Intangible Assets: BEPS Action 8 - Global Tax Update

The taxation of transactions involving intangible assets (either by licence of use or directly by their transmission) is possibly the OECD's biggest concern on transfer pricing and international tax at the moment. Action Group 8 was tasked with developing guidance on the transfer pricing aspects of intangibles.

Definition

According to the OECD guidelines, the term "intangible" refers to those non-physical or financial assets to be disposed of or controlled for use in commercial activities, transfer or whose use should be compensated as if it occurs between nonrelated parties.

Action Plan 8 develops standards to prevent BEPS as a result of intragroup transfer of intangibles with the following implications:

Adopt a comprehensive and clear definition of "intangible". Ensure that the benefits associated with the transfer and use of intangible assets are properly allocated according to value creation. Develop transfer pricing rules or special measures for the transfer of difficult-to-value intangibles. Provide updated guidance in cost contribution agreements. Special Measures Under Consideration

Alongside revised guidance on transfer pricing and intangibles, the following special measures will be considered:

Difficult-to-value IP. Provide tax administration with authority to apply rules based on real results ("according with income" standards) Financial returns. Limit the return of entities that provide only financing services. Treat such entities as lenders rather than equity investors. Mandatory sharing of benefits. Apply quotas/profit split to capital gains of certain transfers of difficult-to-value IP. Capitalisation. Implement Article 7 on attribution of profit to subsidiaries regulations (asset and risk allocation through the "Significant People Function" for situations involving excessive capitalisation of low-function entities). Key Issues Addressed in the Revised Guidance

OECD has also provided guidance in relation to intangibles, brief details of which are set forth below:

Chapter I

Location savings. Should not be considered an intangible, but prices should be based on comparable transaction in the local market. When such comparable cannot be identified, comparability adjustments may be necessary. Uniquely assembled workforce. Transfers should not necessarily require a payment, but any know-how, saving time and associated costs (or any detrimental effects) should be reflected in the price according to the "arm's length" principle...