PROGRAMME PUBLIC CONSULTATION ON TRANSFER PRICING ... · programme . public consultation on transfer pricing discussion drafts . 12-14 n. ovember . 2012. oecd c. onference . c. entre

PROGRAMME

PUBLIC CONSULTATION ON TRANSFER PRICING DISCUSSION DRAFTS

12-14 NOVEMBER 2012

OECD CONFERENCE CENTRE

2 RUE ANDRÉ PASCAL, PARIS 16TH, FRANCE

MONDAY 12 NOVEMBER

08:30-09:30 REGISTRATION

09:30-10:00 OPENING REMARKS AND GROUND RULES

Speakers:

Michelle LEVAC, Chair of Working Party No. 6

William MORRIS, BIAC

10:00-11:00 I: DISCUSSION DRAFT ON TRANSFER PRICING SAFE HARBOURS

Speakers: Page No.

Patricia LEWIS, Caplin & Drysdale ............................................................................................................... 6

- The general approach of the Discussion Draft

- The usefulness of bilateral safe harbours

Michael HECKEL, True Partners Consulting

- The optional nature of safe harbours for taxpayers and the provisions on

rebuttable presumptions;

- The specific OECD proposals for bilateral MOUs

An THEEUWES, Tax Executives Institute ................................................................................................... 10

- The usefulness of bilateral safe harbours; and

- The proposed guidance on unilateral safe harbours

11:00-11:30 Refreshment Break

11:30-13:00 II: SECRETARIAT REQUEST FOR COMMENTS ON TIMING ISSUES

Speakers:

Duncan NOTT, BDO .................................................................................................................................... 14

- The arm’s length price-setting and the arm’s length outcome-testing approaches;

- The need for further direction on year-end adjustments or “true ups”

Brigitte BAUMGARTNER, Plansee Group Services GmbH ...................................................................... 19

- The relative merits of the arm’s length price-setting and the arm’s length

outcome-testing approaches

Matthew WALL, MDW Consulting Inc. ...................................................................................................... 24

- The determination of transfer prices when valuation is uncertain

- Paragraphs 171 – 178 of the Discussion Draft and Examples 20 – 22

Jutta MENNINGER, BSH/PwC ................................................................................................................... 31

- The determination of transfer prices when valuation is uncertain

13:00-14:30 Lunch break

Page 1 of 180

MONDAY 12 NOVEMBER (CONT’D)

14:30-15:15 III: GENERAL DEFINITIONAL APPROACH FOR INTANGIBLES

Speakers:

Jennifer RHEE, Richter Consulting ............................................................................................................. 38

- The definition of intangibles in Section A of the Discussion Draft

Vanessa DE SAINT BLANQUAT, MEDEF ............................................................................................... 45

- General definitional approach for intangibles

Anne QUENEDEY, SALANS ...................................................................................................................... 49

- Intangibles: the relevance of property law definitions, accounting definitions

and separate transferability

15:15-16:00 IV: CATEGORIES OF INTANGIBLES

Ronald VAN DEN BREKEL, Ernst & Young ............................................................................................. 54

- The usefulness of the concept defined as “D.1. (vi) Intangibles”

Wendy NICHOLLS, Grant Thornton UK ................................................................................................... 60

- Should the Discussion Draft distinguish between Routine vs. Unique and

Valuable Intangibles?


16:30-18:00 V: TREATMENT OF GOODWILL AND WORKFORCE IN PLACE

Speakers:

Caroline SILBERZTEIN, Baker & McKenzie ............................................................................................. 65

- The treatment of goodwill (and related examples in the Annex)

Agata UCEDA, International Tax Centre, Leiden ....................................................................................... 70

- The treatment of goodwill (and related examples in the Annex)

Laurence DELORME, A3F ......................................................................................................................... 74

- The Discussion Draft provisions on assembled workforce

Page 2 of 180

TUESDAY 13 NOVEMBER

09:30-10:15 VI. DOES THE DISCUSSION DRAFT FOCUS TOO HEAVILY ON RESTRAINING ABUSIVE

BEHAVIOUR?

Speakers:

Georg GEBERTH, BIAC ............................................................................................................................. 79

- Does the Discussion Draft focus too heavily on restraining abusive behaviour?

James PHILLIPS ........................................................................................................................................... 83

- Does the Discussion Draft focus too heavily on restraining abusive behaviour?

10:15-11:00 VII: DOES THE DISCUSSION DRAFT PLACE TOO MUCH EMPHASIS ON PROFIT SPLIT

APPROACHES?

Speakers:

Gary SPRAGUE, Treaty Policy Working Group ......................................................................................... 88

- Does the Discussion Draft place too much emphasis on profit split approaches?

Arnaud LE BOULANGER, CMS Bureau Francis Lefebvre ....................................................................... 93

- Does the Discussion Draft place too much emphasis on profit split approaches?


11:30-13:00 VIII: INTANGIBLES: ENTITLEMENT TO INTANGIBLE RELATED RETURNS

Speakers:

Alison LOBB and John HENSHALL, Deloitte ........................................................................................... 98

- The treatment of risk and control of risk, including the consistency of the draft with

Chapter IX of the TPG

Linda FERNANDEZ, Transfer Pricing Discussion Group ....................................................................... 103

- The general usefulness of the intangible related return concept and its definition

13:00-14:30 Lunch

14:30-16:00 IX: INTANGIBLES: ENTITLEMENT TO INTANGIBLE RELATED RETURNS (CONTINUED)

Speakers:

Catherine SCHULTZ, National Foreign Trade Council ........................................................................... 108

- The role of registrations and contractual arrangements;

- Disregard of transactions, registrations and contracts

Kate NOAKES, Fidal International Direction .......................................................................................... 111 - Compensation for marketing activities performed by associated enterprises related to

the development, enhancement, maintenance or protection of Intangibles,

including examples 3 through 8

Ian BRIMICOMBE, AstraZeneca .............................................................................................................. 114 - Entitlement to intangible related returns: The importance of performance of

important functions and control


Page 3 of 180

TUESDAY 13 NOVEMBER (CONT’D)

16:30-18:00 X: OPTIONS REALISTICALLY AVAILABLE AND PERSPECTIVES OF THE PARTIES

Speakers:

Isabel VERLINDEN, PriceWaterhouseCoopers ....................................................................................... 130 - Options realistically available and perspectives of the parties and example 19

Carol Doran KLEIN, USCIB ..................................................................................................................... 136

- Options realistically available and perspectives of the parties and example 19

Patrick BRESLIN, Bates White, LLC ........................................................................................................ 140

- Options realistically available and perspectives of the parties and example 19

WEDNESDAY 14 NOVEMBER

9:30-11:00 XI: INTANGIBLES: USE OF FINANCIAL VALUATION TECHNIQUES

Speakers:

Jochem QUAAK and Dick DE BOER, Duff & Phelps .............................................................................. 145

- The relevance of accounting valuations and purchase price allocations

for transfer pricing purposes

Richard GINSBERG, Canadian Institute of Chartered Business Valuators ............................................. 150

- Use of financial valuation techniques and expressly adopting a standard of value

Emmanuel LLINARES, NERA Economic Consulting ............................................................................... 161 - Use of financial valuation techniques for transfer pricing purposes


11:30-12:45 XII: DETERMINING ARM’S LENGTH ROYALTY RATES FOR LICENSING TRANSACTIONS

Speakers:

Brian CODY, KPMG ................................................................................................................................. 167

- Determining arm’s length royalty rates for licensing transactions and

comparability standards for intangibles

Ednaldo SILVA, RoyaltyStat LLC ............................................................................................................. 173

- Use of information from databases

David JARCZYK, ktMINE ........................................................................................................................ 177

- Intangibles: comparability standards and use of information from databases

12:45-13:00 CONCLUDING REMARKS

Speakers:

Michelle LEVAC, Chair of Working Party No. 6

William MORRIS, BIAC

13:00 ADJOURN

Page 4 of 180

SESSION I

DISCUSSION DRAFT ON TRANSFER PRICING SAFE HARBOURS

Speakers:

Patricia LEWIS, Caplin & Drysdale

Michael HECKEL, True Partners Consulting

An THEEUWES, Tax Executives Institute

Page 5 of 180

1

November 12, 2012

-- Safe Harbours -- Comments on

OECD Discussion Draft

Patricia Gimbel Lewis

Caplin & Drysdale One Thomas Circle, N.W. Washington, DC 20005

O: 202.862.5000 F: 202.429.3301

[email protected]

www.caplindrysdale.com

Page 6 of 180

mailto:[email protected]

http://www.caplindrysdale.com

2

-- Safe Harbours -- General Approach of

Discussion Draft

#1

BILATERAL TRANSFER

PRICING SAFE HARBOURS

Acute Taxpayer and Government

Resource Considerations

Treaty-Based Desires to Respect Arm’s Length Standard, Minimize Double

Taxation, and Increase Certainty

Concern with Potential Adverse

Selection

MOUs

#2 UNILATERAL

SAFE HARBOURS, WITH MAP

Page 7 of 180

3

Particular Usefulness of Bilateral Safe Harbours

Test-drive solutions

Emulate arm’s length result via government negotiation;

reduce adverse selection

Efficiently multiply benefit

Minimize double taxation risk

Enhance compliance

Increase government revenues

Enable customized MOUs for specific-country situations

Reduce impediments to cross-border enterprise

Eliminate inadvertent Permanent Establishment exposure

MOU = Many Ought to Use

Overall: A+

Page 8 of 180

4

Suggested Enhancements

1. Make MOUs simpler and broader o Rough justice

o Anti-abuse rule

2. Provide model MOU for Headquarters/centralized services;

tackle “benefit” aspect

3. Reduce adverse selection potential via advance election or

multi-year requirement

4. Include dynamic safe-harbor updating mechanisms

5. Permit post-year-end adjustments

6. Preclude or limit safe harbors for transactions with tax havens

7. Combine with short-cut APA process for unclear cases

********

Page 9 of 180

1

OECD Public Consultation

Safe Harbours for Transfer Pricing

Paris, 12-14 November 2012

Represented by Anna Theeuwes and Alexander Koelbl

Page 10 of 180

http://www.oecd.org/

2

TEI welcomes the Draft’s focus on using safe harbours for non-

entrepreneurial, routine tasks; such an approach will make taxpayer

transfer pricing compliance less burdensome

TEI agrees that the use of safe harbours should be optional (i.e.,

taxpayer may use the arm’s length principle or a safe harbour)

tax authorities should not treat a safe harbour as a rebuttable

presumption of the “correct” arm’s length price

TEI recommends working with ranges for safe harbours

Coordination with the Timing Issues Draft, TEI recommends:

that IP valuation should be done ex ante

that any ex post approach approved in the Guidelines be used only in

conjunction with safe harbour rules, and that taxpayers be permitted to

select either the safe harbour or the standard arm’s length approach

Safe Harbours – General considerations

Page 11 of 180

3

OECD should promote the use of safe harbour rules for interest rates,

low value-added services, and shared services

Unilateral safe harbour:

Set in local legislation - easy for member states

Helpful for businesses - for centralised activities out of a country

Bilateral safe harbour:

Set in tax treaty – not so easy for member states

Complex to manage given the multinational character of MNE transactions

OECD should not encourage the use of bilateral memorandum of

understanding (MOUs) too complex to manage given the multinational

character of MNEs transactions.

