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Base Erosion and Profit Shifting (BEPS)
The OECD have issued Revised Discussion Draft on Intangibles (RDD) seeking to provide guidance on Action point 8 of the BEPS action plan concerning the transfer pricing of intangibles. Taxand India examines the key observations of the RDD.
The RDD highlights that, return on intangibles should be attributed to the entity which performs important functions, provides all assets and assumes key risks and costs related to the development, enhancement, maintenance and protection of intangibles. The RDD explicitly mentions that mere legal ownership of an intangible shall not entitle the legal owner of any return establishing precedence of “economic ownership” over “legal ownership”.
The RDD further mentions that key functions in relation to an intangible may include design and control of research and marketing programmes, management and control of budgets, control over strategic decisions regarding intangible development programmes, important decisions regarding defence and protection of intangibles, and ongoing quality control. Further, it mentions that key risks in relation to intangible include risks related to:
- Development of intangibles, including the risk that costly research and development or marketing activities will prove to be unsuccessful
- The risk of product obsolescence, including the possibility that technological advances of competitors will adversely affect the value of the intangibles
- Infringement risk, including the risk that defence of intangible rights or defence against other persons’ claims of infringement may prove to be time consuming, costly and /or unavailing
- Product liability and similar risks related to products and services based on the intangibles
On outsourcing, the RDD mentions that it is not necessary for the legal owner to perform all the key functions for claiming the return on intangibles so long as the legal owner controls the functions performed by the outsourced entity. Further, importantly from an India perspective, the OECD distinguishes between funding return and the intangible related return. The RDD mentions that where the foreign principal provides funding for the development, enhancement, maintenance, and protection of an intangible without performing the key functions, it shall be merely entitled to the return for funding and not a return attributable to the intangible.
The RDD represents a step in the right direction by the OECD, by providing detailed guidance on the issue of TP of intangibles. The principles articulated in the RDD align intangible related return to the entity which performs key functions, owns assets & assume risks related to the intangibles. This is consistent with the BEPS action plan which mentions that intangible related return should be allocated in accordance with value creation. Considering the guidance provided in RDD, India should contemplate providing clarifications/ guidance regarding key intangible related issues which impact multinationals operating in India.