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OECD Releases Draft Transfer Pricing Guidance on Hard-to-Value-Intangibles

September 06, 2017

Andrew T. Bostian, ASA
Director, Transfer Pricing

The 35 member countries of the Organization for Economic Cooperation and Development (OECD) coordinated to develop a Base Erosion and Profit Shifting (BEPS) action plan. BEPS is the practice of artificially shifting income into tax-advantaged environments, generally through the abuse of transfer pricing. Action 8 of the BEPS action plan mandated the development of transfer pricing rules for transfers of hard-to-value intangibles (HTVI) directed at thwarting base erosion and profit shifting by relocating intangibles among group members.

HTVI are defined as intangibles or rights in intangibles for which, at the time of the transfer between related parties, no reliable comparables existed, and projections of future benefits expected to be derived from the transferred intangible or assumptions used in valuing the intangibles were extremely uncertain. Common characteristics of HTVI include:

  • The intangible is only partially developed at the time of the transfer.
  • It is not expected to be commercially introduced until several years following the transfer.
  • It is essential to the development of other HTVIs.
  • It is transferred to a related party for a lump sum payment.
  • It is linked to a cost sharing or similar arrangement amongst related enterprises.

On May 23, 2017, the OECD released a Discussion Draft providing guidance to tax authorities on how to implement the Action 8 transfer pricing guidelines on transfers of HTVIs. The Discussion Draft contains three sections that present (i) the principles that should trigger the application of the HTVI approach in various situations; (ii) examples to explain the application of the HTVI approach in various situations; and (iii) the interaction between the HTVI approach and the access to the mutual agreement procedure (“MAP”) under the applicable treaty.

Companies that have transferred, or are in the process of transferring HTVIs amongst related parties should be aware that HTVI guidelines for tax authorities have moved further along. Tax authorities will likely apply audit practices to identify and act upon HTVI transactions as early as possible. Some countries may run into difficulties in applying the HTVI approach due to short audit cycles or statute of limitations. As a result, these countries may contemplate changes to procedures or legislation to counteract these application difficulties, such as mandatory prompt notifications in the case of a HTVI transfer or an amendment of the normal statute of limitations when HTVIs are concerned.

The Discussion Draft does not yet represent a consensus view of the Committee on Fiscal Affairs. It was released in draft form in order to provide an opportunity for public comments. Public comments on the Discussion Draft were to be sent by June 30, 2017. The OECD received 42 comments on the Discussion Draft, which were released to the public on July 5, 2017.

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