Multilateral safe harbour:

Basis to be range in OECD commentaries – member states to translate in

DTT or local legislation

Supportive of development of international standards - This would promote

uniformity across MOUs, further decreasing transfer pricing compliance

costs and disputes

Safe Harbours – Type of Safe Harbour

Page 12 of 180

SESSION II

SECRETARIAT REQUEST FOR COMMENTS ON TIMING ISSUES

Speakers:

Duncan NOTT, BDO

Brigitte BAUMGARTNER, Plansee Group Services GmbH

Matthew WALL, MDW Consulting Inc.

Jutta MENNINGER, BSH / PwC

Page 13 of 180

TIMING ISSUES RELATING TO TRANSFER

PRICING Overview

OECD Consultation

DUNCAN NOTT - BDO

8 November 2012

Copyright © November 12 BDO LLP. All rights reserved. Page 14 of 180

TIMING ISSUES RELATING TO TRANSFER PRICING

Overview

Ex ante pricing

• In advance of /

contemporaneous with

transaction date

• Based on historic data,

forecasts and

expectations

• Reflecting functions,

assets and risk at the

transaction date

• Pricing policy

implemented in

management accounts

Timing issues relating to transfer pricing

Page 2

Transaction

date / start

date

Financial

period end

Tax return

filing date

Post hoc pricing

• Set either at the period

end of on preparation

of the tax return

• Based on more recent

historic data and

market and project

data since start date -

reflects actual events

not forecasts

• Implemented through

true ups / transfer

pricing adjustments

Page 15 of 180


Practical problems

Key areas for consideration

The existence of two approaches to price setting – ex ante and post hoc – can give

rise to practical problems, including:

• Nature of information regarding potentially comparable transactions that may

be relied upon

• Taxpayer initiated adjustment and whether/how these will be respected by

different taxing authorities

• Use and impact of post-transaction date developments

• Application of these circumstances to transfers of intangibles of highly uncertain

valuation and the ability to assume the existence of a post-transaction risk

sharing mechanism


Page 3

Ex post

Greater flexibility Ex ante

Third party approach

Page 16 of 180


Comments and areas for discussion

Clear theory

• Clarifying terms

- Using ex ante pricing over a period of

years – can a forward looking standpoint

be maintained?

• Does a ‘hybrid’ approach exist in

practice?

• Usefulness of ex ante approach for

profit based methods

• Extent (or limit) of incidence of price

adjustment clauses in third party

situations

• Expressing a preference for ex ante or

post hoc pricing in the Guidelines


Page 4

Effective practice

• Clarity on what is appropriate available

information for ex ante pricing

• Identifying a reasonable level for

contemporaneous documentation of ex

ante pricing

• When and how to interpose

retrospective pricing adjustment

- A place for bad business decisions in

transfer pricing policy?

• Enabling the ‘right kind’ of true up

• Creating transparency for tax

authorities without increasing

administrative burden on business

Reflecting the outcome of these areas in the Guidelines

Page 17 of 180

DUNCAN NOTT Director - Transfer Pricing

BDO LLP

+44(0)20 7893 3389 (DDI)

+44(0)780 580 8969 (Mobile)

+44(0)20 7893 2418 (Fax)

[email protected]

Page 18 of 180


1

Timing issues: The relative merits of arm’s length price-setting and the arm’s length outcome-testing approaches

LL.M. Brigitte Baumgartner International Tax Manager Plansee Group

October 2012

Page 19 of 180

Plansee Group 2

Plansee Group Example

Hardmetals

& Tools

High Performance

Materials

Tungsten

& Powders

Kolkata

Tianjin

Vista

Franklin

Towanda

Warren

Gabrovo

Hitzacker

Lechbruck

Liezen

Reutte

Alserio Seon

St. Pierre en Faucigny

Biel

Niederkorn

Empfingen

Livange

Mamer

Bruntál

Esashi

Sakura

Sales companies

and sales partners

in 50 countries

Mysore

Shanghai

Tamsui

Wugu Zhangzhou Xiamen

Seoul

Page 20 of 180

Plansee Group 3

What are we looking for?

Page 21 of 180

Plansee Group 4

Certainty: We want to know if we are doing things right! Clarity on: when should be the ex post approach acceptable and

appropriate and adjustments (timing & consequences on VAT and Customs)

Simplicity: regarding the applicability of TPG

Minimization: of possible disputes with the tax authorities and double taxation issues

Examples

Page 22 of 180

Plansee Group 5

THANK YOU

Page 23 of 180

Working Party No. 6

Public Consultation on the Transfer Pricing Discussion Drafts 12 - 14 November 2012

OECD Conference Centre, Paris

The determination of transfer prices when valuation is uncertain

Presentation by: Matthew Wall CA CBV

MDW CONSULTING INC.

Page 24 of 180

MDW CONSULTING INC. Page 1

Draft Paragraphs 171 - 178(currently Paragraphs 6.28 - 6.35)

Draft Examples 20 - 22 give More Guidance needed

clearer meaning and purpose to restrict the use of hindsight for

to Paragraphs 171 - 178 "exceptional circumstances"

Draft Examples 20 - 22 Draft Paragraphs 3.67 - 3.71(currently Annex to Chapte VI) (currently Paragraphs 3.67 - 3.71)

Certain changes (e.g., Examples) and more Guidance (e.g., Paragraphs 3.67 - 3.71)

needed to mitigate the risk of misunderstanding, misuse and dispute.

1

2 3

Page 25 of 180

Paragraph 171 – 178 of the Intangibles Draft

• Information should be both relevant and reliable for arm’s length pricing. This might be information at the time of the transaction, in the year of the transaction, or at the year-end or tax filing.

Example Product A Product B

Transfer price at the time of the transaction $13.50 $10.00

Transfer pricing adjustment in the year of the transaction 1.50 5.00

Transfer price at the year-end or tax filing $15.00 $15.00

• More Guidance is needed to restrict the use of information after the year-end or tax filing for “exceptional circumstances only” to avoid the potential for misuse, dispute and double taxation.


Page 26 of 180


Key Facts and Assumptions Ex. 20 Ex. 21 Ex. 22

a) Fundamental change in the facts? Yes Yes Yes

b) Foreseeable at the time of the agreement? No No No

c) Following third party terms and conditions? Yes No No

OECD Guidance per Discussion Draft

d) Example adjusts the royalty payment? No Yes Yes

e) Example uses a price adjustment clause? No Yes Yes

f) Example uses hindsight? No Yes Yes

SUMMARY CHART of EXAMPLES 20 - 22 from the Intangibles Draft

(This chart is for discussion purposes only and does not reflect MDW's views or comments.)

Page 27 of 180

Hindsight

The Tax Court of Canada has many cases that consistently state each case must be decided based on the facts and circumstances at the time without the benefit of hindsight.

... the Court must not second-guess the business judgment of the taxpayer ... should not use the benefit of 20-20 hindsight to substitute its judgment for the taxpayer’s judgment ...

... the determination ... was made not with the benefit of hindsight. When expenditures are being incurred by a person, that person does not know what the future will hold. Expenses should not be denied simply because a person, with the benefit of hindsight, made a poor business decision.

... This is easy to say in hindsight but not reasonable ...


Page 28 of 180

Recommendation

Please consider the following guidance to be included: a) A tax administration’s examination of a controlled transaction ordinarily should be

based on the transaction actually undertaken by the associated enterprises as it has been structured by them, using the methods applied by the taxpayer insofar as these are consistent with the methods described in Chapter III.

b) If the contractual arrangements between the related parties include a price adjustment clause or other terms that require the use of information after the fiscal year or tax filing of the transaction, the tax authority should then be allowed to consider and use this information as it relates to the contractual arrangements.

c) If the economic substance of a transaction differs from its form, the tax authorities should then be allowed to consider the actual facts and circumstances (i.e., not assumptions) involving independent enterprises in the same or similar circumstances, and compare this to a transaction between related parties.

d) In other than the exceptional circumstances described above, information after the fiscal year or tax filing of the transaction should not be used to determine or adjust the arm’s length price of a controlled transaction.


Page 29 of 180

References

For further details, please consider:

a) MDW’s comments on the OECD’s Discussion Draft on Intangibles.

b) MDW’s comments on the OECD’s Discussion Draft on Timing Issues.

c) Contacting the presenter at:

Matthew Wall CA CBV MDW Consulting Inc. 416.737.2276 [email protected]


Page 30 of 180

OECD - WP 6 - Special Session on the Transfer Pricing Aspects of Intangibles

Paris, November 12, 2012

www.pwc.de

Dr. Jutta Menninger

Page 31 of 180

PwC

Determination of Transfer Prices when valuation is uncertain: What is “highly uncertain”?

• Current Discussion Draft on Intangibles (DDI): paragraphs 171 - 178

• Par. 171 DDI: When valuation of intangible property at the time of the transaction is highly uncertain. See par. 9.87 TPG

• Par. 9.87 TPG: Transaction of an intangible when it does not have an established value (e.g. pre-exploitation).

• Several disciplines (economics, physics, natural science) provide support, how to deal with risk and uncertainty via statistical tools.

• Valuation practice uses methods like the Monte Carlo Simulation:

- Sensitivity analysis to understand the effect of uncertainty,

- Numerical estimation of probability distribution,

- Random number generators with certain statistical properties.

2

November 2012

Page 32 of 180

PwC

Determination of Transfer Prices when valuation is uncertain: Steps to deal with high uncertainty

• Par. 172 DDI: In determining the anticipated benefits, financial valuation techniques, particularly those based on the discounted value of projected cash flows, may be helpful tools.

• Par. 173 DDI: Shorter-Term agreements or price adjustment clauses

• Par. 174 DDI: Renegotiation of pricing agreements by mutual agreement of the parties

• Par. 175 DDI: The arrangements that would have been made in comparable circumstances by independent enterprises should be followed without using hindsight.

3

November 2012

Page 33 of 180

PwC

Determination of Transfer Prices when valuation is uncertain: Suggested changes to DDI

• Define, what is meant by “highly uncertain”.

