By Caroline Silberztein and Melanie Schneider, Baker & McKenzie
This article summarises the November consultation of the OECD on the transfer pricing aspects of intangibles.
On November 12-14, 2012, OECD Working Party No. 6 held a consultation with commentators on its proposed revision of Chapter VI of the Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (hereafter "TPG”). This consultation follows from the release in June 2012 of a discussion draft on the transfer pricing aspects of transactions involving intangibles and related provisions (hereafter "the Discussion Draft”). Written comments on the Discussion Draft have been submitted by over seventy private sector organisations, totalising almost a thousand pages. The Discussion Draft, public comments received and presentation material from the consultation are available on the OECD Internet site.1The most salient points from the consultation are summarised below together with a few observations from the authors.2
l. Presentation of the Discussion Draft
The Discussion Draft is a sixty-page document, organised in four parts:
A. Identifying intangibles;
B. Identification of parties entitled to intangible related returns;
C. Transactions involving the use or transfer of intangibles and
D. Determining arm’s length conditions in cases involving intangibles.
It also contains an Annex with twenty-two examples and a proposed amendment to paragraph 2.9 of the TPG on the use of non-recognised methods ("other methods”).
The Discussion Draft is an interim draft and the Working Party indicated that it is not a complete draft and that further work is needed on several sections and on the examples. It was released earlier than originally planned, while the Working Party is still discussing a number of the concepts in it and has not yet reached consensus on the text. Because the areas of disagreements are not identified in it, some business commentators have expressed concerns that the release of such a non-consensus document may create more uncertainty than it brings responses.
Observation:The OECD Secretariat however noted in the past that "each paragraph is probably agreed upon by 80 percent of the delegates” so that the document as a whole can be seen as providing a strong indication of the direction of the work, while still being open to significant redrafting.
The Chair of WP6, Michelle Levac, opened the consultation stating that the outcome of this work should maintain the integrity of the TPG, be faithful to the arm’s length principle and give clear guidance. Business representatives noted that while international taxation of intangibles may not have kept pace with globalisation and adjustments might be needed, the objective should be to produce guidance that will deal with intangibles in the current situation and in the next 10-15 years keeping in mind that there is also a need to build structures which encourage broader range of innovative activity key to growth and business reputation.
Observation:In the news release which was posted on the OECD Internet site after the consultation, it was however made clear that the transfer pricing project on intangibles is part of the broader OECD project on base erosion and profit shifting (BEPS).
ll. General definitional approach for intangibles
In the Discussion Draft, WP6 has taken a broad approach to defining transfer pricing intangibles. Rather than providing a closed definition or list of intangibles, it uses the word intangible to refer to "something which is not a physical asset or a financial asset, and which is capable of being owned or controlled for use in commercial activities”. It notes that "the thrust of a transfer pricing analysis in a matter involving intangibles should be the determination of the conditions that would be agreed upon between independent parties for a comparable transaction” irrespective of accounting and legal definitions. Accounting definitions are dismissed because "intangibles that are important to consider for transfer pricing purposes are not always recognised as intangible assets for accounting purposes”. With respect to legal definitions, the OECD notes that "the availability and extent of legal, contractual, or other forms of protection may affect the value of an item and the returns that should be attributed to it. The existence of such protection is not, however, a necessary condition for an item to be characterised as an intangible for transfer pricing purposes”. At the consultation, the Working Party explained that in its view the main focus of discussions between taxpayers and tax administrations should not be on whether "something” is or is not in the list, but rather on whether value has been transferred between associated enterprises.
Many business commentators expressed the view (both in their written comments and at the consultation) that the above definitional approach would be too broad and unclear. The use of the word "something” was regarded by many as too vague and not offering sufficient legal certainty. Commentators called for a more precise definition of "intangibles” that should be based on objective principles. Some suggested that a reference to accounting definitions should be used; some favoured a reference to intellectual property law and contractual protection; some suggested a combination of both.
Several commentators urged the OECD to explicitly recognise transferability and availability of legal protection as prerequisites for a transfer pricing intangible to be found in existence…