THE OECD BEPS ACTION PLAN - Copenhagen … Questions & Answers. 1 ... a transaction between...
Transcript of THE OECD BEPS ACTION PLAN - Copenhagen … Questions & Answers. 1 ... a transaction between...
TRANSFER PRICING
Transfer pricing valuations and documentation related to…
• TP systems upon business re-structuring efforts
• I/co license rates for brand, technologies, know-how…
• Determination of economic benefits from centrally provided services and functions
• Implementation of global transfer pricing documentation (master file, local file, CbC)
• Local tax audit support
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IP Valuation & Transfer Pricing
We help our clients by quantifying the economic value of various kinds of
intellectual property and intangible assets, employing state-of-the art
economic models. This can be for transfer pricing, dispute, or strategic and
monetization purposes.
DISPUTES & LICENSING
• Calculation of damages in e.g. infringement cases and loss of patenting
• Support settlements and settlement negotiations with economic analysis
• Determine license rates for commercialization purposes
HENDRIK FÜGEMANN
Partner
VINCENZO ZURZOLO
Senior Economist
KATHARINA HUHN
EconomistMORITZ LUBCZYK
AnalystHENRIK KARLSSON
Analyst
KATRINE
VESTERGAARD
Assistant
STRATEGY
• Economic evaluation of early-stage technology
• Market assessments to determine the market potential for a (to-be-developed) technology and patents
• Policy-related questions on e.g. the design of licensing, IP and related frameworks
CONTACT INFORMATION
www.copenhageneconomics.com
Hendrik Fügemann
+46 76 1872 665
• Established year 2000
• Offices in Copenhagen, Stockholm and Brussels
• Single expertise: Economics
• 70 employees, Ph.D. or M.Sc. in Economics
• Multiple nationalities: Danish, Swedish, Finnish, German, Italian, Lithuanian, Romanian, American
• Partner-owned, six partners
Hard Facts about Copenhagen
Economics
4
From CUP to Valuation Techniques
Number of OECD publications on TP Topics. DD: Discussion Draft. CCA: Cost Contribution Arrangement. 7
20152008 2010 2012
•Value creation
•Control over functions & risks
•Use of valuation techniques
DD Business Restruct.
•Cross-border services
•Most appropriate TP method
•CCA
DD on Intangibles
•Important functions (DEMPE)•Unique & Valuable contributions•Opening to Safe Harbours
2010 TP Guidelines
Attribution of profits to
PE
Attribution of profits to
PE
1995
1st OECD TP
Guidelines
• Cross-border transfers of valuable intangibles
• Significant People Functions
2011
•Differentia-tion between intangible transfers and services
•Marketing intangibles
Scoping doc. on
Intangibles
DD on Safe Harbours
BEPS Actions
8-10
• The CUP method as the best method in hierarchy
2015=19
Year = #
1999=1
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INTANGIBLES
• DISENTANGLING DIFFERENT CATEGORIES OF INTANGIBLES
• DIFFERENT WAYS TO EXPLOIT INTANGIBLES
• ESTABLISHING THE ARM’S LENGTH PRICE FOR INTANGIBLES
• VALUE OF CONTRIBUTIONS TO INTANGIBLES
• TRANSFER PRICING METHODS APPROPRIATE FOR INTANGIBLES
Something which is not a
physical asset or a financial
asset, which 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
BEPS ACTION 8-10: 2015 Final Report, par. 6.6.