• Introduce statistical tools as a means to deal with risk and uncertainty, e.g. in par. 172 and maybe also in example 21.

• In most cases performing a sensitivity analysis based on statistical tools should be sufficient to determine a reliable transfer price at the time of the transaction.

• Alternatively the taxpayer might be allowed to agree a price adjustment clause at the time of the transaction; although it should be noted, that in third party transactions this is not very often the case.

4

November 2012

Page 34 of 180

PwC

Contact WP/StB Dr. Jutta Menninger Partner Transfer Pricing and Valuation Services PwC Munich, Bernhard-Wicki-Str. 8 Phone: +49 89 5790-6400 E-Mail: [email protected]

5

November 2012

Page 35 of 180

Thank you…

© 2011 PricewaterhouseCoopers AG Wirtschaftsprüfungsgesellschaft. Alle Rechte

vorbehalten. In diesem Dokument bezieht sich "PwC" auf die PricewaterhouseCoopers

Aktiengesellschaft Wirtschaftsprüfungsgesellschaft, Frankfurt am Main, die eine

Mitgliedsgesellschaft der PricewaterhouseCoopers International Limited (PwCIL) ist. Jede der

Mitgliedsgesellschaften der PwCIL ist eine rechtlich und wirtschaftlich selbständige

Gesellschaft.

Page 36 of 180

SESSION III

GENERAL DEFINITIONAL APPROACH FOR INTANGIBLES

Speakers:

Jennifer RHEE, Richter Consulting

Vanessa. DE SAINT BLANQUAT, MEDEF

Anne QUENEDEY, SALANS

Page 37 of 180

WWW.RICHTERCONSULTING.COM

Public Consultation with the OECD Definitional Aspects of Intangibles

Paris

November 12 - 14, 2012

Page 38 of 180

OECD Invites Comments on the Scoping of its Project on

Intangibles - 2010

• Need for a clear definition and criteria of “intangibles” for transfer pricing purposes:

– Accounting, legal, economic, or transfer pricing definition.

• Categorization of intangibles:

– “Soft” vs. “hard” intangibles;

– Routine vs. non-routine intangibles;

– Legally vs. non-legally owned intangibles.

• Further guidance on specific types of intangibles:

– Marketing intangibles;

– Know-how and trade secrets.

1 Page 39 of 180

The Scoping Document on Intangibles is Released by the

OECD - 2011

• Specific areas identified for further work in terms of definitional aspects related to intangibles:

– Usefulness of language related to payment for transfers of “something of value” from Chapter IX;

– Relevance and usefulness of accounting, financial valuation, and legal definitions;

– Factors to consider in determining whether or not an intangible is used or transferred:

• Future economic benefits;

• Legal protection;

• Separate transferability.

– Relevance and usefulness of the categorization of intangibles:

• Routine and non-routine intangibles;

• Marketing and trade intangibles.

2 Page 40 of 180

OECD Releases a Discussion Draft on the Transfer

Pricing Aspects of Intangibles - June 2012

• Definition in the Discussion Draft:

– “The word “intangible” is intended to address something which is not a physical asset or a financial

asset, and which is capable of being owned or controlled for use in commercial activities.”

• No reliance on accounting or legal definition of an intangible;

• Legal protection and separate transferability being not necessary conditions for an intangible;

• Distinguish intangibles from market conditions;

• No attempt is made towards the categorization of intangibles;

• A general list of illustrations is provided to give further guidance on identifying intangibles.

3 Page 41 of 180

Comments Provided by the Public on the Discussion

Draft - September 2012

• Majority of the respondents, who provided comments on the definition, see it as too broad and not

precise enough.

4

Too broad, 42%

Good as is, 9% Too narrow, 5%

No comment, 44%

The definition of intangibles is

Page 42 of 180

Comments Provided by the Public on the Discussion

Draft - September 2012

• Major areas of concern of the public with respect to the definition of intangibles:

– An intangible is defined as “something”, and not as an “asset” or as a “property”;

– Transferability of an intangible;

– Legal and/or contractual protection of an intangible.

• Other concerns:

– Categorization of intangibles;

– Goodwill and going concern as intangibles;

– Assembled workforce viewed primarily as non-intangible;

– Group synergies.

5 Page 43 of 180

Questions

• Does the Discussion Draft achieve the objectives established in the scoping document?

• Does the definition of intangibles assist in the following:

– Identify when an intangible asset has been transferred between related companies; or

– Identify the existence of an intangible asset in determining intercompany pricing?

6 Page 44 of 180

General definitional approach for intangibles

Vanessa de Saint-Blanquat

OECD – 12th November 2012

Page 45 of 180

2

Why is a clear definition of intangibles necessary in the area of transfer pricing?

Key concerns:

1. Intangible assets resulting from a subjective view (ex-post analysis, vague definition, valuation, related return, residual profit split …) a) will create intangibles that might not be internationally recognised as such

b) contradicts the aim of the OECD TP Guidelines that transaction and its price can only be determined if its nature is previously and clearly identified

c) creates insecurity for both taxpayers and tax administrations + increases double taxation risks

2. Solution should be based on simple definition and formal process

3. Objective : to protect administration and MNE’s interests (proper allocation of profits & facilitating business economic activities)

Page 46 of 180

What is an asset? What is an intangible? What is an intangible asset?

ASSET

Recognised by legal, contractual or accounting principles and subject to

ownership, control and transferability

INTANGIBLE

3 cumulative factors : protection (ex ante or ex post),

functions (creation, maintenance and management),

costs

INTANGIBLE ASSET

Meets both criteria of an intangible and an asset

(all assets are not intangibles and all intangibles are not assets)

3

Not an asset if not transferrable (excluded : “something”)

Not an intangible if only “right of income”, added-value or expense

Page 47 of 180

What about in practice?

An intangible that is not an

asset

A company owns an intangible and licenses it to its subsidiary, which sells and commercialises the goods or services developed by its parent company. The subsidiary indeed contributes to local market development and needs to earn sufficient margin to reflect this, but does not “co-own” its parent’s intangible because it solely plays a normal role in the value chain

An asset that is not an intangible

If a company restructures its business and ceases to carry out an activity that is transferred to another company in the group (eg: a local company is closed as another company handles its activity with more synergies at a regional level from another country), some assets may be transferred from one company to the other, but such transfer of assets does not imply the transfer of an intangible

4

Process : 2 step analysis 1. Does an intangible exist? (according to the aforementioned definition) 2. How is it included in the TP policy ? (according to economic & functional analysis)

Page 48 of 180

Intangibles : the relevance of property law

definitions, accounting definitions and

separate transferability

Anne Quenedey

Partner

Email : [email protected]

12 November 2012

Page 49 of 180

Relevance of property law definitions

Most detailed comments not in Part A “Identifying Intangibles” (paragraph

7) of the Discussion Draft but in Part B “Identification of Parties Entitled to

Intangible Related Returns” (paragraphs 30 to 36)

What is already acknowledged in the Discussion Draft:

Intangibles protectable under intellectual property registration systems

Intangibles legally protected via unfair competition legislation or other

unforceable laws or by means of employment contracts

“There may also be intangibles whose use is not protected under any

applicable law” (paragraph 32)

However : “Because legal registrations and relevant contracts form the

starting point for an analysis of which members of an MNE group are

entitled to intangible related returns, it is good practice for associated

enterprises to document in writing their decisions to allocate significant

rights in intangibles […].” (paragraph 36)

Page 50 of 180

Relevance of accounting definitions

“Intangibles that are important to consider for transfer pricing purposes

are not always recognised as intangible assets for accounting purposes.”

(paragraph 6)

Comments on the example of research and development costs:

Research and development costs are not always booked as an asset for

accounting purposes (paragraph 6)

Not all research and development expenditures produce or enhance an

intangible (paragraph 10)

accounted : YES = INTANGIBLE

R & D

accounted : NO

accountable : YES = INTANGIBLE ?

accountable : NO

Page 51 of 180

Relevance of separate transferability

Discussion Draft:

“while some intangibles may be identified separately and transferred on

a segregated basis, other intangibles may be transferred only in

combination with other business assets. Therefore, separate

transferability is not a necessary condition for an item to be characterised

as an intangible for transfer pricing purposes.” (paragraph 7)

“It may sometimes be difficult or impossible to segregate or separately

transfer the various intangibles contributing to brand value.” (paragraph

19)

“It is generally recognized that goodwill and ongoing concern value

cannot be segregated or transferred separately from other business

assets.” (paragraph 21)

Transferability separate or not is a necessary condition

Page 52 of 180

SESSION IV

CATEGORIES OF INTANGIBLES

Speakers:

Ronald VAN DEN BREKEL, Ernst & Young

Wendy NICHOLLS, Grant Thornton UK

Page 53 of 180

Discussion Draft on Intangibles

OECD Public Consultation 12 November 2012

Ronald van den Brekel, Ernst & Young

Page 54 of 180

Agenda

► Introduction

► Use of concept

► Points of attention

Page 55 of 180

Introduction

► Section D.1.(vi) Intangibles: ► An intangible (i) that is not similar to intangibles used by or

available to parties to potentially comparable transactions, (ii)

whose use in business operations (e.g. in manufacturing, provision

of services, marketing, sales, or administration) is expected to yield

greater future economic benefits than would be expected in the

absence of the intangible, and (iii) whose use or transfer would be

remunerated in dealings between independent parties, will be

referred to as a Section D.1.(vi) intangible.

► Unique and valuable intangibles vs. routine intangibles in

context of comparability

► Relationship with profit split

Page 56 of 180

Use of having a definition of a unique and valuable intangible

► Welcome attempt to clarify “unique and valuable”

► DD par 121: “only where the intangibles in question can be clearly and distinctly identified and where the intangibles are manifestly section D.1.(vi) intangibles.

► Relationship with “unique and valuable contributions”

► Comparability ► 1) tested party = “routine” function -> avoid (routine) rejection of

comparables

► 2) tested party = intangible owner -> proposed concept might lead to (routinely) rejecting CUT’s

Page 57 of 180

Points of attention

► Concept

► Avoid “artificially” splitting an intangible into several “micro

intangibles” or otherwise “unbundling” or “atomizing” intangibles

► To distinct between unique/valuable and routine. However: risk

that comparability factors by “backdoor” are promoted to

intangibles -> to be clarified

► Definition in draft

► Replace by more natural term

► Subjective and circular -> to be further elaborated

Page 58 of 180

Ernst & Young

Assurance | Tax | Transactions | Advisory

Ernst & Young is a global leader in assurance, tax, transaction and advisory services. Worldwide, our 167,000 people are united by our shared values and an unwavering commitment to quality. We make a difference by helping our people, our clients and our wider communities achieve their potential.

Ernst & Young refers to the global organization of member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit www.ey.com.

