At the end of September, the taxation committee of the United States Council for International Business (USCIB) issued its comments on the scope of the OECD’s project on the transfer pricing aspects of intangibles. The OECD had released a scoping document for this project in January of this year. The USCIB comments largely focused on the definition of intangibles, as well as the distinction between intangibles and services.
The USCIB paper (the “paper”) distinguishes between owned and controlled intangible property. The former includes any asset “in which a person can hold a legally cognizable (and protectable) right”, such as patents or copyrights. Controlled intangible assets may not be eligible for the same type of legal protection, even though such protection is afforded anyway in most countries, and include such items as supply contracts and customer lists. When intangible asset ownership is transferred among related parties, either fully or partially (e.g., through a license), transfer pricing rules should be applied in order to determine arm’s length compensation.
The USCIB contrasts these definitions with certain “business attributes or notions” which may cause the value of a business, or line of business, to exceed (or trail) that of its component parts (tangible and intangible). This residual value can be characterized as goodwill or going concern value, and may be due to workforce in place, existence of a global network, synergies, or other factors that cannot be easily or meaningfully separated from the business as a whole, or attributed to identifiable intangible assets. The USCIB argues that such attributes cannot be transferred, between either related or unrelated parties, and are therefore not subject to transfer pricing rules.
A related discussion pertains to the possible general definition of an intangible asset as “something of value”. The paper notes that such a definition could fit a situation where business risk is transferred from one related party to another (e.g., a full-service distributor is converted to limited risk). The party bearing the additional risk might then reasonably expect to realize higher average profits, so that the assumed risk may be seen as providing a certain value. However, the paper argues that this would not constitute a transfer of an intangible, and should not be compensated as such, since the expected increase in profitability is due to the assumption and skillful management of the risk, as opposed to any specific property transferred between the two entities. (Of course, should one party assume risk from another by providing insurance protection, it would be due compensation for that protection. However, this would not be a transfer of an intangible.)
Finally, the USCIB paper downplays the need to distinguish between the transfer of intangibles and the provision of services. A provider of high-value services can make use of intangibles, and this may impact the market value of the services, but it does not necessarily mean that any ownership in those intangible assets is being transferred. For that to happen, the recipient would have to receive rights to exploit valuable assets that it does not own for a defined period of time.
The USCIB comments touch on important definitional and conceptual issues with respect to intangible assets and their transfer pricing treatment. Practitioners, taxpayers, and tax authorities will be following the progress of the OECD project with great interest.
Source: Ceteris Transfer Pricing Times Volume VIII, Issue 10