1 BEPS ACTION 8-10: 2015 Final Report, par. 6.30-6.31. 11
Hard intangiblesAn intangible characterized by legal, contractual, or other forms of protection (local or worldwide)
Soft intangiblesAn intangible not protected/ registered under international or local law. Taken into account, but not considered intangibles for TP purposes1
Hard vs. Soft Intangibles
Trademarks Patents
Government
Licenses &
Concessions
Software /
Copyrights
Group
Synergies
Location
Savings
Skilled
Workforce
Access to
market
Know-how
Customer
List
1 BEPS Action 8-10: par. 6.10. 2 Ibidem, par. 6.116. 12
Routine intangiblesAn intangible commonly available on the marketplace. Does not justify the allocation of premium return, over and above normal returns earned by comparable enterprises1
Unique intangiblesAn intangible with unique characteristics having the potential for generating returns and creating future benefits that could differ widely2
Routine vs. Unique Intangibles
Non unique Know-how
Retail customer list
(e.g. tobacconists)
Open-source software
Commercial Licenses
Trademarks Patents
Proprietary market and
customer data
Government Licenses &
Concessions
1 BEPS Action 8-10: Section A. 3 Amendment to Glossary. 2 OECD TP GL 2010: Glossary. 3 UN Practical Manual on Transfer Pricing, par. 1.6.5. 13
Marketing intangiblesAn intangible that relates to marketing activities, aids in the commercial exploitation of a product or service, and/or has an important promotional value1
Trade intangiblesA commercial intangible other than a marketing intangible2. Trade intangibles relate to the production of goods and the provision of services. Typically developed through R&D3
Marketing vs. Trade Intangibles
Trademarks Tradenames
Customer List/
Relationship
Proprietary market and
customer data
PatentsKnow How &
Trade Secrets
Government Licenses &
ConcessionsSoftware
Licenses and Big
data
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Combination of
intangibles
Intangibles &
Services
Goodwill
Different ways to exploit intangibles
Trademark Patent Tangibles GW
On a stand-alone
basis
1 BEPS Action 8-10: par. 6.94. 15
Combination of intangibles
Some intangibles are more valuable in combination with other intangibles. In isolation, they may have much less value1
Patent on active
ingredient
Regulatory Approval
Trademark
Service
1 BEPS Action 8-10: para. 6.99 - 6.101. 2 TP: Transfer Price. 16
Intangibles may also be transferred in combination with services1
Intangibles & Services
Where comparable arrangements are
not available, it may be possible and
appropriate to separate services from
the transfer of intangibles (e.g.
franchising agreements)
In other situations, the provision of
services and the transfer of intangible
may be so intertwined that is difficult
to separate the transactions (e.g.
brand, software)
Service
Intangible
Testing TP2 for the provision of service
Testing TP for the transfer of rights in the intangible
Intangible
Testing TP on an aggregate basis for the provision of services and the transfer of rights in the intangible
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• Three main aspects should be taken into account:
− The unique features of the intangibles
− The value of contributions made by the parties to the value of the intangibles
− The specific industry where the transaction takes place
Establishing the arm’s length price for
intangibles
Intangibles often have unique characteristics and have the potential for generating returns and creating future benefits that could differ widely1
Unique features of intangibles
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1
Exclusivity2
Extent and duration of legal protection
3
Geographic scope
4
Useful life 5
Stage of development
6
Rights to enhancements, revisions and updates
1 BEPS ACTION 8-10: 2015 Final Report, par. 6.116.
1 BEPS ACTION 8-10: 2015 Final Report, par. 6.48. 2 BEPS ACTION 8-10: 2015 Final Report, par. 6.42. 19
• Under the arm’s length principle, members of a MNE Group must be compensated for their contribution to the value of the intangible, in terms of functions, risks, and assets related to the Development, Enhancement, Maintenance, Protection, and Exploitation of the intangible1
• Legal ownership of intangibles, by itself, does not confer any returns derived by the MNE Group from exploiting the intangible2
1/2 Value of contributions to intangibles
2/2 Value of contributions to intangibles
1 BEPS ACTION 8-10: 2015 Final Report, par. 6.55. 2 Ibidem, par. 6.56. 3 Ibidem, par. 6.65. 4 Ibidem, par. 6.59. 20
Risks3
Assets4
• Design and control of research and marketing programmes
• Direction and establishing of priorities (e.g. determining blue-sky
research)
• Control over strategic decisions and budgets
• Defense and protection of the intangible
• Quality control over functions performed by other enterprises
Functions2
The MNE Group members making the more significant contributions should receive the greater compensation1
• Development of intangibles risk (i.e. risk of failure)
• Product obsolescence risk
• Infringement risk
• Product liability risk
• Exploitation risk
• Other intangible assets used in research, development or
marketing
• Physical assets
• Funding
The increasing role of industry specific
intangibles
1 BEPS ACTION 8-10: 2015 Final Report, par. 6.10. 21
Fashion
Banking
Formulae, Patents, Reg. approvals, TrademarksPharma
Trademarks, Models, Supplier agreements
Customer list, Asset management systems
Apps, Network, IRUs, Customer-related intangiblesTelco
Depending on the industry sector and other facts specific to a particular case, exploitation of intangibles can account for either a large or small part of the MNE’s value creation1
1 One sided methods: Resale Price Method (RPM); Cost Plus Method (CPLM); Transactional Net Margin Method (TNMM). 22
Transfer pricing methods in brief
Transactional Profit Split
Valuation Techniques
Direct regard to the price applied in transactions between independent parties (i.e. at arm’s length)
Comparable Uncontrolled Price
One sided methods1
Replacement costs
1) Selection of the simplest party to the transaction (Tested Party); 2) Application of the margins earned by independent parties
Split the combined profit realized by the parties, based on contributions in terms of functions, risks, and assets
Reference to costs incurred (or that would have been incurred) in developing the intangible
Reference to the present value of future flows of income (or cash) attributable to the intangible
His
tori
cal
TP
Met
ho
ds
New
Tec
hn
iqu
es
1 BEPS ACTION 8-10: 2015 Final Report, para. 6.131 – 6.157. 23
TP Methods appropriate for intangibles1
Where comparable uncontrolled transactions are available (difficult or impossible)
Transactional Profit Split
Valuation Techniques
Comparable Uncontrolled Price
One sided methods
Replacement costs
Generally not reliable methods for directly valuing intangibles
May have application in the sale of full rights in intangibles or partially developed intangibles
Lack of correlation between cost of developing intangibles and their value once developed
Valuation Techniques, in particular discounted cash flows derived from the exploitation of the intangible may be particularly useful
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SERVICES
• CENTRALIZATION OF SERVICES
• DUPLICATION OF SERVICES
• EXEMPLARY UNIVERSE OF SERVICES
• EVOLUTION OF TP METHODS FOR SERVICES
Whether an activity provides a
respective Group member with
economic and commercial
value to enhance or maintain its
business position and […] an
independent enterprise would
have been willing to pay for the
activity or would have
performed the activity in-house
BEPS ACTION 8-10: 2015 Final Report, par. 7.6.
