OECD Draft on Intangibles – Bringing clarity to Transfer Pricing?
With regard to the ongoing debate and the increasing pressure on Transfer Pricing issues worldwide, the subject of intangible assets will be of big interest to companies with international transactions – also in Switzerland. Aiming at the revision of the special considerations for intangibles, the OECD published a discussion draft for Chapter VI of the OECD Transfer Pricing Guidelines in June 2012. In November 2012, more than 120 delegates from business and politics convened with the Working Party 6 (WP 6) delegates and the OECD Secretariat in Paris in order to discuss the comments that have been handed in before. Although the report of the convention does still not reflect a consensus, some key contents of a further revised draft and their potential effects can already be highlighted.
Key elements and goals of the discussion draft
In the past years, my daily work with clients and KPMG’s Global Transfer Pricing Services team has demonstrated that from our clients’ point of view, there is neither clear guidance nor a business consensus with regard to transfer pricing aspects of intangibles. Saying this, it would clearly be helpful to have a useful and widely accepted definition or at least a description of what should and could be recognized as an intangible asset, who should be entitled to the returns from intangibles and how to value intangibles for tax and transfer pricing purposes. However, this wish might be hard to fulfill – in particular if such attempts are made with focus on misconduct and abuse rather than support and the goal of common understanding. But let’s see…
Definition of intangibles
The transfer pricing practice finds itself caught between the locally applicable laws and regulations, the OECD definitions in the model convention as well as in the transfer pricing guidelines, third party contracts and last but not least the respective accounting standards. Hence, it is a common goal of tax authorities and taxpayers to establish a framework that allows for an easy implementation. As it is the case with most standards, the discussion draft of Chapter VI provided by the OECD therefore starts with the definition of intangibles. According to the draft, an intangible asset is “something that is not a physical asset or a financial asset, and that is capable of being owned or controlled for use in commercial activities” (OECD Discussion Draft on Intangibles, p.7).
The comments made by many parties during the public consultation period but also during the convention, clearly criticize the rather vague expression “something”, but also the inclusion of goodwill as an intangible, what seems more harmful than healing the issue of uncertainty and debates over intangibles. Similar comments are made regarding the inconsistency of how the definitions of intangibles are used throughout the draft.
From my point of view – and many practitioners’ and scholars agree – there is generally no need to broaden the definition of intangibles to capture the wider transfers that would get captured by Chapter IX of the guidelines anyway. And hence the definition should be more consistent with the existing legal as well as accounting definitions of intangibles and should not be driven by an attempt to avoid misconduct and abuse at first hand.
All those critics will likely motivate the WP 6 to revise its attempt to establish an overall definition of what an intangible is and what not with the next draft. However, the Party will likely have to remain vague as there is little chance for consensus by all stakeholders.