Intellectual property and intangibles are one of the hot topics and as such I wanted to touch on the subject. Please note that intellectual property and intangibles sometimes are used interchangeably, however, there are instances where an intangible is not an intellectual property (for example most websites are not considered to be intellectual property). Because intangibles encompass intellectual property, in transfer pricing we usually talk of intangibles when referring to IP.
A lot of work around IP has been done by the OECD Guidelines and as such I do not want to copy exactly what has already been done but rather touch on some issues or discuss some problems that one may encounter. I do not have all the answers to the problems and hope to get some discussion going rather than just giving my view points.
Please refer to the OECD’s discussion draft on IPs for an in depth analysis on:
- Identifying Intangibles
- Identification of Parties Entitled to Intangible Related Returns
- Transactions Involving the Use or Transfer of Intangibles
- Determining Arm’s Length Conditions in Cases Involving Intangibles
The above is still a discussion draft and the OECD published comments on the draft which can be found here.
When doing a transfer pricing analysis we must not forget two important things, firstly transfer pricing is not an exact science and secondly the arm’s length principle. From a transfer pricing perspective the steps performed to find an arm’s length price/arm’s length range for a cross-border related party transaction involving IP is similar to that of other goods or services. The biggest problem usually lies within the valuation of the IP. Putting the statement differently, how do you value something like the coca cola brand? Yes there are many different methods on how to value brands but do they give us a fair result? The problem is that we are trying to compare a cross-border related party transaction involving IP to that of independent companies involved in a comparable transaction, however, independent parties may not be involved in such transaction.
Before going further into the above let’s start from the beginning. As mentioned by the OECD’s discussion draft on IP, a transaction involving IP would fall under Article 9 of the Model Tax Convention, if a double tax treaty is in place. Further, the OECD provides a definition of IP and what it entails. This may result in the following problem. The definition provided by the OECD may be much wider than local legislation in different countries and as such the OECD definition may encompass transactions that would otherwise not fall within the ambit of IP. As we all know double tax treaties merely give a taxing right but cannot create one. So what happens if one country that has a double tax agreement with another country would define a transaction as dealing with IP and the other country does not?
The problem would be solved if we all used the definition provided by the OECD but this does not seem to be the case. In some countries double tax agreements become law by being written into the income tax act or are given the power through constitutional sections. But then we still haven’t solved the issue that a double tax treaty cannot create additional tax.
What are your thoughts on this? The OECD is trying to deal with some of these issues with the well known BEPS (Base Erosion and Profit Shifting) action plan which will be discussed in another post.