Intangible Assets and Transfer Pricing

What are intangible assets?

Intangible assets are non-physical assets that hold significant value due to the economic benefits they provide. Unlike tangible assets such as machinery or buildings, intangible assets do not have a physical presence but are crucial in driving a business’s profitability and market position.

Intangible assets are generally classified into as trade intangibles and marketing intangibles, routine and non-routine intangibles. Few examples of items that are considered as intangible assets are patents, trademarks, copyrights, brand names, customers list, know-how, trade secrets, goodwill, licenses.

Consideration and Treatment under the Transfer Pricing Regime:

From a Transfer Pricing perspective, it is crucial to determine the entity or entities within an MNE Group that are entitled to share in the returns derived from exploiting the intangibles. The identification and examination of intangibles are relevant in two general types of transactions:

• Transactions involving the transfer of intangibles or rights in intangibles.
• Transactions involving the use of intangibles in connection with the sale of goods or the provision of services.

The framework for analysing the transactions involving intangibles requires taking the following steps:

1. Identify the intangibles used or transferred.
2. Identify the full contractual arrangements, with special emphasis on determining legal ownership of intangibles based on the legal arrangements, including relevant registrations, license agreements, other relevant contracts, and other indicators of legal ownership, and the contractual rights and obligations, including contractual assumption of risks in the relations between the related parties or connected persons.
3. Identify the parties performing functions, using assets, and managing risks related to Development, Enhancement, Maintenance, Protection and Exploitation (“DEMPE”) of the intangibles by means of the functional analysis, in order to determine the economic ownership of the intangibles.
4. Confirm the consistency between the terms of the relevant contractual arrangements and the conduct of the parties and determine whether the party assuming economically significant risks actually controls the risks in practice and has the financial capacity to assume the risks relating to the DEMPE of the intangibles.
5. Characterise the actual controlled transactions related to the DEMPE of the intangibles in light of the legal ownership of the intangibles, the other relevant contractual relations under relevant registrations and contracts, and the conduct of the parties, including their relevant contributions of functions, assets and risks.
6. Determine the Arm’s Length Price for these transactions consistent with each party’s contributions of functions performed, assets used, and risks assumed.

Key takeaways

The treatment of intangibles under transfer pricing requires careful consideration of valuation methods, compliance with guidelines, and local regulations. Companies should strive for transparency and consistency in their approaches to minimize disputes with tax authorities. Best practices include:

• Robust Documentation: Maintain thorough documentation to support the valuation and pricing of intangible assets.
• Regular Review: Periodically reassess the transfer pricing policies to adapt to changing business models and market conditions.
• Collaborative Approach: Engage with tax authorities proactively to clarify the treatment of intangibles in transfer pricing arrangements.