BEPS Action Plan: Action 8 – Transfer pricing and intangibles

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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.


7 August 2018
The OECD’s recent Guidance on hard-to-value intangibles (HTVI) confirms the approaches that were presented in the 2017 discussion draft, namely ...

as our Bulletin/ Insight of 7 August 2018 explores:

  • Ex post results can be used as presumptive evidence on ex ante pricing;
  • Ex post results are used to be informed on the valuation made at the time of the transaction, while at  the same time considering the probability of achieving such results at the time of the transfer of the intangible in question;
  • The revised value may be used for tax reassessments, irrespective of payment profiles the taxpayer has put forward; and
  • Application of audit procedures in order to identify and act upon HTVI issues as soon as possible.

21 June 2018
The OECD on June 21 released Guidance for tax administrations on application of the approach to hard-to-value intangibles (HTVI) aimed at

creating a common understanding among tax administrations on how to apply adjustments resulting from application of the HTVI approach, while improving consistency and reducing the risk of double taxation. The Guidance sets forth the underlying principles that govern the HTVI approach and provides two examples that are intended to assist in clarifying the approach. It also links the HTVI approach with granting access to the mutual agreement procedure.

10 July 2017
As expected, the OECD has released the 2017 edition of the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations that

…makes changes to the 2010 edition for revisions:

7 July 2017
Our comments on hard-to-value intangibles one of 42 now published by OECD as part of a consolidated set of responses with some of the main focus on:

  • the factual assumptions underlying the examples leading to the conclusion that the income method is not a reliable transfer pricing method, yet concluding that the income method nonetheless should be used as the basis for making an ex-post transfer pricing adjustment
  • with regards to information asymmetry, the difficulties that taxpayers face in valuing the intangible at the time of the transaction
  • ex post adjustments only to be made by tax administrations when the taxpayer was negligent/ has acted in bad faith at the time of the transaction
  • objective principles to support the adjustments described in the examples in order to promote a consistent application of the Guidelines
  • an explicit recommendation that access to MAP should be available to resolve disputes on HTVI, and strong support for mandatory binding arbitration.

12 June 2017
On 23 May 2017, the OECD released a Discussion Draft on Implementation Guidance on hard-to-value intangibles (HTVI) that provides

…guidance on the implementation of the HTVI approach by way of examples.

In addition, the Discussion Draft explains the relationship of the HTVI approach to access to the Mutual Agreement Procedure (MAP).

The Discussion Draft builds on an earlier discussion draft of 4 June 2015 which lead to the insertion of section D.4 on hard-to-value intangibles in the revised Chapter VI on Intangibles in the OECD’s Transfer Pricing Guidelines. After repeating the main principles of the HTVI approach as discussed in Section D.4, the discussion draft suggests to tax administrations to act as early as possible when HTVI issues are identified.

Read our joint Tax Policy Bulletin and Insight from Transfer Pricing

25 April 2016
The OECD undertook to produce some implementation guidance on the approach to ‘hard to value intangibles’ agreed in chapter 6 but...

work on this is complicated and goes to domestic law issues in some countries. Significant advances are expected on it during May.

28 January 2016
Work remains on hard-to-value intangibles (with completion expected in 2016) but the guidance already released, in line with the key themes of the BEPS framework...

brings into focus the substance and conduct related to the development of intangibles. The OECD looks closely at the role of financial capacity and risk associated with the development of intangibles and delineates financial risk related to funding as opposed to operational risks for which the funding is used.

This concept extends beyond the realm of intangible development and has knock-on impacts for other structures (see also Action 9).

Similarly, clarification on concepts such as group synergies has wide-reaching results beyond procurement companies. For example, in the financial services sector, fund administration entities may realise economies of scale as the size of assets under management increases.

In general, the updated guidance has prompted a review of the role of funding between associated enterprises. In addition, it has prompted organisations to review their operating guidelines and substance of intangibles owners to ensure adequate control of activities related to intangibles development.

