Transfer pricing perspectives: Winds of Change - PwC

Of particular interest is the last factor –whether a specific intangible can carryvalue if it cannot be transferred in isolation.This, to a large extent, introduces thechallenges associated with so-called “softintangibles”. Typical “soft intangible”examples include workforce in place,network intangibles, goodwill and businessopportunities (to name a few).What will be particularly interestingis whether WP6 will be able to avoidrevisiting some of the difficult challengesencountered during Chap I‐III and ChapIX. Suppose the OECD concludes that a“soft intangible” has been transferred anddoes constitute an intangible that shouldbe compensated for tax purposes. Does thisimply that sufficiently detailed comparabledata will need to be available to distinguishbetween returns when “soft intangibles”are present and when they are not? Andwould this imply that a profit split methodshould have been applied before the “softintangible” was actually transferred?Bearing in mind the challenges posed bytrying to find a consensual definition ofintangibles, in recent communications theOECD has made clear that although thedefinitional issues regarding intangiblesare still an important part of the project,the focus of the OECD is shifting towardsproviding guidance on whether a transferhas occurred and the corresponding pricingor valuation of those intangibles that havebeen transferred.Who owns the intangible?Another equally challenging issue isdetermining who should, in fact, own theintangible. Despite the fact that a legallyprotected intangible is, according to theOECD, also considered an intangible fortransfer pricing purposes, the January2011 scoping document specificallymentions that, in the context of transferpricing concepts, “economic ownership”,“beneficial ownership” and “functionalownership” are also relevant.There is currently no guidance in the OECDGuidelines on the role of legal ownershipor on determining ownership of intangiblesthat are not legally protected. Moreover, theOECD currently does not clearly advocateeither legal or economic ownership asthe basis for determining the appropriateowner of the asset.A strict reading of the current version ofChapter IX of the OECD Guidelines aswell as recent discussions by the OECDabout this matter seems to indicate thatlegal ownership is just the starting point.The owner, for transfer pricing purposes,could be considered to be the party thathas incurred the costs of developing theintangible and that will be able to sharein the potential benefits from thoseinvestments. A typical example where thisissue arises is in the context of marketingintangibles, where determining which levelof licensee’s marketing costs would renderan intangible fully or partially owned bythe licensee is far from certain.However, as mentioned above, the OECDseems more focused on issues surroundingthe valuation and whether intangibles havebeen transferred.One can hope that the OECD will be ableto establish some factors that can be usedwhen determining which entity or entitiesare the owners of the intangibles, eventhough this will be no easy task.One of the particularly interestingownership issues relates to unique andhigh-value services. The WP6 provide agood example of this issue in the January2011 scoping document when they raisethe question of whether it is appropriate tocompensate a service provider with a costplusfee, if the service provider is providingservices that are unique and carry highaddedvalue.This really hits the heart of the matter– specifically whether incurring thefinancial risk of developing the intangibleis sufficient to be the sole owner ofthe intangible, or whether in somecircumstances it is also necessary to have afunctional role in developing the asset.The above are simply examples associatedwith some of the challenges WP6 will needto deal with in the future, and there areby all means countless other examplesof difficult issues that WP6 will need toattempt to deal with over the course of thisambitious project. It will be interestingto see how far WP6 is willing to go, andwhether it will be ultimately forced torevisit some of the issues discussed inprevious projects.80 Transfer Pricing Perspectives. October 2011