OECD Discussion Draft on Hard to Value Intangibles – A deep dive!

June 05,2017
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Paresh Parekh (Partner, International Tax & Transfer Pricing, Ernst & Young LLP)

Vishal Agarwal (Manager, International Tax & Transfer Pricing, Ernst & Young LLP)

Piyush Jain (Consultant, International Tax & Transfer Pricing, Ernst & Young LLP)

1. Introduction

The OECD issued its final report on transfer pricing under Actions 8-10 of its Action Plan on BEPS on 5 October 2015. On 23 May 2017, OECD released a discussion draft on the implementation guidance on HTVI in connection with Action 8.

Action 8 provides for HTVI approach which is aimed at reaching a common understanding and practice among tax administrations on various approaches to determine Arm’s Length Price (‘ALP’) that could be applied on adjustments arising out of transactions involving HTVIs. The discussion draft provides additional guidance on implementation of such HTVI approach with the help of illustrative examples. Further, the draft also provides for a possibility of entering into a Mutual Agreement Procedure (‘MAP’) under applicable treaties in order to resolve cases of double taxation arising from the application of HTVI approach.

OECD has invited interested parties to provide their comments on the discussion draft by 30 June 2017.

Before we take a deep dive into the contents of the discussion draft, it is important to understand what makes HTVIs a specific category of intangibles.

2. What does Action 8 state about HTVI?

a. Definition of HTVI

HTVIs have been defined as “intangibles or rights in intangibles for which, at the time of their transfer between associated enterprises”:

b. Features of HTVI

HTVIs may display the following features:

c. Issues with HTVIs

HTVIs involve a lot of uncertainties in terms of determination of arm’s length price of the HTVIs.

Further, it is pertinent to note that there would be information gaps as the tax payer would possess more information (that can be used to create a comprehensive and robust valuation report) as compared to the tax administrations, due to lack of externally available data.

Therefore, tax administrations face a challenge to test the valuation at the time of transfer as it is extremely difficult to objectively evaluate the taxpayer’s estimations, since it may be wholly based on the information provided by the taxpayer. Such information mismatch restricts the ability of tax administrations to establish or verify developments or events that might be considered relevant for the pricing of a transaction involving the transfer of intangibles or rights in intangibles, as well as the extent to which the occurrence of such developments or events, or the direction they take, might have been foreseen or reasonably foreseeable at the time the transaction was entered into.

d. Suggested approach to determine ALP of HTVI

In order to test the arm’s length nature of HTVIs, Action 8 suggests that tax administrations are entitled to consider ex post outcomes as presumptive evidence about the appropriateness of the ex-ante pricing arrangements. In case there are material differences between the ex-ante projections and ex-post outcomes, which are not due to unforeseeable developments or events, it might be possible that at the time of determining the transfer price, such developments or events might not have been accounted for, and accounting of which would have significantly impacted the transfer price of the transaction.


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