Dissecting revised OECD TP Guidelines - Special Considerations for Intangibles in focus

July 24,2017
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CA Mahesh Mandlecha (Partner, BSR & Co. LLP)

CA Vartika Jain (Assistant Manager, BSR & Co. LLP)

Backdrop

Intangibles provides competitive advantage and are key profit drivers in most MNEs. It is therefore necessary to give careful consideration to intangibles when conducting a transfer pricing analysis, especially when MNEs develop, acquire, exploit or transfer intangibles. Transfer pricing aspects pertaining to intangibles is an evolving subject, creating challenges for both taxpayers and tax authorities across the globe.

Considering the complexity surrounding this issue, the OECD had commissioned a project on transfer pricing aspects of intangibles in July 2010. Then in 2015, Base Erosion and Profit Shifting (BEPS) introduced major transformation in the lives of taxpayers riddled with TP issues and tax authorities alike when the final reports on Actions 8-10 (Aligning transfer pricing outcomes with value creation) and Action 13 (Country-by-Country reporting) was released.

Recently, the OECD released the 2017 edition (revising the 2010 edition) of OECD Transfer Pricing (TP) Guidelines for Multinational Enterprises and Tax Administrations which mainly reflects a consolidation of the changes emanating from the OECD/G20 BEPS Project (hereinafter referred as the Guidelines). The Guidelines incorporates substantial revisions introduced by the 2015 BEPS Reports on Actions 8-10 and Action 13. The OECD Council also advised that both the OECD member countries and non-member countries follow the guidance set out in the Actions 8-10 and the Action 13.

Key considerations from Chapter VI of OECD TP guidelines

Chapter VI of the OECD TP guidelines on intangibles provides clarity on the approach to be followed for identification of intangibles, their ownership (legal or economic), approach for the comparability and selection of transfer pricing method for determination of the arm’s length price. The guidance in other chapters relating to determination of ALP, application of most appropriate TP method and comparability analysis apply to the transactions pertaining to intangibles as well. Following sections are covered in the revised guidance:

Section A: Identifying Intangibles

OECD has laid emphasis on the importance to identify the relevant intangibles and various illustrations have been provided in respect of different categories of intangibles. The Guidelines also provide detailed meaning of intangibles i.e. something which is not a physical asset or a financial asset, is capable of being owned or controlled for use in commercial activities and whose use or transfer would be compensated had it occurred in a transaction between independent parties in comparable circumstances.

Indian TP regulations provide for an inclusive definition of intangible property, which apart from the clearly defined intangibles such as marketing, technology, artistic, etc. related intangible assets (examples also provided), also includes any other similar item that derives its value from its intellectual content rather than its physical attributes. It is interesting to note that this detailed definition was introduced only around ten years after the introduction of TP regime in India. In essence, this definition differs than what is mentioned in the OECD guidelines (for instance, OECD considers human capital and market specific characteristics/ location factors as comparability factors and not as intangibles themselves).

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