© 2012 EYGM Limited.

All Rights Reserved.

This publication contains information in summary form and is therefore intended for general guidance only. It is not

intended to be a substitute for detailed research or the exercise of professional judgment. Neither EYG Limited nor any

other member firm of the global Ernst & Young organization can accept any responsibility for loss occasioned to any person

acting or refraining from action as a result of any material in this publication. On any specific matter, reference should be

made to the appropriate advisor.

Page 59 of 180

© 2012 Grant Thornton UK LLP. All rights reserved.

Categorisation of Intangibles: Should the Discussion

Draft Distinguish Between Routine vs. Unique and

Valuable Intangibles?

Wendy Nicholls

Partner, Head of Transfer Pricing

Grant Thornton UK LLP

Page 60 of 180


Routine vs Non-routine: not helpful; not clear; not useful?

• Are 'routine' intangibles something that protects the business from competition

but do not create super profits?

• If so, 'routine' intangibles are presumably assets or rights used in the ordinary

course of business, for example brought into being by

'normal' levels of expenditure on marketing (by distributors) or

know-how that is widely available in the market (by a manufacturer or

service provider)

• Our (and some other contributors') views are that intangibles must be capable of

separate transferability for a consideration

• Hence, we do not consider that most 'routine' intangibles would be intangibles

and the distinction would be moot

• The Draft suggests 'separate transferability is not a necessary condition...' (para

7) but does seem to agree that the routine vs non-routine distinction is not

necessary and the approach should 'not turn on these categorisations' (para 13)

Page 61 of 180


Routine vs Non-routine: are they terms used by business?

• Is a 'routine' intangible actually an intangible at all?

• Is it an arbitrary distinction? Are these terms used by businesses?

• Is there a 'bright line' between what is routine and what is not?

• Does one extra euro of marketing spend require the parties to share the

intangible related returns? Is that consistent with third party behaviour?

• We agree not all intangibles, even unique ones, are valuable (consider all the

redundant patents that gather dust on shelves) or consistently maintain that

value throughout their lives.

• We also agree that the distinction between valuable intangibles (which would

generate extra profit potential and which one might be able to sell) and other

intangibles is vital to get the transfer pricing right

• The concept of 'unique and valuable' is therefore a helpful distinction (see para

128 regarding profit split and para 2.109). Distinguishing the term 'unique and

valuable' reduces the need for inclusion of the term 'routine'.

Page 62 of 180


Routine vs Non-routine: suggested way forward

• Whilst para 13 suggests that WP6 has not relied on the routine vs non-routine

distinction, references are made to it in para 108 (residual profit split), para 148

(financial projections) and again in para 166 (useful life)

• If, as we and presumably WP6, believe, the routine vs non-routine distinction is

arbitrary, tends towards over simplistic assumptions and does not add clarity to

the analysis of who should get 'intangible related returns', then these

inconsistent references should be removed

• In conclusion:

We agree with WP6's view that there should not be a distinction between

routine and non-routine intangibles

We consider that the distinction between 'unique and valuable' intangibles

and other intangibles is vital to get the transfer pricing right

Further guidance on comparability is needed in this area (especially

qualitative factors) and work is required to make the wording in the Draft

more internally consistent

Page 63 of 180

SESSION V

TREATMENT OF GOODWILL AND WORKFORCE IN PLACE

Speakers:

Caroline SILBERZTEIN, Baker & McKenzie

Agata UCEDA, International Tax Centre, Leiden

Laurence DELORME, A3F

Page 64 of 180

BAKER & MCKENZIE GLOBAL TRANSFER PRICING AND GLOBAL TAX

POLICY GROUPS

Goodwill and transfer pricing

OECD consultation, 12-14 November 2012

Caroline Silberztein, Partner

[email protected]

Page 65 of 180

Need clear definition(s) for an "important and monetarily

significant" TP intangible: different words for fundamentally

differing concepts (not a mere question of “context”):

Name Proposed definition Reference

Goodwill Portion of the purchase price, paid in

the context of an acquisition of an

entire business, which is not allocable

to any identified asset of said

acquired business

Accounting

Going concern A business or activity which is not

about to be liquidated

Accounting

Common law

goodwill

Clientele, activity Legal

Profit potential Expected future profits / losses Not an intangible asset but

a concept used for

valuation purposes; see

Glossary and TPG 9.66

Reputational

characteristics

Reputational characteristics of

otherwise existing assets

Comparability factors

2

Page 66 of 180

Examples could be improved if it was made clear

what notion they are referring to:

– Example 13 : “… over the years of its operation in branch form,

Ilcha developed substantial goodwill and ongoing concern value

in country B. The transfer of the going business to Company S…

implicitly conveys the value of that continuing goodwill to

Company S” => Valuation of assets transferred in combination?

– Example 14: Whether Company S is or is not ”entitled to

intangible related returns associated with goodwill in respect of

Product Y created through the advertising costs it has borne.”

=> Product-related marketing intangible?

– Example 15: “Depending on the facts, a substantial portion of the

value described in the purchase price allocation as goodwill of

Company T may have been transferred to Company S together

with the other Company T intangibles… may have been retained

by Company T.” => Premium paid above identified asset value? 3

Page 67 of 180

Goodwill (accounting definition, “survaleur”) may

arise from a number of factors, for instance:

– Intangible assets which are not identified or are specifically allocated

to goodwill for accounting purposes

– Control premium paid by the acquirer,

– Premium to exclude competitors from the acquisition

– Premium paid because of anticipated synergies with the

acquirer's other assets or activities (may or may not materialise)

– Over-optimistic evaluation by an acquirer who has imperfect

information on the assets and liabilities of the acquired entity

(as is always the case in arm's length acquisitions)

– Etc.

Goodwill should therefore not be assumed to systematically

correspond to the value of assets of the acquired entity;

Goodwill value may or may not disappear, depending on the

facts and circumstances of each case.

4

Page 68 of 180

BAKER & MCKENZIE GLOBAL TRANSFER PRICING AND GLOBAL TAX

POLICY GROUPS

Thank you for the opportunity to share

our views and contribute to the debate

on this important OECD project.

Page 69 of 180

Goodwill definition Accounting: purchase price minus fair market value of assets

Psychology (buyer): bigger ego of the CEO -> bigger goodwill

Commercial/Legal: good reputation, clientele and established (assembled) well run business

Other languages: fondo de comercio (well established, synergies of the business)

Etymology: hope that "good will" come and several religious meanings

Synergy and established/assembled business common factor in all definitions

In all cases the concept has an objective/intrinsic component and (often more dominant) subjective/external component

Date of presentation Insert filename here 1 Page 70 of 180

Goodwill measurement Value, like beauty, is in the eye of the beholder

Aggregate value of assets vs. sum of separate tangibles and intangibles (definition in draft par. 20) ~ what is the difference to synergies?

If all intangibles assets are already identified and valued AND synergies, market circumstances, assembled workforce and other factors are considered in the comparability analysis: is there anything left?

Is there really anything left?

Most likely not, but if there is, that must be "goodwill"

Proposition: goodwill for transfer pricing purposes as the synergies resulting from having certain Functions Risks and Assets established


Can you count the black dots?

Date of presentation Insert filename here 3

Page 72 of 180

Why does it matter? For transfer pricing purposes goodwill matters primarily when

buying/selling assets intercompany: is there any goodwill? where? how do we account for it?

Possible scenarios: When selling going concern (full business): what happens to goodwill?

When selling only some fixed or intangible assets whereas rest of the business stays: what happens to goodwill?

When selling a combination of Functions Risks and Assets ("FRAs") while some FRAs stay locally: what happens to goodwill?


The OECD public consultation on the Discussion Drafts on issues related to Transfer Pricing Safe Harbours, Timing Issues and Intangibles

The OECD Conference Centre, Paris

12-14 November 2012

Discussion Draft (« DD ») on Intangibles Provisions on Assembled Workforce

Laurence Delorme

Page 74 of 180

Assembled Workforce in DD Section A paragraphs 25 & 26, and section D paragraph 124

Comparability factor

impacting arm’s length price for services

(25) Existence of a uniquely qualified/experienced employee group may affect arm’s length price for services provided or goods produced

(26) Transfer of an existing assembled workforce may provide a benefit to the transferee by saving it expense/difficulty of hiring and training new workforce

(26) Transfer or secondment of isolated employees does not, in and of itself, constitute the transfer of an intangible

(124) Comparability adjustments may be required for matters such as assembled workforce. While such factors may not be intangibles (within meaning of section A.1.), they can nevertheless have important effects on arm’s length prices in matters involving the use of intangibles.

Intangible

capable of being transferred for a price

(26) Contractual rights and obligations MAY be intangibles within meaning of section A.1, so that a long term contractual commitment to make available the services of uniquely qualified employees MAY constitute an intangible

(26) As a factual matter, a transfer or secondment of employees MAY result in the transfer of valuable know-how or trade secrets for which compensation MAY be required in arm’s length dealings.

12 November 2012 A3F Association Française des Femmes Fiscalistes 2 Page 75 of 180

Business comments (1/2)

• Ambiguities in DD

(i) what is meant under “transfer of an assembled workforce”, and

(ii) whether “assembled workforce” qualifies as an intangible (within the meaning of section A.1 of the DD), or comparability factor (paragraph 124)

• Clarifications needed

Circumstances when “a long term contractual commitment to make available the services of

uniquely qualified employees may constitute an intangible”

– Employer entitled to claim compensation from an employee, based on e.g. unfair competition legislation or labour law, employment contract restricting employee’s freedom (non compete, non disclosure agreement, star athletes’ contracts)

– Where this is the case based upon legal rights and obligations, transaction to be valued would relate to know-how and trade secrets themselves (or to value provided in the contract), and not to group of employees

• Clarifications and practical guidance needed

– How in practice to undertake comparability adjustments for differences in factors such as assembled workforce


Business comments (2/2)

• Employee secondments (international mobility within MNEs)

– Globalization, division and specialization of labour within MNEs – Economic necessity for cooperation on an international basis => extensive secondment

programs for engineers and management executives – Seconded employees retain employment contract with home office and remain on home

payroll – Service transactions, appropriately compensated with a cost or cost plus method – Skills and expertise as comparability factors only, not intangibles

• Assembled workforce

– Cannot be “owned or controlled” by the employer, hence cannot be sold or licensed independently of the entire business to which the workforce relates, i.e. issue of “transfer of an assembled workforce” arises only as part of a business transfer

– As such, to be considered as business attribute that influence the value of an MNE’s assets, but not to be qualified as an intangible asset

– Assembled workforce is NOT an intangible within the meaning of section A.1 – Assembled workforce can contribute to the development of intangibles (e.g. know-how and

other legally protectable intangibles), and should be taken into consideration in transfer pricing comparability analysis


SESSION VI

DOES THE DISCUSSION DRAFT FOCUS TOO HEAVILY ON

RESTRAINING ABUSIVE BEHAVIOUR?

