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OECD Revises Transfer Pricing Guidelines
The proposed guidance contains some significant and fundamental changes from the existing guidance, which will be important to companies to consider when evaluating their transfer pricing arrangements. Taxand summarises the changes, updated to reflect discussions at the OECD hearing held in Paris on 11 - 13 November, and suggests a few important points for companies to consider.
There are 4 points in particular which are of significant importance in the draft:
- The definition of intangibles subject to the guidance has been clarified, and is a fairly comprehensive definition, not limited by requirements of legal registration or protection.
- The concept of entitlement to intangible related returns is the guiding principle that determines which entity should receive the compensation arising from the intangible. Legal ownership and funding the development of the asset are a 'starting point', but the performance of the most significant functions with respect to the development, enhancement, maintenance and protection of the intangibles and, in particular, controlling the risks related to these functions is the key determinant.
- The concept of 'options realistically available' to the related parties involved in an intangible asset transaction is very important to determine whether the transaction will be respected.
- The economic analysis methods used to determine the arm's length price of intangibles now includes valuation techniques. Whereas the draft rejected the use of cost-based approaches in favour of the market/CUP or discounted cash flow approach, the OECD will now take a more open-minded approach to the potential application of all of the methods.
The proposed changes are likely to have a material impact on companies with transfer pricing policies that address intangibles. It is strongly recommended that the potential impact is assessed, as there is time to implement changes before the guidance becomes final.