OECD TP GL Chapters 5 and 6 Have Officially Been Replaced
This is the obvious conclusion that can be drawn from the OECD documents “Guidance on Transfer Pricing Aspects of Intangibles” and “Guidance on Transfer Pricing Documentation and Country-by-Country Reporting” published on September 16, also available in our BEPS Library.
As for Chapter V of the OECD Transfer Pricing Guidelines, the three-tier approach has now been agreed upon by OECD member countries. Changes to the Canadian ITA shall indeed follow in 2015.
Regarding intangibles, “trade and marketing intangibles” still exist although the OECD guidelines do not differentiate between “routine and non routine intangibles”.
Section A of new Chapter 6 greatly expands on various definitions (patents, know-how and trade secrets, trademarks, trade names and brands, rights under contracts and government licences, licences and similar limited rights in intangibles, goodwill and ongoing concern value, group synergies).
Section B « confirms that the ultimate allocation of the returns derived by the MNE group from the exploitation of intangibles, and the ultimate allocation of costs and other burdens related to intangibles among members of the MNE group, is accomplished by compensating members of the MNE group for functions performed, assets used, and risks assumed in the development, enhancement, maintenance, protection and exploitation of intangibles » (par. 6.32).
There is now little doubt that the information obtained through Chapter 5 will « help » with that allocation which should, however, be based on the arm’s length principle… It will likely be of use, misuse and abuse by tax administrations all over the world as they keep challenging the legal and contractual arrangements of taxpayers…
Member countries will most likely fall upon par. 6.42 to justify these challenges resulting from « compliance » TP audits:
« While determining legal ownership is an important first step in the analysis, that determination is separate and distinct from the question of remuneration under the arm’s length principle. For transfer pricing purposes, legal ownership of intangibles, by itself, does not confer any right ultimately to retain returns derived by the MNE group from exploiting the intangible, even though such returns may initially accrue to the legal owner as a result of its legal or contractual right to exploit the intangible. »
Section B.2 reviews the functions, risks and assets that may be of use in a given transaction with specific emphasis on the « performance and control of functions » and the « assumption of risks ».
Par. 6.68 provides taxpayers with an audit defense strategy, if it can be enabled successfully:
« If the legal owner of an intangible in substance:
- Performs and controls all of the functions (including the important functions described in paragraph 6.56) related to the development, enhancement, maintenance, protection and exploitation of the intangible;
- Provides all assets, including funding, necessary to the development, enhancement, maintenance, protection, and exploitation of the intangibles; and
- Bears and controls all of the risks related to the development, enhancement, maintenance, protection, and exploitation of the intangible,
then it will be entitled to all of the anticipated, ex ante, returns derived from the MNE group’s exploitation of the intangible. […] »
Part C discusses « transaction involving the use or transfer of intangibles ».
Part D offers « supplemental guidance for determining arm’s length conditions in cases involving intangibles ».
New Annex to chapter VI offers 33 examples which remind us of some of the examples contained in Section 1.482 CFR (1.482-4 – Methods to determine taxable income in connection with a transfer of intangible property).
For Canadian taxpayers involved in international trade, transfer pricing has now entered a new era where a complete revision of TP policies and procedures is required.
Robert Robillard, CPA, CGA, MBA, M.Sc. Econ.
Senior Partner, DRTP Consulting Inc.
514-742-8086; robertrobillard “at” drtp.ca
DRTP Consulting Inc. solutions go beyond transfer pricing and international tax solutions. This blog post originally appeared at rbrt.ca. The information in this blog post is general information only. Data and information come from sources believed to be reliable but complete accuracy cannot be guaranteed. DRTP Consulting Inc. or the author are not responsible or liable for any error, omission or inaccuracy in such information. Readers should seek advice and counsel from DRTP Consulting Inc. as required.