Speakers:

Georg GEBERTH, BIAC

James PHILLIPS

Page 78 of 180

Seite 1/5 November 2012 Georg Geberth (Siemens AG)

Public Hearing on the treatment of Intangible

Assets

12th November 2012

Paris

Does the Discussion Draft focus too heavily on

Restraining Abusive Behaviour?

Page 79 of 180


Businesses need a clear Definition of „Intangible“ not driven by Anti-Abuse

The draft definition (« something ») is too vague and clearly driven by

anti-abuse thoughts. Businesses need more clarity.

Foundation of a Definition of Intangibles

• Legal principles

• Accounting Principles

• Contractual arrangements

Possible elements of a definition

• An asset

• Being capable of being owned and controlled

• Separately transferrable

Page 80 of 180


Business concerns over Anti-Abuse Language

The draft implicitely focuses on abuse by mentioning numerous times

that legal consequences apply only « where the parties’ conduct is

aligned with contracts » etc.

Examples:

• In total this or a similar wording is being used in at least 13 Paragraphs (29,

35, 37, 38, 40, 41, 42, 44, 46, 48, 55, 66, 180)

• It would be better to have a clear wording, without mentioning the possibility

of an abusive behaviour in all those cases

• Instead, a general clause could be added at the end of the text

Page 81 of 180


Instead, Businesses need a clear Allocation Process

The draft does not define a clear and reliable process for the Allocation

of Intangible Assets. Businesses need more certainty.

Allocation of Intangibles:

• Who owns legal protection?

• Who performs functions in relation to the ownership, the maintenance or the

management of the intangible?

• Who incurs costs in relation to the intangible?

• Right to earn income from exploiting the asset

• Right to exclude others from exploiting the asset

• Right to transfer ownership or use of the asset to another owner

Page 82 of 180

Does the Discussion Draft focus too heavily on restraining abusive

behaviour?

Tuesday 13 November

James Phillips Comments are provided in a personal capacity only

Page 83 of 180

• The purpose of the OECD Guidelines should be to provide a common and objective framework, acceptable to both businesses and tax administrations, multilaterally, to help reduce the risk, and the incidence, of double or less than single taxation.

• The purpose of the OECD Guidelines is not to provide, or substitute for domestic, anti-avoidance or anti-abuse guidance or legislation.

• Unfortunately, the general tone of the current draft, no doubt a reflection of governments under domestic political pressure to increase tax yields from MNEs, seems to emphasise a preconception of, certain, tax administrations that the OECD Guidelines are an avoidance tool used by multinationals to avoid taxation which is their due.

• Whilst it may seem self-evident, it does bear repeating that MNEs are just as worried about double taxation as Tax Administrations and their governments are about less than single taxation, and this dynamic can impact investment decisions.

• This is most particularly true at the interface between Developed and Emerging Economies and intangibles are a frequent source of concern on such issues.

Introductory comments

Page 84 of 180

• The organisation and structuring of IP by an MNE is often done for wholly legitimate business reasons and it should not be seen as some form of automatic indication of aggressive tax planning.

• It is best practice for businesses to ensure strong control, which can often mean centralised control, of all of their high-value assets and this is even more true of intangible assets which are at particular risk of being exploited in an unauthorised manner.

• Businesses are required to respect the arm’s length principle, including for their intangibles - it is not a choice and correct transfer pricing is, in nature, a compliance obligation.

• Whilst profit splits for intangibles may superficially appear tempting, their current emphasis in Chapter VI is likely to generate serious unwanted consequences, particularly in relation to materially higher compliance burdens and costs for MNEs and significantly greater incidences of double taxation.

• Chapter VI, once finalized, should strive to continue the OECD’s solid track record in guiding Tax Administrations and MNEs alike in their interpretation of Article 9, particularly in such a difficult topic area as intangibles.


Page 85 of 180

• The OECD Guidelines and Chapter VI must therefore continue to be fundamentally based around what independent parties would do in unrelated transactions – i.e., they must reaffirm the pre-eminence of the arm’s length principle in the context of the transfer pricing of intangibles.

• More specifically, the Guidelines should focus around their primary and founding purpose – to provide an acceptable structure for taxpayers and tax administrations to work within in order to help avoid double and less than single taxation and, by so doing, allow international trade to grow and do its part to help rebuild the world economy.

• Using the OECD Guidelines other than for determining the arm’s length principle is to render the consensus weakened for increased international trade which has been so important in helping deliver economic growth, and reducing global poverty, over the last 20 years.

• The current financial crisis will, eventually, pass - it is far from historically unique. If, however, an additional long-term impact of the Great Recession is to retrench cross-border trade by reducing opportunities for profitable gain via the institutionalisation of double taxation, its legacy will be even more negative than it already is.


Page 86 of 180

SESSION VII

DOES THE DISCUSSION DRAFT PLACE TOO MUCH EMPHASIS ON

PROFIT SPLIT APPROACHES?

Speakers:

Gary SPRAGUE, Treaty Policy Working Group

Arnaud LE BOULANGER, CMS Bureau Francis Lefebvre

Page 87 of 180

TREATY POLICY WORKING GROUP

Does the Discussion Draft Place Too Much

Emphasis on Profit Split Approaches?

OECD WP6 Consultation, 12-14 November 2012

Gary D. Sprague, Partner ([email protected])

Holly E. Glenn, Principal Economist ([email protected])

Page 88 of 180



Discussion Draft Does Place Too Much Emphasis

on Profit Split Approaches

– Under the most reliable method requirement of the TPG, a method other than

the PSM normally is the most appropriate method to apply to many

transactions involving rights in or use of intangibles.

– All other methods (except CUP) are based directly on comparable entities

which themselves own and exploit the important intangibles necessary for

their business.

Comparable distribution entities may own client lists, operate in fast growing

markets, employ an experienced sales force, and have experience in branded

goods distribution.

Comparable manufacturing entities may own process technology, employ a

skilled workforce, and own highly sophisticated production assets.

Comparable R&D entities may employ highly skilled engineers, have deep

expertise in the industry, and have a long track record of developing successful

products.

– “Comparable” does not mean “identical”. It means no material differences, or

that material differences can be addressed with “reasonably accurate

adjustments”. TPG 1.33.

– Assuming reliable comparables (with comparability adjustments when

needed), a one-sided method is appropriate in most cases and a CUP method

also normally is more reliable than a PSM.

2 Page 89 of 180

Existing TPG Guidance on Selection of Methods

Normally Can Apply

– One-sided methods normally should apply when local entity is not making

unique contributions. TPG 2.59, 3.18, 3.19.

TPG 2.109 refers expressly to contract manufacturing and contract service

activities.

– The use of intangibles that are normal to the function is not a reason to use a

two-sided method. TPG 2.60.

Examples: distribution of branded goods, deployment of experienced

development team, manufacturing using process intangibles.

We agree with DD para. 87 on this point.

– Comparability adjustments can be made as necessary. TPG 2.68.

Example: adjustments can account for differences in technology in product,

barriers to entry, growing market share, etc. TPG 2.72.

– The TPG provide additional tools to increase reliability.

Use of the arm’s length range. TPG 2.73.

Choice among different possible net profit indicators. TPG 2.76.

3 Page 90 of 180

Discussion Draft Should Focus on Reliability

– PSM frequently is an appropriate method when exploitation and further

development rights are transferred, as both sides to the transaction typically

are making unique and valuable contributions.

– PSM is not the most appropriate method when reliable comparables exist to

used a one-sided method.

Use of PSM, usually without comparable data, generally requires economically

complex and frequently controversial assumptions.

Fact that a group is profitable or that “something of value” may exist in an

entity’s business is not a principled reason to employ PSM.

PSM will also require loss sharing, if method is applied consistently.

– Recommendations:

Discussion Draft should acknowledge cases where one-sided methods normally

are appropriate.

Further guidance could be provided on comparability factors and on use of

comparability adjustments to improve reliability of one-sided methods in

transactions involving the use of intangibles.

Further guidance could be provided in TPG 3.38 and 3.39 for cases where

availability of local comparables is limited.

Paras. 128, 136 and 141 should be reconsidered.

4 Page 91 of 180

TREATY POLICY WORKING GROUP

Thank you for the opportunity to share our

views and contribute to the debate on this

important OECD project.

Page 92 of 180

|

OECD – Public consultation on transfer pricing discussion

drafts - Intangibles

Does the Discussion Draft Place Too Much Emphasis

on Profit Split Approaches?

Arnaud Le Boulanger, CMS Bureau Francis Lefebvre

Partner, Chief Economist

13 November 2012


Page 93 of 180

|

Does the Discussion Draft Place Too Much Emphasis on

Profit Split Approaches?

– Many commentators (more than 25) discuss in their response the fact that

the discussion draft places too much emphasis on Profit Split approaches, or

at least present drawbacks of this method that may not be sufficiently

addressed in the document

• Why do respondents largely appear to express the same general comments?

• Recommendations to better balance the merits and drawbacks of the Profit Split

method compared to others

13/11/2012 2 Page 94 of 180

|

Why do so many respondents believe that the discussion

draft places too much emphasis on Profit Split approaches?

– The proposed guidelines set quite significant restrictions to the use of

any methods…

– Standards required for comparability purposes have been raised again to a level

that may disregard the concept of reasonableness expressed in Chapter I of the

OECD Guidelines

– The draft includes a very interesting discussion on valuation techniques.

However, the draft is largely focused on the drawbacks of these methods and on

the degree of subjectivity required to apply them

– Other methods, such as some one-sided ones as the TNMM, are not specifically

discussed in the draft

– … except to the use of the Profit Split method

13/11/2012 3 Page 95 of 180

|

Recommendations to better balance the merits and

drawbacks of the Profit Split method compared to others

– Does the Discussion draft miss some drawbacks of the Profit Split method?

• Is this really a method that unrelated parties would use for intangibles?

– Unrelated parties only rarely share any information regarding their profits, in transactions involving strategic assets such as intangibles

– In what circumstances would unrelated parties use it for intangibles?

– How to minimize possible debates between taxpayers and tax administrations over Profit Split approaches when applied to transactions involving intangibles?

• In our experience, Profit Split methods that create less debates between taxpayers and tax administrations are generally those based on allocation keys using obvious, quantitative data readily available such as costs or workforce.

• Is this applicable to transactions involving intangibles?

13/11/2012 4 Page 96 of 180

SESSION VIII

INTANGIBLES:

ENTITLEMENT TO INTANGIBLE RELATED RETURNS

Speakers:

Alison LOBB and John HENSHALL, Deloitte

Linda FERNANDEZ, Transfer Pricing Discussion Group

Page 97 of 180

© 2012 Deloitte LLP. Private and confidential.

