New transfer pricing rules have implications for intellectual property valuation
July, 14th 2016
The Organization for Economic Co-operation and Development (OECD) and the G20 recently adopted a formal plan related to transfer pricing that has implications for valuations of intangible and intellectual property (IP).
The Action Plan on Base Erosion and Profit Shifting (BEPS) is meant to address multinational enterprises that engage in harmful tax practices, including treaty shopping, related-party financial transactions, and intangible property transactions.
Transfer pricing rules require corporations and their commonly controlled entities to value all transactions at fair market value. When transferring an intangible asset among entities, compensation for the intangible asset must be commensurate with the income earned by the asset.
Background To ensure OECD member countries are not subject to “unfair base erosion practices and profit shifting,” the BEPS Action Plan was developed in 2013. The OECD’s main objective is to “assure that transfer pricing outcomes are in line with value creation.”
The OECD is moving in a direction similar to the U.S., tightening controls and making sure OECD member countries do not assign a low value to IP to transfer into a more favorable tax jurisdiction. In recent years, the OECD has expressed concern over practices that artificially segregate taxable income from the activities that generate it, stating profits should be going to the place where it is being generated.
Potential benefits and costs A benefit of the new policy is that risk assessment guidance may discourage tax authorities from initiating costly disputes over minor issues. A master file could encourage the adoption of a set of globally-consistent and uniform transfer pricing policies that may streamline the compliance process. For more information on recommended transfer pricing document requirements, click here.
Potential costs of the policy include tax authorities possibly using the country-by-country report to inappropriately make “formula-based” adjustments, and therefore increase the likelihood of disputes and double taxation.
Intellectual property valuation matters The new regulations formalize the use of the income approach for determining the value of the IP. While it is not a new method of valuation, this formalization may imply the need for significantly greater documentation and support for the valuation. To avoid scrutiny, it is important to obtain a supportable valuation of IP. If you do not have a defensible IP structure in place, tax authorities will assert their view.