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May 18, 2022
Anatomy of Intangible Transfer Pricing Scheme, With A
Focus on Corporate Restructurings
taxguru.in/income-tax/anatomy-intangible-transfer-pricing-scheme-focus-corporate-restructurings.html
1. INTRODUCTION
Intangible assets characterize an entire era of economic-related technological innovation.
Many argue that intangibles have created the “New Economy,” or a global economy in
which wealth is no longer integrated in tangible assets such as land, but instead in assets
related to conceptual, reputational, and technical capital. Given the inherent difficulties in
measuring, valuing, and allocating value in this category of assets, taxation issues are
unavoidable. The issue is especially acute in the case of multinational enterprises
(MNEs), where intangible assets are developed and converted internally among members
of a group of companies. It is easily understandable why countries suffer significant
revenue losses because of the deception of intangible assets, which is frequently part of
MNE-created tax avoidance schemes. The OECD has tried to mitigate the effects of this
issue by providing updated assistance in its Base Erosion and Profit Shifting (BEPS)
Project, particularly Actions 8-10[1] on transfer pricing and intangibles. Amidst the
OECD’s inclusionary efforts, many issues remain unresolved, particularly when it comes
to the transfer of intangibles for the specific purpose of business restructurings. Cross-
border transfers of intangibles are frequently made with the final goal of changing
corporate structures, such as when a company is entirely comprised of this type of assets
(IP company). Corporations carefully plan these transfers as section of their tax planning
strategies, and they have significant ramifications for global taxation and the economy.
2. INTANGIBLES
2.1 Definition

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The OECD defines intangible as “something that is not a physical asset or a financial
asset, that is “capable of being owned or controlled for use in commercial activities, and
whose use or transfer would be compensated had it occurred in a transaction between
independent parties in comparable circumstances”[2] in Actions 8-10 of the BEPS project.
Patents, trade secrets, trademarks, licenses, goodwill and ongoing concern value, and
some market particularities are examples of intangible assets, according to the OECD
definition. It must be acknowledged that, in addition to intangible assets themselves,
rights in intangible assets can be transferred between corporations.
3. TAXATION ISSUES RELATING TO INTANGIBLE ASSETS
When trying to discuss the impact on the economy of intangible assets, one important
factor to consider is the taxation of these kind of assets. The distinctiveness of
intangibles, and thus the unlikelihood of assessing them, is the beginning point for taxing
them. To identify the estimated price of intangibles, the least risky solution is to determine
similar assets or “comparable” assets.[3] This assumes a dependence on market rates
where comparable transactions could be found, which is frequently insufficient. Aside
from this broad aggravation, there are concerns in the domain of taxation. The first is if
the cost of developing an intangible asset must be allowed to deduct from the year of
formation or depreciated over many years equivalent to the asset’s average lifespan. The
next issue would be whether intangibles have a restricted expected useful life and
therefore should be depreciated, in the context that ideologies and intellectual property do
not deteriorate in the same way that tangible assets do. The latter concern has been
addressed by academia[4] and practise, as there is widespread agreement that intangible
assets are depreciable[5]. Furthermore, intellectual property-related products such as
patents and licences are only available for a limited period (i.e. 20 years for patents).
Ultimately, the transfer pricing issue is the most pressing and persistent issue in the
taxation of intangible assets. Provided that several multinational corporations use the
transfer of intangible assets among group members to reduce their tax liabilities, either
lawfully (tax avoidance) or unlawfully (tax evasion), the crucial question is just how we
classify the transfer prices of intangible assets, particularly in cases where comparable
transactions are lacking.
4. TRANSFER PRICING OF INTANGIBLES IN CASES OF COMPANY
RESTRUCTURINGS
To lay the groundwork for the problem of corporate restructurings, it was essential to
analyze transfer pricing methods on intangible assets. I’ll try to explain the fundamentals
of transfer pricing in corporate restructurings and how they connect to intangible assets.
4.1 Transfer Pricing in Company Restructurings
As part of the BEPS Project implementation, the OECD publicly released specific
guidelines on transfer pricing in cases of corporate restructurings[6] in the summer of
2016. The OECD’s definition of corporate restructuring serves as the foundation for this
evaluation. A corporate restructuring is a cross-border rearrangement of commercial or