16 October 2015
The guidance published by the OECD attempts to ensure that transfer pricing outcomes align with value creation of multinational enterprise (MNE) groups in a way that…

on delineation of transactions

  • in effect, looks at contractual terms and actual legal ownership in light of the substance of the "commercial or financial relations" between related parties in order to form a basis to compare how unrelated parties would behave under similar circumstances
  • affirms the exceptionality of re-characterisation and the importance of accurately delineating transactions through a detailed functional analysis
  • in essence, questions the inherent trustworthiness of the terms of contracts entered into between related parties as a stand-alone basis for risk allocation and, instead, identifies the conduct of the associated enterprises as the ultimate deciding factor in accurately delineating a transaction and aligning transfer pricing outcomes

on intangibles

  • clarifying guidance on the determination of arm’s-length conditions for transactions that involve the use or transfer of intangibles and the parts dealing with “ownership of intangibles and transactions involving the development, enhancement, maintenance, protection and exploitation of intangibles” in particular
  • specifying that the return ultimately retained by or attributed to the legal owner depends upon the functions it performs, the assets it uses, and the risks it assumes and upon the contributions made by other MNE group members through their functions performed, assets used, and risks assumed
  • introduced an analytical framework comparable to that introduced in Chapter I of the OECD Guidelines for analysing risks, consisting of six steps to ensure that all members of the MNE group are appropriately compensated for the functions they perform, the assets they contribute, and the risks they assume
  • defining intangibles and splitting them between ‘marketing intangibles’ and ‘trade intangibles’, explicitly stating that it is important to distinguish intangibles from market conditions or local market circumstances that are not capable of being owned or controlled with specific guidance on the application of the arm’s-length principle in the context of how to address location savings and other local market features, assembled workforce, and MNE Group synergies
  • using ex post outcomes as presumptive evidence about the appropriateness of ex ante pricing arrangements for hard-to-value intangibles in certain cases

Cost Contribution Arrangements

  • with an underlying theme that parties performing activities under arrangements with similar economic characteristics should receive similar expected returns regardless of the existence of a CCA
  • specifying that a participant must have the capability and authority to control the risks associated with the “risk-bearing opportunity” and one only providing funding should receive a limited return, raising concerns regarding consistency with the arm’s length principle
  • distinguishing development CCAs, noting that they often involve significant risks associated with uncertain and distant benefits (with participants often agreeing to share the upside and downside consequences of risks associated with achieving the anticipated CCA outcomes) and service CCAs, which are generally less risky and offer more certainty

5 October 2015
The OECD work in the context of Actions 8 to 10 of the Final Report includes guidance on several key transfer pricing areas, including…

  • the accurate delineation of intercompany transactions;
  • transactions involving intangibles; and
  • cost contribution arrangements (CCAs).

Other transfer pricing work on the transactional profit split method, commodity transactions and “low-value adding intra-group services” transactions is covered in the sections on Action 9 and Action 10.

The accurate delineation of intercompany transactions is paramount, and the conduct of parties will prevail over contractual arrangements where there is a misalignment between the two.

Returns from intangibles accrue to the entities that carry out the development, enhancement, maintenance, protection, and exploitation functions, and not necessarily to the legal owner of the intangibles. A six-step process for identifying risk is provided, with the return for risk allocated to the party that controls the risk and has the financial capacity to assume it.

CCA participants must have the capability and authority to control risks associated with the risk-bearing opportunity. Current contributions can be valued at cost, but pre-existing contributions should be valued using TP methodology.

7 July 2015
The OECD’s public consultation on a cluster of transfer pricing matters on 6-7 July has indicated …

that much of the intangibles work will be part of the September deliverable that will include the bulk of the BEPS transfer pricing package (see further our comments on Action 10).

19 June 2015
Our response below is one of 42 comment letters published by the OECD on the 4 June BEPS discussion draft

18 June 2015
We told the OECD in our written response to the 4 June discussion draft that we were pleased to see that the OECD had…

removed some of the initial proposals for dealing with “thick capitalisation”, “minimal functional entity” and “capital-rich asset owning companies”.

We also said the proposals now depend too heavily on subjective terminology to set boundaries for using ex-post information and expressed a number of other concerns we wish the OECD to address so as to preserve some fundamental tenets of transfer pricing and the arm’s length principle. Our response was one of 42 published by the OECD.

4 June 2015
The OECD’s discussion draft on the arm’s length pricing of intangibles when valuation is highly uncertain at the time of the transaction or the intangibles are hard to value ...

explains that tax authorities face difficulties when verifying the arm’s length basis on which taxpayers determined pricing for transactions involving a specific category of intangibles because of information asymmetry between tax authorities and taxpayers.

As the OECD announced when it released its discussion draft on risk, re-characterisation and special measures, the need for special measures arises because of the potential for systematic mispricing in circumstances where no reliable comparables exist, where assumptions used in valuation are speculative and where information asymmetries between taxpayers and tax authorities are acute.

The discussion draft is an improvement upon the prior version to the extent some of the more radical special measures (e.g., those regarding minimal functional entities, thick capitalization, and capital-rich asset-owning companies) have been eliminated. It relies much more heavily on ‘commensurate with income’ type rules, allowing for use of information in years subsequent to the transfer, to determine the pricing of intangibles.

