post Monday October 22, 2012
The comments on the OECD’s draft on intangibles from September 13th, included Clark Chandler writing on behalf of KPMG, stating that the discussion draft should include a framework that is similar to that of the OECD’s guidelines on business restructuring based on comparability with unrelated parties.
Chapter IX and VI of the OECD transfer pricing guidelines cover situations within multinational enterprises where the application of third party comparables can be difficult. Chapter IX provides guidance relating to business restructuring which is grounded in the fundamental concepts of the arm’s length principle, in contrast to the discussion draft on intangibles. The latter “seems to endorse approaches which are not referenced to commonly understood concepts about the relevance of what happens in similar arrangements between unconnected parties” according to Chandler, although he agrees with parts of the draft, he believes that much needs to be done to provide certainty for both taxpayers and tax authorities.
Another comment submitted by Steven Hannes of McDermott Will & Emery, concerns section B of the draft which addresses which member of an MNE should be entitled to intangible-related returns, relies too much on theory as opposed to relying on commercial facts.
When considering the entitlement of intangible related-returns, Chandler proposes an approach similar to that prescribed in Chapter IX for determining whether allocation of risks in a controlled transaction is at arm’s length. First, the taxpayer should evaluate whether there is reliable evidence of similar allocation of entitlement to the intangible related return in comparable uncontrolled transactions. If there is, then the entitlement is arm’s length. If there isn’t then the taxpayer should evaluate whether the allocation of entitlement to the intangible related return is one that might have been expected to have been agreed between independent parties in comparable circumstances. When evaluating who controls risk, the taxpayer must consider who controls functions or bears costs.
Hannes also proposed some amendments, namely that of “informed hiring party”. Under this concept, he proposed that if the hiring party outsources discovery, development, enhancement, maintenance or other functions, then it can claim returns from intangible assets if it has the financial capacity and expertise to agree to a budget and other contractual terms for such functions as well as to determine whether the contract’s terms are followed.
On September 24th 2012 the OECD posted all the comments it received from different companies, in its Discussion Draft on Intangibles.
The OECD will hold a public consultation on the Discussion Draft in Paris in the week of November 5th2012.
Source: Bloomberg Transfer Pricing Report
Image Source: Free Digitial Photos
