Intangibles Scoping by the OECD

post Wednesday August 31, 2011

Tags: tax/transfer pricing

After its 2010 revision of Chapters I-III and XI of the Transfer Pricing Guidelines (TPG), the Organisation for Economic Co-operation and Development (OECD) concluded that transfer pricing issues pertaining to intangibles are a key area of concern to governments and taxpayers.  The two chapters that relate to intangibles in the TPG are Chapter VI, which contains special considerations for intangibles, and Chapter VIII, which contains guidance on cost contribution arrangements.  As it is written now, the OECD lists two categories of typical intangibles:

• Trade  intangibles e.g. patents, know-how, designs and models that are used for the production of a good or the provision of a service; and 
• Marketing intangibles e.g. trademarks and tradenames which enhance the commercial exploitation of a product or service, customer list, distribution channels, and unique names, symbols, or pictures that have an important promotional value.

As Chapters VI and VIII were last updated in 1995, they do not give adequate international guidance on the definition, identification, and valuation of intangibles in today’s world.  This discrepancy has led to many monetarily-significant transfer pricing disputes and risks of double or less-than-single taxation.  As such, the OECD has scheduled an update of these chapters for 2013.  To aid in the process, the Working Party No. 6 of the Committee on Fiscal Affairs (CFA) section of the OECD invited public comments in July 2010 on what interested parties saw as real issues in practice and shortfalls in the existing guidance, areas in which the OECD could do further work, and what the format of the final output should be.  The 50 responses to the scoping project differed widely as the way the chapters are revised could potentially benefit one industry while hurting others.  Depending on how the OECD decides to word the guidelines and define intangibles could have far-reaching financial implications when you take for example the difference between high-tax jurisdictions with decentralized intangibles and low-tax jurisdictions that centralize intangibles and risk.  The task has proved so cumbersome for the OECD that the potential backlash was rumored to be a determinant in Carol Silberztein’s (the former head of the transfer pricing unit of the OECD) resignation from the OECD, an organization she had been with for 10 years.  In response to the business community’s input, the CFA published a scoping paper in January 2011which identified five areas in need of further work:

• A framework to aid taxpayers in determining whether an intangible exists and what criteria to use;
• Definitional aspects, as the TPG currently do not contain a definition of intangibles for transfer pricing purposes;
• A clearly defined list of the different categories of intangibles;
• Identification of intangible transfers to aid taxpayers in determining whether an intangible has been transferred and in what form – full or partial IP rights;
• Legal versus economic ownership of an intangible for transactions between associated enterprises;
• Cost Contribution Arrangements as they relate to the sharing of costs and risks of developing, producing, or obtaining intangibles between two parties; and
• The question of whether the TPG should provide guidance on how to determine the arm’s length value of intangibles.

For further reference on OECD Scoping of Intangibles, please visit http://www.oecd.org/dataoecd/10/50/46987988.pdf. 

Leave your comment

Comments on 'Intangibles Scoping by the OECD' (0)