The treatment of risk and control of risk, including the consistency of the draft with Chapter IX TPG

Revision of Chapter VI Special Considerations for Intangibles

WP6 Public Consultation

13 November 2012

John Henshall, Partner, Deloitte

Page 98 of 180


Recognition of the arm’s length principle • Intangible property rights are commercial assets; a form of monopoly granted

by law.

• The arm’s length principle requires that MNEs follow what happens between

unrelated parties according to IP laws and commercial practice.

• The Guidelines need to help MNEs and tax authorities to understand what

happens between unrelated parties and how to gather evidence to show

compliance with the arm’s length principle. The level of functional control

required is therefore that which an independent party would be expected to

have in comparable circumstances.

• Where comparable data exists to show the allocation of risk associated with

intangible-related activity, this is the best material that MNEs and tax authorities

can provide to evidence compliance with the arm’s length principle. If such

evidence is available, and comparability adequately assessed, then compliance

with the arm’s length principle has been satisfied.

• Where such third party evidence is not available, then, as for functions, the

guidance should take into account the allocation of risk when allocating

intangible related returns. In that case, is there consistency with Chapter IX?

2 OECD WP6 Public Consultation Nov. 2012 Page 99 of 180


Consistency with Chapter IX (Business Restructuring) • Inconsistency can arise between Chapter VI and Chapter IX only if the

guidance in either one would lead to a non-arm’s length result.

• Per Chapter IX the examination of risks should start with the contractual

arrangements between the parties. The three additional questions that should

be asked also apply to intangibles: ‒ Is the allocation of risks in the controlled transaction arm’s length?

‒ Does the conduct conform to the contractual allocation?

‒ What are the consequences of the risk allocation?

• The impact of the allocation of risk, and conduct of the parties, is decided for

independent parties by IP law. Chapter VI must respect that position under the

arm’s length principle.

• Commercial court cases around the world provide one source of evidence of

how third parties should agree the impact of risk and activity allocation on the

right to enjoy a return from intangibles. This material should be used when

available to provide factual evidence of arm’s length behaviour, and in particular

takes into account the relative bargaining power of the parties.

• See for example • Jay-Lor International Inc et Al v Penta Farm Systems Ltd et Al 2007 FC358,

• Allied Signal Inc v Dupont Canada Inc (1998) 78 CPR (3d) 129,

• Uniloc USA Inc v Microsoft Corp., 632 F.3d 1292 (Fed. Cir. Jan 4, 2011) and

• Meridian International Services Limited v Richardson &ors (08) EWCA Civ 09



Treatment of risk if no arm’s length evidence available

• Relevant (but not conclusive) factors to consider in determining whether

arrangements are arm’s length are

• functional control of and capability to undertake risks; and

• financial capacity to bear the associated risks; and

• commercial “reality” of the transaction, including evidence of arm’s length behaviour in

a commercial setting or dispute.

This is consistent with Paragraph 9.22 of Chapter IX:

• It is only in the absence of comparable transactions evidencing the consistency

with the arm’s length principle of the risk allocation in a controlled transaction

that the examination of which party has greater control over that risk is relevant;

• In such circumstances, the examination of which party would have greater

control over the risk “...can be a relevant factor”, meaning both that it need not

be a relevant factor and that even if it is, it is not the only (or determinative)

factor; and

• The financial wherewithal to bear risk is also a relevant but not determinative

factor.



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each of which is a legally separate and independent entity. Please see www.deloitte.co.uk/about for a detailed description of the legal structure of DTTL and

its member firms.

Deloitte LLP is the United Kingdom member firm of DTTL.

This publication has been written in general terms and therefore cannot be relied on to cover specific situations; application of the principles set out will

depend upon the particular circumstances involved and we recommend that you obtain professional advice before acting or refraining from acting on any of

the contents of this publication. Deloitte LLP would be pleased to advise readers on how to apply the principles set out in this publication to their specific

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Page 102 of 180

Topic: Entitlement to Intangible-

Related Returns Under DDI

Transfer Pricing Discussion Group (“TPDG”) Founded and Chaired by Steven Hannes,

McDermott Will & Emery

Presentation for TPDG by Linda H. Fernandez, J.D.

Eli Lilly

OECD Business Consultation on 2012 Discussion Draft on Transfer Pricing For

Intangibles (“DDI”) November 12-14, 2012

Page 103 of 180

2

Return Entitlement

• TPDG supports DDI’s introductory statement: where relevant registrations and contractual arrangements align with the conduct of the parties, the party entitled to use the intangible (and exclude others from using it) is the party entitled to intangible returns.

• TPDG strongly disagrees with (a) the DDI’s extreme “expectation” that entity claiming entitlement to returns from intangibles will perform, through its own employees, the important functions for development, enhancement, maintenance and protection of intangibles and (b) the DDI’s proposed requirement that the entity “control” important functions.

• TPDG’s objections to the “expectation” and control requirement.

– Inconsistent with third party conduct in the marketplace; an inappropriate, theoretical substitute for the arm’s length standard’s traditional reliance on facts.

– Third parties are often hired to provide services related to intangibles (R&D, marketing, and so forth); the hiring party does not control the services provider.

– Inconsistent with principles of OECD’s Transfer Pricing Guidelines (“TPG”) allowing outsourcing, whereby hiring party has capacity to decide to put its capital at risk.

– Conflicts with the fact-based and commercially-realistic standard in the DDI (e.g., Example 11) and OECD TPG for return entitlement for intangibles that are licensed.

• TPDG’s other objections to DDI’s “control” proposal.

– “Control” is not defined nor easily definable; it is not an administrable standard.

– A hiring party does not “control” a third party service provider, but it does have the capacity and expertise to enter into the contract and to bear its own risks.

Page 104 of 180

3

Return Entitlement

• Issue of Risk – The hiring party bears risks on discovery, development, enhancement, etc., but the service

provider has its own risks & opportunities.

– The OECD TPG need to clarify and recognize the different types of risk borne by the hiring

party and the service provider.

• TPDG Proposals

– The legal or contractual owner of the intangible asset that bears risks and owns opportunities should be entitled to claim intangible returns for tax purposes.

– Outsourcing of functions related to intangible discovery, development, enhancement, etc. by an “informed hiring party” with financial capacity and expertise should not jeopardize its ownership of intangibles or its entitlement to intangible-related returns.

– To the extent the intangible owner outsources many or most functions related to discovery, development, enhancement, etc., its status as intangible owner entitled to returns can be questioned by the tax authority, but the taxpayer will have the opportunity to establish as a fact that it is an “informed hiring party.” In other words, that it has the financial capacity and expertise to agree to a budget or other contractual terms with the service provider as well as to determine that the contract’s terms are followed.

Page 105 of 180

4

Return Entitlement

• Concluding TPDG Observations

– Chapter VI should use fact-based approaches anchored in the marketplace for determining entitlement to intangible related returns for both licensed intangibles and intangibles that are discovered, developed, enhanced, etc. by way of services performed by others, whether related or unrelated.

– In general, OECD TPG for intangibles (and other) pricing should avoid the DDI’s proposed reliance on speculation and theories about how either the related parties or unrelated parties “should” or “would” structure transactions or otherwise behave. Chapter VI should consistently rely on the related parties’ facts and the facts of the chosen comparables.

– Courts make decisions based on facts, not theories of behavior. Tax authorities should do the same to determine entitlement to intangible-related returns.

– The OECD TPG should consistently emphasize that before rejecting transactions or companies as “insufficiently reliable” to be used (perhaps with adjustments) as “comparables” in connection with intangibles (and other pricing matters), one must consider the relative (un)reliability of the theoretical alternatives (e.g., almost all profit splits of the residual).

* * *

Page 106 of 180

SESSION IX

INTANGIBLES:

ENTITLEMENT TO INTANGIBLE RELATED RETURNS

(CONTINUED)

Speakers:

Catherine SCHULTZ, National Foreign Trade Council

Kate NOAKES, Fidal International Direction

Ian BRIMICOMBE, AstraZeneca

Page 107 of 180

Goals of Guidance

• Conceptually sound and principled: conforms to the arm’s length principle

• Clear: can be administered by tax authorities and complied with by MNEs

• Objective: leads to predictable results and thereby avoids uncertainty and disputes

Page 108 of 180

Role of Registrations & Contractual Arrangements

• Rights to intangible property typically arise from registrations and contractual arrangements

• At arm’s length, persons with the legal right to use (and exclude others from using) intangible property can derive significant expected returns from such rights. Actual returns from intangible property may be disproportionate to the costs of obtaining or developing the rights.

• In an associated enterprises setting, the arm’s length principal therefore requires that legal rights under contractual or other legal arrangements serve as a starting point for the functional analysis. Further, such rights typically attract the residual returns from the use of the intangible property given that the returns from other related assets or functions (such as R&D, marketing, or other intangible development functions) likely are easier to benchmark.

Page 109 of 180

Disregard of Transactions, Registrations and Contracts

• The arm’s length principle requires that legal and contractual arrangements, which govern the allocation of risk and the ownership of assets, be respected except in rare and unusual circumstances

• Rare and unusual circumstances include only where the conduct of associated enterprises is not consistent with the transaction or contractual arrangements

• The functions performed by associated enterprises may be consistent with a broad range of potential legal or contractual arrangements and therefore will usually not be reliable as the primary basis for determining the return for an individual intangible

• A standard that permits tax authorities to disregard legal or contractual arrangements when it believes that parties at arm’s length “would have” structured their arrangements in a different manner would not be consistent with the arm’s length principle, would be impossible to administer on a uniform basis, would substitute the administrative judgment of the tax authorities for the business judgment of the taxpayer, and would lead to increased uncertainty and disputes

Page 110 of 180

Compensation for Marketing activities -

Paragraphs 49-51 of the OECD Draft on

Intangibles and Examples 3-8

Kate Noakes, Partner – FIDAL

International Direction, Paris.

Page 111 of 180

The existing paradigm Is it still fit for purpose? What needs to change?

Reward follows functions, assets (including IP) and risks – so far so good - what

is wrong with this picture?

Often used with broad comparables data to set operating profit margin targets

(resale price) or cost plus service fees for broad categories of entities with no IP

related reward to the Marketeer, little if any to the Limited Risk Distributor (lower

part of the range), and some for the Full Risk Distributor (higher part of the

range).

Functions, Assets, Risks

Reward

Marketeer

Limited Risk

Distributor

Full Risk

Distributor

Page 112 of 180

Issues to consider

Is the existing paradigm is too simplistic?