The most controversial aspect of the discussion draft will likely be with respect to the proposals to allow tax authorities to recharacterise a transfer of intangibles based upon speculation about alternative, hypothetical pricing arrangements that possibly could have been entered into.

The discussion draft also attempts to set boundaries around the situations where it would or would not be appropriate for tax administrations to use ex post information.

1 June 2015
Our response to the discussion draft on cost contribution arrangements (CCAs) is one of 45 now published by the OECD in a consolidated document "Comments received on public discussion draft BEPS Action 8: Revisions to chapter VIII of the Transfer Pricing Guidelines on cost contribution arrangements (CCAs)"

29 May 2015
We urge caution in making fundamental revisions to the provisions on Cost Contribution Arrangements (CCAs) in the Transfer Pricing Guidelines …

to ensure such revisions are consistent with the other changes to the Guidelines to be finalized later in 2015. We also recommend that the OECD allow for the grandfathering of existing CCAs.

Other key points we make to the OECD in our response cover:

  • The requirement for any participant in a CCA to have the “capability and authority to control the risks associated with the risk-bearing opportunity” under the CCA is in line with the increased focus on substance but we believe will unnecessarily impair the usefulness of CCAs. Instead, a clarification is needed that any entity participating in a CCA must engage in an analysis prior to joining a CCA to demonstrate that it represents its best realistic alternative taking into account the effect, if any, of performing key functions itself or as a contractor to another party.
  • The need to measure contributions based on value rather than costs to all “contributions” is inappropriate. It should be clarified whether it is development CCAs that are in focus, and possibly also service CCAs when the services cannot be qualified as low value-added. Removing agreements to share costs in intangible development activities from qualification as a CCA under the Guidelines may simply drive taxpayers out from arrangements covered by the Guidelines into partnerships. (We note that a CCA is not meant to create a partnership in any event.)
  • We see a problem with the current Discussion Draft requiring tax administrations to determine market value for the services provided as part of a development CCA. This bears the risk of confusing arm's length value with the value of the outcome from these services. This would almost certainly lead to double taxation and protracted disputes.
  • We are concerned with the proposals for “disregarding” part or all of the terms of a CCA. In our view, this continues a troubling trend in other recent discussion drafts under Actions 8-10 of recharacterizing legitimate transactions. That will lead to a great deal of uncertainty and chaos, especially in the likely event that tax authorities take different views on when it is appropriate to exercise this expanded ability to disregard transactions.

29 April 2015
Multinational enterprises (MNEs) involved in the development and use of intangibles under cost contribution arrangements (CCAs) should note new discussion draft proposals …

to modify Chapter VIII of the OECD Transfer Pricing Guidelines:

  • with respect to measuring the value of contributions to CCAs, the effect of government subsidies or tax incentives, and the tax characterisation of contributions, balancing payments and buy-in/ buy-out payments, and
  • to make it consistent with other BEPS amendments including those addressing the fundamental issues on risk, capital, recharacterisation and intangibles.

The main aim is to ensure that contributions are commensurate with the benefits received under a CCA. This is a difficult task when the contributions are complex and cannot be valued at cost.

It should be noted that there is still disagreement between OECD member states, as well as with non-OECD members, on certain key transfer pricing concepts.

11 February 2015
Our response of 6 February is one of 82 comment letters published by the OECD on the 19 December BEPS discussion draft

6 February 2015
Our written response to the 19 December Discussion Draft expresses concern that the Discussion Draft prescribes …

potentially inconsistent guidance with rules already enacted or promulgated under domestic tax regimes that rely on the existing Transfer Pricing Guidelines.

That would give tax authorities wide latitude, on a potentially subjective and arbitrary basis, to judge what is commercially reasonable and to disregard the terms of legal agreements between parties that are part of legitimate business transactions.

One-sided methods are appropriate and reliable based on a thorough functional analysis - a value chain analysis and a profit split are not, and should not be considered to be, synonymous.

19 December 2014
The OECD has invited comments from interested parties on a discussion draft on revisions to Chapter I of the Transfer Pricing Guidelines (Including risk, recharacterisation and special measures). This work relates to Actions 8, 9 and 10 of the BEPS Action Plan.

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 TP 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.

Contact us

Stef van Weeghel
Leader, Global Tax Policy & Administration Network
Tel: +31 (0) 88 792 6763

William Morris
Deputy Leader, Global Tax Policy & Administration Network, PwC Global
Tel: [1] 202 312 7662

Aamer Rafiq
Partner, Transfer Pricing and Tax Policy, PwC Global
Tel: [44] 207 212 8830

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