In its announcement today, the OECD has strengthened and clarified Action 8 which specifically looks at cracking down on tax avoidance by multinationals who simply moved intangibles between members of the same group. The report doesn’t specifically say what an ‘intangible’ is, but describes it an asset that isn’t physical or financial in nature, but which is capable of being owned or controlled for use in commercial activities and whose use or transfer would be compensated for, had it occurred between two third parties. So a licence or goodwill could be considered to be an ‘intangible’ here.
The report clearly states that legal ownership of an intangible and contractual relationships are simply reference points for identifying the controlled transaction to be considered when preparing transfer pricing documentation. Put more simply, legal ownership doesn’t mean entitlement to income generated by the business. The business has to look at the functions, assets and risks assumed by all members of the multinational in relation to the intangible, in order to determine the appropriate remuneration for each member. So going forward, businesses will have to consider which member of the group performs the:
- development, maintenance, enhancement, protection and exploitation of the intangible;
- the assets and funding necessary to perform and continue those functions; and
- the risks associated with carrying out the functions.
The report also sets out detailed guidance on the principles and key areas to be considered, with respect to pricing such intra-group transactions.
Where there are transactions involving the transfer of intangibles where the intangible in question is hard to value (possibly because the intangible is only partially developed at the time of transfer or it won’t be exploited economically for the foreseeable future), the OECD has set out a framework as to what the relevant tax authority should consider as being an arms-length arrangement, and the options available for pricing, based upon the information available and provided by the taxpayer.
The OECD has also clearly illustrated the activities and practices that will be challenged within this new framework, as well as those which demonstrate the potentially substantial revisions to transfer pricing policies that multinationals will now need to undertake. Action 8 is also referenced in another part of the report which addresses the tax challenges of the digital economy. Here it hopes that this new framework with a nexus style approach, will address issues exacerbated by the digital economy with respect to ‘stateless income’.