BEPS Action Plan: Action 8 – Transfer pricing and intangibles

The revised discussion draft on transfer pricing aspects of intangibles shows the direction in which the OECD had been travelling even before the BEPS Action Plan was published. We discuss here how action 8 of the Plan will help to focus the remaining work on this project.




24 September 2014

While the key sections of the revised Transfer Pricing Guidelines on intangibles have not yet been finalised, the ultimate goal of the latest G20-approved report seems to be…

that functional value creation remains to the fore with the starting point being an analysis of the group global value chain to show how intangibles interact with other functions, risks and assets.

Combined with special measures to be developed in 2015, these aim to make sure that an MNE group member that merely provides funding without performing and controlling all of the important functions, providing all assets and bearing and controlling all risks in relation to the development, enhancement, maintenance, protection and exploitation of the intangibles would only be entitled to a risk-adjusted rate of anticipated return on its funding but no more.

On the revised definition of intangibles, Chapter VI will state the importance of distinguishing between intangibles and market conditions or local market circumstances which are not capable of being owned or controlled.

Regarding location savings or local market features, the most reliable approach is stated to be local market comparables and only if they don’t exist to consider advantages and disadvantages and whether they’re passed on to customers.

The benefits of an assembled and experienced workforce may affect the arm’s length price. The transfer of such people within an MNE should not be separately compensated but reflected to the extent that there are time and costs savings (except where there is a transfer of know-how or other intangibles).

Group synergies should result in arm’s length remuneration only if they arise from deliberate concerted group actions that provide a member of an MNE group with material burdens or advantages not typically available to comparable independent entities.


3 June 2014

At the OECD’s Annual Conference in Washington DC, there was a particular focus on …

the underlying economics and to reward value where it is being conveyed rather than the labels of intangible property.

There was also discussion of valuation techniques and the potential use of the discounted cash flow (DCF) method. This is bedded in the realistic alternatives paradigm and caution is advocated when using the DCF method as it is clearly sensitive to the assumptions used. The DCF was also included to give a viable alternative when other methods could not be used and no comparables were available, it was suggested.

There was also some debate on the use of ex post and ex ante pricing and that the most recent draft seeks to make this clearer with a new example.


26 May 2014

The OECD’s webcast today noted that Working Party WP6 had virtually agreed …

revised text for Chapters I, II and VI to the Transfer Pricing Guidelines. There was though a need to look further at risk, recharacterisation and capital and they were aiming for a discussion draft in December 2014 in order not to hold up the work further.

Thanks were offered to outgoing chair Joe Andrus and a warm welcome given to incoming chair Andrew Hickman.


16 April 2014

There is to be a meeting in May 2014 of the Working Party dealing with transfer pricing and intangibles which will discuss …

the need for further work to be carried out in due course in relation to the integration with the 2015 BEPS work. However, it is expected that changes to the definition of intangibles are near to completion but that the inclusion of goodwill continues to be a highly contentious topic.

Comparability factors and the treatment of an assembled workforce, together with group synergies, should also be discussed.

On the valuation side, it is expected that the discounted cash flow method should be retained. Valuation guidelines ought though to be simplified with more comments on the use of, in particular, a profit split methodology.


14 November 2013

The public consultation on transfer pricing at the OECD on 11/12 November, including the Revised Discussion Draft containing proposed revisions to the OECD Transfer Pricing Guidelines...

included discussion on the following BEPS-related issues which Working Party 6 (WP6) need to focus on.

Finishing the intangibles draft

  • Further work needs to be done on the definition of intangibles. Specifically, many delegates were of the view that intangibles should be limited to assets which are proprietary in nature, i.e. with reference to rights which are protected by law or contract. The majority view was that goodwill should be taken into account when determining the arm’s length price of a business transfer, but should not be considered an intangible in its own right. A large consensus of delegates agreed that the term ‘marketing intangibles’ is potentially confusing and could be removed.
  • The importance in comparability factors of things like an assembled workforce and group synergies was discussed. Delegates stressed the importance of recognising the negative effects of group synergies, in addition to the positive effects.
  • Sections on the use of valuation methods in circumstances where appropriate transfer prices using comparable uncontrolled transactions cannot be found should remain though in a more ‘light’ version, it was felt. Given that they’re inherently intertwined with the BEPS work, taking out any reference to valuation is probably not a way forward anyway.

Finishing other issues on intangibles such as hard to value intangibles and cost contribution arrangements

  • It was generally considered that a separate definition for hard to value intangibles is not required as the relevant issues and factors are already dealt with as part of the Chapter 6 framework.
  • Ultimately, the determinative factor in relation to pricing hard to value and partially developed intangibles is risk.


2 September 2013

The language used in the Action Plan reflects some of what we’ve seen recently regarding countries interpreting or revising transfer pricing rules …

to “align profits with value creation”. This has often meant focusing more on where ‘important people functions’ are performed, so that the location of a particular intangible should be commensurate with people who created, interpret or (in the case of litigation and legal protection) defend it as well as applying appropriate governance and controls over it (rather than merely by reference to the legal ownership). Countries may begin adopting rules similar to the US ‘commensurate with income’ rules or other special measures to price hard-to-value intangibles (on which latter topic the OECD is carrying out further work).

Existing guidance on cost contribution arrangements at the OECD and among member countries may also soon be updated to reflect current thinking in this area. We think that it should adopt principles that apply to similar arrangements which are economically equivalent, such as those involving the licensing of rights by a party incurring the full cost of development of the intangible from which they derive.

We also believe that allowing for ex-post-valuation rules is inconsistent with the arm’s length principle and should be resisted. 


15 August 2013

The OECD’s 30 July 2013 Revised discussion draft on transfer pricing aspects of intangibles shows the direction in which the OECD had been travelling...

on this even before the Action Plan was published; the Plan will help to focus the remaining work on this project. Arguably there has sometimes been too much of a focus from tax administrations on defining novel intangibles in order to justify large returns in their jurisdictions. The revised discussion draft, for example, considers things like features of the local market, location savings, the availability of an assembled workforce and corporate synergies, concluding they should not be intangibles but comparability factors for this purpose.


19 July 2013

Rules are to be developed to prevent BEPS by moving intangibles amongst group members. The work will involve...

adopting a broad and clearly delineated definition of intangibles; ensuring appropriate allocation of profits in accordance with value creation; developing transfer pricing rules or special measures for transfers of hard-to-value intangibles and updating the guidance on cost contribution arrangements. The work is scheduled to be completed within two years.

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