Centralization of services
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HQ
Op. Co 1 Op. Co 2 Op. Co N
Sales
Marketing
R&D
Finance/HR
IT
HQ
Op. Co 1 Op. Co 2 Op. Co N
Monitoring
Sales
IT Local
MarketingR&D
IT Global
Sales
IT Local
Sales
IT Local
Regional Office 1
Regional Office 2
Decentralized Centralized
Finance/HR
Sales
Marketing
R&D
Finance/HR
IT
Sales
Marketing
R&D
Finance/HR
IT
1 BEPS ACTION 8-10: 2015 Final Report, par. 7.11. 2 Ibidem. 27
• No service should be found for activities undertaken by one Group member that merely duplicate a service that another Group member is performing for itself1
• Similarly or equally labeled functions, at different group levels, may differ in intensity, scope, and value creation
• Services [can be] different, additional or complementary to activities performed in-house2
Duplication of services
One of the main challenges in many countries refers to the deductibility of charges for management services
1/2 The definition of a ‘service’ is not
simple…
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Low Value
Added
Services
• Activities performed by one Group member solely
because of its ownership interest in one or more
group members
• Independent enterprises would not be willing to pay
• Not considered intra-group services
Shareholder
activities
• Are supportive in nature and not part of the core-
business of the Group
• Do not require the use of unique and valuable
intangibles and do not involve significant risks
• The arm’s length price is closely related to costs
One of the main challenges in many countries refers to the deductibility of charges for management services
2/2 The definition of a ‘service’ is not
simple…
29
Business
Services
• Are related to the core-business of the Group
• May involve the use of intangibles (know how)
• Involve significant people functions (SPF)
High Value
Added
Services
• Are strictly related to the core-business of the Group
• Likely to involve the use (or lead to the creation) of
valuable intangibles
• Involve significant people functions (SPF)
Exemplary universe of services
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Accounting
& Auditing
Consolidated
Financial
Statements
Reporting
Human
Resources
Information
Technology
Internal &
External
Communi-
cation
Legal
Service
Tax
General
Services
Sales &
Marketing
Senior
Manage-
ment
Manufac-
turing &
Purchasing
Parent
company
Investor
Relations
Research &
Develop-
ment
Financial
&
Insurance
Extraction
&
Exploration
Evolution of TP Methods for services
LVAS: Low value added services. HVAS: Low value added services. GL: Guidelines. EUJTP: European Joint Transfer Pricing. 31
OECD Developments
Supplementary Developments
20152008 2010
2008 Attribution of profit to PE:Significant People Functions
2010 TP GL:Economic Substance, Cross-border services
BEPS 8-10:Value creation,Unique & valuable contributions
US Regs. §1.482:Service Cost Method
TP Methods Cost+At cost /Cost+ Cost+
LVAS:E.g. HR, LegalC+ [Safe Harbour]
Business Services:E.g. ProductionC+ [Benchmark]
HVAS:Val. TechniquesE.g. R&D, Mktg
General functional
comparability
Comparability requirements
Value creation
EUJTP Forum:Low Value Added Services
How to clear the dust …
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Value
Creation
IntangiblesIntragroup
Services
LVAS
BS
Routine
Soft
Hard
Unique
HVAS
Hard facts. Clear Stories.
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