The Impact of New Transfer Pricing Rules on Intellectual Property Valuation

 

The Organization for Economic Co-operation and Development (OECD) and the Group of 20 (G20) have officially approved a transfer pricing plan with implications for intangible and intellectual property valuation. The Base Erosion and Profit Shifting Action Plan (BEPS) is aimed at multinational corporations that participate in damaging tax tactics such as treaty shopping, related-party financial transactions, intellectual property transfers, and other similar activities.

What does it mean to have a transfer pricing policy?

Tax authorities should demand a "three-tiered approach" to its transfer pricing documentation requirements, according to the Documentation Report:

A master file is a summary of the multinational's activities, intangible assets, intercompany financial transactions, and financial and tax situations. This should contain information on the organization's structure and a comprehensive description of the company's operations.

A local file contains comprehensive information on the local business and its role within the multinational group and a summary of its financial data and significant intercompany transactions. Local entity information, such as a description of the local entity's management structures, the local organization chart, and data on reporting structure, must be included in the local file. A description of material regulated transactions and a list of local entity financial accounts should also be included in this form.

The country-by-country report details revenue, profit/(loss), income tax paid, workers, and assets owned by entity and jurisdiction on a country-by-country basis. The country-by-country report includes global level information on income distribution, taxes paid, and activity indicators such as employee lists, assets, and revenue for each jurisdiction in which the organization operates.

Benefits and costs potential:

One of the advantages of the new approach in intellectual property valuation is that risk assessment guidelines may discourage tax authorities from launching expensive legal battles over small problems. The master file may facilitate compliance by encouraging the adoption of a set of internationally consistent and uniform transfer pricing rules. Furthermore, rather than demanding the use of the local language in every instance, tax authorities could accept documents written in widely used languages.

The policy's potential drawbacks include the possibility that tax authorities would utilize the country-by-country report to make improper "formula-based" changes, increasing the risk of disputes and double taxation. The country-by-country report necessitates data that may be utilized as formulary allocation criteria, such as revenue, staff numbers, and physical assets by tax jurisdiction. The quantity and degree of detail needed for multinationals' financial data may necessitate expensive and ultimately needless compliance, and private information shared with tax authorities may be risked.

Coca-Cola case in point:

Coca-Cola and many foreign-based licensees were engaged in one of the first major lawsuits using the new transfer pricing regulations late last year. The IRS issued Coca-Cola a statutory notice of a $3.3 billion deficit based on more than $9 billion in transfer pricing changes. In December 2015, Coca-Cola filed a petition with the tax court to have the decision overturned.

Many people are keeping an eye on this case because it may indicate that the IRS is trying to unify its approach to transfer pricing issues. Some think the IRS is prepared to disregard previous agreements, long-term risk allocations, and informal shared intangible development agreements.