to predict the level of ultimate success of the intangible at the time of the transfer. OECD agrees that in these circumstances, the tax administration can consider ex post outcomes as presumptive evidence about the appropriateness of the ex ante pricing arrangements. However, in circumstances where the taxpayer can satisfactorily demonstrate what was foreseeable at the time of the transaction and reflected in the pricing assumptions, and that the developments leading to the difference between projections and outcomes arose from unforeseeable events, tax administrations will not be entitled to make adjustments to the ex ante pricing arrangements based on ex post outcomes.

 

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