Easy to understand, apply and defend on one level, but it is potentially

unsophisticated – where in the range to target? – how to make proper

comparison with third party IP use/risk given lack of transparent

information?

Potentially ignores marketing/brand related IP development functions

and risks; changes to IP and its use over time; exclusivity of

contractual arrangements; length of contract; stage of market

development; global versus local marketing and brand development

AND the very difficult questions of how to factor these into price

setting, cost reimbursement by brand owner and so on

In practice, will we end up changing anything?

When are royalties appropriate and when is profit split appropriate?

Page 113 of 180

OECD WP 6

Ian Brimicombe

Group Head of Tax and Treasury

13 November 2012

Entitlement to Intangible Related

Returns: The Importance of

Performance of Important Functions

and Control

Page 114 of 180

Performance of Important Functions and

Control

• Identify important functions

• Assess whether a function creates valuable intangibles

• Performance of functions

• Risk and cost

• Control

• Where are the fault lines for transfer pricing related to

intangibles?

•Draft discussion document on intangibles

2

Page 115 of 180

Identify Important Functions

• Understanding the taxpayer business – at a group level

• Activities

• Build and Run spend (balance sheet and P/L)

• Products/Services and component parts

• Markets

• Risks within the group’s control

• Dynamics and trends – growth and decline of products, markets, technologies, brands

• Global functions and organisational structure

• People, capabilities and culture

• M&A activity

• Value drivers (intangibles; barriers to entry etc)

• Taxpayer contracts

• A division of responsibilities, activities, risks, costs of each party

• Relate this division between related parties to the group picture

• Assess the taxpayer entity in the group context for relative assessment

3

Page 116 of 180

Assess whether a function creates valuable

intangibles

• Commercial expenditure / activity does not necessarily create

an intangible or valuable intangibles

• Manufacturing tablets – comparable know-how

• Sales force – commoditised know-how (not uniquely qualified)

• AZ logo – value?

• Not all intangibles deserve separate compensation or premium

returns

• Normal returns may well apply e.g. Patent administration

• Look for economically significant intangibles in the context of

the global business under review

• R&D

• Brands

• Licenses

4

Page 117 of 180

Performance of functions

• An understanding of the division between entities of the

functions that generate economically significant intangibles

is critical to the transfer pricing analysis

• What do we mean by performance of function?

• Conduct and contractual alignment is very important (walking the talk)

• No need to physically perform the function

• Arrange under its control via independent or associated parties (outsourcing)

• Retained capability and expertise needed to exert control and risk/cost bearing

are key indicators of performance of a function that may entitle returns on

intangibles

5

Page 118 of 180

Risk and cost

• Bearing risk

• Incurring cost and the financial capacity to meet downside risks

• Being subject to volatility of possible outcomes of an investment decision

• Risk and cost are relatively simple to align to a legal entity structure i.e. a

potential fault line in transfer pricing

• Financial capacity to invest and bear risk is necessary but not sufficient and

does not on its own equate to performance of a function

• Alignment of costs, risks, competent risk management and control / decision

making = functional performance and entitlement to returns on valuable

intangibles

• Service providers also have risk – failure to deliver service, negligence, stock

mismanagement, foreign exchange, specific performance metrics etc but would

not be entitled to an intangible return

6

Page 119 of 180

Control

• Control means capacity/capability to make decisions on investment and

associated risk management

• How far does a principal have to control the risks associated with the

development, enhancement, maintenance and protection of the

intangibles?

• A rigid interpretation i.e. 100% of control must reside in the party claiming

an intangible return would be inconsistent with third-party commercial

behaviour in outsourcing arrangements

• Day to day control of local operational risks PE’s

• Concept of an “informed hiring party” is an appropriate threshold for

control

• Hiring of experts should not necessarily give rise to a shift in control /

intangibles

7

Page 120 of 180

Control

• MNC control framework not necessarily aligned to legal

entity structure

• Governance framework – committees / other bodies

• Group delegation of authority and accountability

• Cascade of authority may be made by global function (R&D, Commercial,

Manufacturing) .....

• .....results in geographical spread of individual accountability and committees

made up of personnel from many countries (who move around)

• Control not singly determinative of intangible ownership

• See appendix

8

Page 121 of 180

Where are the fault lines for transfer pricing

related to intangibles?

• What functions generate economically significant

intangibles?

• Lack of alignment between the operation of global

business functions and legal entity boundaries

• Non-discrete legal entity functional performance

• Legal entity separation of function and risk/cost bearing

• Complexity of control framework in MNC’s

• Does the discussion draft resolve these issues?

9

Page 122 of 180

Draft discussion document on intangibles

• Makes some excellent points:

• Market conditions are not intangibles

• Requires identification of relevant / economically significant intangibles

• Performance and or control must be aligned with contractual assignment

• Ensuring services rendered are appropriately rewarded

• Entitlement to returns on intangibles needs to be informed by market practice

• Points to be clear on

• Physical performance of a function is not necessary (para 40 “It is expected....”)

• More guidance to identify MNC associates that are retained to perform functions and are

not entitled to a return on intangibles e.g. Marketer / distributor

• Are there marketing intangibles or not?

• Reflect acknowledgement that degrees of control and risk exist in service providers

• Leads to a question of comparability

• Does the taxpayer’s contractual arrangement reflect the bargain that would have been struck

between unrelated parties under the same economic conditions?

10

Page 123 of 180

11

Appendix

Extract from presentation made on 9 June 2009:

“Consultation on the OECD Discussion Draft on the Transfer Pricing Aspects

of Business Restructuring”

Page 124 of 180

The nature of decision making in MNE’s (1)

Product

Product family

Portfolio

management

Executive

team

Parent Board In this illustrative example

each group decision making body:

•Has a Global remit;

•Is populated by personnel from many

countries provided by global functions;

•Dynamic remit and constitution;

•Draws on group data to make decisions;

•Is not primarily driven by the allocation

resources to legal entities.

Page 125 of 180


Global

Functions R&D, BD Manufacture Marketing/

Selling

Products

Product A Research /

Development

Project

Life Cycle

Management

Post-Launch

Product B

Underpinned by global support functions

e.g. Finance, HR, Legal, CF, Legal entity framework

Strategic Vision and Objectives

Page 126 of 180


Marketing &

Selling

R&D Manufacture

Local Board and corporate organisation

Global supporting functions e.g. Finance, HR, legal

Global

Marketing

& Selling

Global

R&D

Global

Manufacturing

Legal entity

Page 127 of 180

Reconciling group behaviour with requirements

of the arm’s length principle (1)

• Given that the nature of “control” and decision making is

at least in part by decisions made by global bodies and

functions focused on global objectives………..

• ……and is a subjective concept………..

• ……its use in formulating a view on arm’s length

behaviour is, in my view, limited.

• Essentially “control” is not necessarily a determining

factor for the allocation of risk in MNE’s.

Page 128 of 180

SESSION X

OPTIONS REALISTICALLY AVAILABLE AND PERSPECTIVES OF THE PARTIES

Speakers:

Isabel VERLINDEN, PriceWaterhouseCoopers

Carol Doran KLEIN, USCIB

Patrick BRESLIN, Bates White, LLC

Page 129 of 180

Draft Chapter VI - Transfer Pricing Aspects of Intangibles OECD Public Consultation Paris, 12 - 14 November 2012 “Options Realistically Available”

Isabel Verlinden: [email protected] Andrew Casley: [email protected] David Swenson: [email protected] Irving Plotkin: [email protected] Marios Karayannis: [email protected] Vivienne Ong: [email protected]

www.pwc.de

Page 130 of 180







PwC

Options Realistically Available (“ORA”): Current IP draft

Current Discussion Draft on Intangibles (Draft Chapter VI):

• Paras. 80 – 84: General remarks

– Mandatory evaluation of ORA to each party for transactions involving the use or transfer of intangibles

– 2-sided approach required

– Lowest price seller accepts vs. highest price buyer willing to pay (i.e. minimum price concept?)

– Assumption: MNE groups seek to optimise resource allocation, at least on an after-tax basis

– If prices is consistent with ORA of each parties (i.e. mismatch in prices), to consider:

o Recharacterisation / Non-recognition of transaction? (Para 1.65 TPG)

o Comparability adjustment? (Para 9.34 – 9.38 TPG)

o Indemnification? (Para 9.122 TPG)

o Adjustment of conditions of transaction?

• Paras. 126 and 139: Determining the arm’s length price when comparables cannot be identified

• Example 19

• Reference to Paras. 9.59 – 9.64 TPG, Paras. 1.34 and 2.122 TPG.

2

November 2012

Page 131 of 180

PwC

OECD Transfer Pricing Guidelines: Chapter IX

• Para. 9.59: Parties will only enter into the transaction if no alternative is clearly more attractive.

• Para 9.60: Non- recognition vs. adjustment of conditions of transaction

• Para. 9.62: Examples for ORA (termination of contract)

- Stop using the function, or internalise it,

- Engage a more efficient provider, Or

- Seek more lucrative opportunities.

• Para. 9.63: Sound commercial reasons only at the level of the MNE group are not enough, i.e. the remuneration needs to be at arm’s length from the perspective of each of the restructured entities.

• Para. 9.64: ORA is not intended to create a requirement for taxpayers to document all possible hypothetical ORA.

OECD Transfer Pricing Guidelines: Chapters I, II and III

• Para. 1.34: Link between ORA (Para. 9.59) with Chapter III (comparability assessment)

- Are there any economically relevant differences (e.g. level of risks involved)?

• Para 2.122: Use of the profit split method (residual analysis)

- Lowest price seller accepts vs. highest price buyer willing to pay Replication of bargaining power between 3rd parties?

3

November 2012

Options Realistically Available (“ORA”): Current TPG

Page 132 of 180

PwC

• Non-recognition of transactions or structure

– OECD TPG § 1.64 – 1.69: Recharacterisation / Non-recognition only in the case of

Economic substance of a transaction differs from its form

Structure practically impedes the tax administration from determining an appropriate transfer price

– Generally accepted that associated enterprises are able to make a greater variety of contracts and arrangements than independent enterprises

– Viewpoint:

Clarify that ORA should not become a test for recharacterisation / non-recognition, but should rather, seek to achieve a balance with business reality

Limit the application of ORA only to transactions involving transfer of intangibles (and not extended to simple transactions involving the “use of” / licensing of intangibles)

Limit the application of ORA to identify “sensible” options and not impose unnecessary burden of proof for taxpayers to consider all possible options

• Analysing / Reconciling each various ORA

– Best method rule (US) / Most approach method (OECD): Different TP methods apply to each ORA - How to reconcile?

– How to ensure consistency in determining which ORA is the best option? Perspectives (transferor vs. transferee vs. group) often do not match.