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financial connections among associated enterprises, which includes the dismissal or
significant negotiations of existing arrangements. This definition’s cross-border
component makes it obvious that transfer pricing is a consistent risk in these structures,
which is correct. The depicted picture will be incomplete only if we clarify on the incentive
schemes for companies to engage in corporate restructurings. In broad sense, there is a
need for special purpose goods and services, economies of scale and scope, cost
cutting, and the results appeared by synergies are encouraging businesses to restructure.
[7] Diversification advantages are also essential when looking to disintegrate different
risks across multiple jurisdictions.[8] These days, it is not uncommon to come across
situations in which companies merge with the primary goal of combining knowledge or
know-how. When intangibles are engaged, the main goal is to consolidate them by
reallocating the risks and profits associated with these assets between persons of the
MNE group.
In accordance with prior guidelines, the OECD insists on the implementation of the arm’s
length principle in corporate restructurings. Even though it acknowledges that MNEs
participate in transactions which are not found in transactions among enterprises, it helps
clarify that the absence of comparable doesn’t really render the ALP extremely difficult or
useless.[9] As a result, to define the arm’s length price, we must first distinguish the
happening transactions using a functional analysis. The assets involved in the
restructuring, their economic significance, and the risks transferred and allocated will all
be considered in this analysis. It will typically include a comparison of pre-restructuring
conditions to post-restructuring conditions to identify all assets and risks converted. As a
result, while the OECD’s logic is understandable, countries and authorities must be given
more specific guidance. Thus, assessing commercial rationality is insufficient; we must
also consider the conditions for each member individually, particularly the anticipated
returns and the availability of possibilities for the transaction.[10]
5. CONCLUSION
Intangible assets are a highly specialized field in transfer pricing that necessitates
specialized knowledge as well as an understanding of wider matters. This paper
demonstrates that even conventional transfer pricing techniques are commonly
insufficient to face these challenges of intangibles. When intangibles are shifted as part of
corporate restructurings, the picture becomes much hazier because the incentives for
incorporating businesses must also be considered. In these circumstances, achieving a
balance among fairness, free market function, and good health tax competition appears
incredibly difficult. The arm’s length principle, according to the winter’s opinion, somehow
doesn’t offer an effective solution to the issue of intangibles for several reasons. So, it
seems that MNEs are organized this way to take full advantage of inter-company
transactions, particularly intangibles, and the second is that intangibles transactions
cannot adhere to the arm’s length principle due to a lack of comparable transactions if
they exist at all. Another issue would be that judges fail to reach the intangibles problem
appropriately and considerately, resulting in decision making that articulate outdated
viewpoints. Therefore, in this way, they not only disallow smaller businesses from

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investing in intangible assets, but they also encourage MNEs to continue engaging in tax
evasion and avoidance, resulting in massive revenue losses. As a result, the interaction
of these factors has policy recommendations for all countries.
An advanced version of the formulary apportionment method with special regulations for
only certain types of intangible assets could as of now provide a workable solution to the
intangibles problem in conjunction with corporate restructurings. A plethora of transfer
pricing cases could be detected and resolved using formulary apportionment, which the
OECD must also develop, resulting to stricter adherence and greater profits for certain
countries. Concurrently, money invested in intangible assets will increase because
companies will face decent tax burdens that will be dispersed across different
jurisdictions. In the end, this would result in increased earnings in more countries,
boosting the connection for international taxation and competition. Overall, the
implementation of a formulary apportionment system will just stand to gain the
international tax system overall, as well as individual countries. This strategy is not
without risks and disadvantages, but if necessary, modifications are needed, intangible
assets will give rise to even more significant growth, since intangible assets are the game
changer of the modern economy. As noted, attorney Lloyd Cutler stated in 2000: “given
that no company can establish a monopoly on brains, how do you keep the people that
make it work? There are no tangible assets to divest. There is intellectual property and
that’s about it- and a building.”
[1] OECD ‘Aligning Transfer Pricing Outcomes with Value Creation, Action 8-10-2015
Final Reports’ (OECD Publishing, Paris 2015)
[2] OECD (n 2) 67
[3] Blair and Wallman (n 1) 15
[4] Jason Cummins, ‘A New Approach to the valuation of Intangible Capital’ in Carlo
Corrado, John Haltiwanger and Daniel Sichel (eds) Measuring Capital in the New
Economy (The University of Chicago Press 2005)
[5] Elisebeth landes and Andrew Rosenfeld, ‘The durability of advertising revisited’ (1994)
42 JIE 263.
[6] OECD, ‘Conforming Amendments to Chapter IX of the Transfer Pricing Guidelines:
Transfer Pricing aspects of Business Restructurings’ (OECD Publishing, Paris, 4 July
2016)
[7] OECD (n 58) 9
[8] Caves (n 56) 2
[9] OECD (n 58) 11
[10] OECD (n 41) 379
Tags: OECD, Transfer Pricing

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Author Bio
Name: Chitrapu Anand Hitesh
Qualification: Post Graduate
Company: N/A
Location: hyderabad, Telangana, India
Member Since: 17 May 2022 | Total Posts: 1
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