– How to account for differences at both perspectives (e.g. application of discount rates, risk factors)?

– Viewpoint:

Guidance requested on practical application of ORA (currently unclear)

4

November 2012

Points for discussion

Page 133 of 180

PwC

Example 19 – Points of attention

• Insufficient information on functional and risk profile of parties involved Leads to lack of clarity in:

– Selection of TP methodology: How to determine that the Discounted Cash Flow as the best method / most appropriate method?

– Use of critical assumptions (e.g. useful life of IP, discount rates, tax rates): How to select them?

• Use of after-tax income i.e. How to reconcile the use of after-tax income to determine pre-tax transfer prices

• Reality check

– Group vs. individual perspectives: In practice, group considerations / taking into account group benefits or synergies also feature prominently in decision making processes. ORA should take such considerations into account.

– Complexity of real-life situations: The example shows straight forward options, which may not adequately take into account unforeseeable situations in practice (e.g. Changing market business conditions or business drivers) that groups cannot control

• Viewpoint:

– Clarify facts of the example

– Provide step-by-step guide to readers through the various decision points envisaged in the example (e.g. Choice of TP methodology, critical assumptions used, ORA)

5

March 2011

Page 134 of 180

PwC

Thank you!

6

November 2012

Page 135 of 180

Options Realistically Available, Perspectives of the Parties and Example 19

November 13, 2012, United States Council for International Business

Page 136 of 180

Realistically Available Alternatives • Principles of paragraphs 9.59 through 9.64 should be applied

• Best available alternative

• Respecting the transaction vs. determining the price taking into account alternatives

• Risk profiles of the parties

• Options that may be hypothetically available vs. those that are realistically available

• Cost approach, downplayed by the Discussion Draft, is often the “reasonable alternative” for many intangibles

Page 137 of 180

Perspectives of the Parties

• How would unrelated parties account for relative tax advantages or disadvantages faced by the transferee following the transfer in determining the arm’s length price?

• Unrelated parties would not know their tax positions and generally would assume a uniform statutory rate as a way of recognizing that cash flows are subject to tax.

• Use of post-tax framework is inconsistent with the rest of the OECD Guidelines

Page 138 of 180

Example 19 – Residual Value • Example adopts the simplifying assumption that all non-

routine profit is attributable to IP. Residual valuation approaches are not helpful in determining ALP for licensed IP.

• CM structure or other cost savings are not relevant to IRR.

• Licensees earn non-routine returns for risk involved in licensing and developing

• Licensees may use local IP to enhance value of licensed IP

• Example 19 relies on many key, but potentially unrealistic, assumptions

– Country X has “reasonable alternative” to continue as manufacturer at $600

– Pervichnyi has “reasonable alternative” to continue as IP developer

Page 139 of 180

Business consultation on the OECD

Discussion Draft

Chapter VI of the OECD Guidelines on Transfer Pricing

November 13, 2012 Patrick Breslin, Bates White LLC

Options Realistically Available, Perspectives of the Parties and Example 19

Page 140 of 180

Options realistically available (e.g. para. 80 – 83)

2

• Independent parties compare alternatives in making decisions to invest, approve

projects or conclude transactions

Necessary in order to maximize value or benefits and/or minimize related costs

Rational commercial behavior: seek best value at best price (e.g. para. 1.34)

Opportunity costs (benefits) have real effects on prices

Hypothetical examples provided in various comments:

e.g. Strategic benefits, Risks of outsourcing, “Freed up” resources for other projects

e.g. Capital budgeting decisions, rent/lease vs. buy decisions, comparison shopping

• No action is taken if the only available alternatives make one worse off

e.g. Outsourcing risks loss of control of valuable intangibles (e.g. trade secrets)

e.g. NPV of a project is negative (or IRR < Opportunity cost of capital)

November 13, 2012 Patrick Breslin, Bates White LLC Page 141 of 180

Illustrating options realistically available

3

• Typical arm’s length transactions involve 2 parties, each with at least 2 options

Both parties will compare their available options (e.g. Example 19)

Deals conclude at a point between

a) the minimum acceptable value to the seller and

b) the maximum price acceptable to buyer, when b exceeds a

Values a and b result at least in part from each party’s other available options

NPV puts the parties’ expected income on a comparable basis

Market prices (e.g. acquisitions) also result from the NPV analyses of two parties

Market price and NPV are conceptually connected (e.g. share price of a stock)

• Topics on options realistically available

Is the issue already fully covered in Chapter IX (e.g. 9.59 – 9.64)?

Administrative burden: e.g. exhaustive searches for alternatives (3.81 and 9.64), available data

Realistic options in presence of risks?...hypothetical analyses?...uncertain outcomes?

Other topics?


Topics and issues: Example 19

4

• Commentary regarding Example 19:

Useful depiction of arm’s length behavior based on the separate views of each party

Some concerned that the financial analysis:

Reduces attention to facts and circumstances, functional analysis, and non-financial drivers (see p. 126)

Implies use of NPV as a “primary method” rather than high level check on comparability

Discounted cash flow (DCF) disregards the transaction as structured

Is too detailed or too simplified as an example, data availability issues highlighted

Applies an after tax analysis to a tax question

Residual value fully attributes to intangibles (in contrast with para.108)

Some propose variations in assumptions about the two party analysis with respect to:

Risk profiles and discount rates, other marketplace comparables, other options available

Allocation of location savings (lower costs and tax benefits) to seller questioned

• Other financial analysis topics regarding realistic options:

Risk (e.g. “risk free” and risk-adjusted discount rates; probabilities of outcomes)

Control (e.g. over risks, resources, strategy)

Financial capacity and required returns of investors

Rights to returns and benefits under realistic scenarios

Other topics?


SESSION XI

INTANGIBLES:

USE OF FINANCIAL VALUATION TECHNIQUES

Speakers:

Jochem QUAAK and Dick DE BOER, Duff & Phelps

Richard GINSBERG, Canadian Institute of Chartered Business Valuators

Emmanuel LLINARES, NERA Economic Consulting

Page 144 of 180

The Relevance of Financial Reporting related

Valuations for Transfer Pricing Purposes

Prepared for the public consultation on the discussion draft of chapter VI ofthe OECD Transfer Pricing Guidelines

12-14 November 2012


Jochem QuaakTel +31 20 851 [email protected]

Dick de Boer

Tel +31 20 851 5195

[email protected]

November 14, 2012

Page 145 of 180

Arm’s length Principle versus Fair Value measurement

Duff & Phelps 2November 14, 2012

Arm’s Length PrincipleAuthoritative statement stems from Article 9 of theOECD MTC: In essence the ALP states that transfers ofgoods or services should be made at market prices set byreference to what independent parties would have paidunder similar circumstances

Separate entity approach

All options realistically available and two sidedapproach

Comparability analysis on the basis of the 9-stepapproach

Sufficient reliability of comparable data

Most appropriate transfer pricing method

Fair ValueDefinition: “The price that would be received to sell an asset or

paid to transfer a liability in an orderly transaction between

market participants at measurement date”

Willing buyer and willing seller

Highest and best use

Economic analysis to understand valuedrivers, risks, market and industrycircumstances, etc.

Fair Value hierarchy regarding quality of input

Valuation techniques

Conclusion: Large similarities between the Arm’s Length Principle and Fair Value definition

Page 146 of 180

Valuation techniques


The OECD Guidelines describe five methods for determining

arm’s length prices. The five methods are:

Comparable Uncontrolled Price

Resale Price Method

Cost Plus Method

(Residual) Profit Split Method

Transactional Net Margin Method

As included in IFRS 13, the three widely used and commonly

accepted valuation techniques are:

Market approach

Cost approach

Income approach

Income approach comes in many forms, e.g.:

» Discounted cash flow method

» Relief from royalty method

» Excess earnings method

Conclusion: Various valuation techniques show large similarities with the approved OECD

methods

Page 147 of 180

Overall conclusions

• In our comment letter we advocate that:

Fair Value Measurement as defined in IFRS 13, envisages achieving the same objective as the arm’s length principleas applied in transfer pricing;

Valuation techniques applied under IFRS 13 could be a sound starting point in establishing an arm’s length price forintangible assets; and

The OECD would give more relevance to the role of (valuation) accounting standards and valuation techniques.

• A similar and transparent approach would result in lower costs, enhance consistency and mitigate risks on doubletaxation.


The opinions found within this presentation are those of the presenters and do not necessarilyreflect the opinions of Duff & Phelps

Page 148 of 180

Appendix


9-step approach for transfer pricing What would we do for Fair Value Measurement (based on IFRS 13) in

accounting?

Step 1: Determination of years to be covered. Determination of transaction date.

Step 2: Broad-based analysis of taxpayer’s circumstances (factors relevant to the

taxpayer or the environment in which the controlled transactions take place).

Analysis of the relevant factors and circumstances with respect to the financial

reporting related valuation (e.g. PPA), to understand the context and drivers of the

transaction.

Step 3: Understanding the controlled transaction(s) under examination, based in

particular on a functional analysis, in order to choose the tested party (where

needed), the most appropriate transfer pricing method to the circumstances of the

case, the financial indicator that will be tested (in the case of a transactional profit

method), and to identify the significant comparability factors that should be taken

into account.

An entity takes into account the characteristics of the asset or liability being

measured that a market participant would take into account when pricing the asset

or liability at measurement date (e.g. the condition and location of the asset and

any restrictions on the sale and use of the asset) [IFRS 13.11] to understand

functions, risks, value drivers, market circumstances, etc., taking into account

highest and best use of the asset.

Step 4: Review of existing internal comparables, if any. IFRS 13 seeks to increase consistency and comparability in fair value

measurements and related disclosures through a “fair value hierarchy”. The

hierarchy categorizes the inputs used in valuation techniques into three levels. The

hierarchy gives the highest priority to (unadjusted) quoted prices in active markets

for identical assets or liabilities and the lowest priority to unobservable inputs.

[IFRS 13.72]

Step 5: Determination of available sources of information on external comparables

where such external comparables are needed taking into account their relative

reliability.

Step 6: Selection of the most appropriate transfer pricing method and, depending

on the method, determination of the relevant financial indicator (e.g. determination

of the relevant net profit indicator in case of a transactional net margin method).

The valuation technique(s) appropriate for the measurement, considering the

availability of data with which to develop inputs that represent the assumptions that

market participants would use when pricing the asset or liability and the level of the

fair value hierarchy within which the inputs are categorized. Three widely used

valuation techniques are: [IFRS 13.62]

• Market approach • Cost approach • Income approach

Step 7: Identification of potential comparables: determining the key characteristics

to be met by any uncontrolled transaction in order to be regarded as potentially

comparable, based on the relevant factors identified in Step 3 and in accordance

with the comparability factors set forth at paragraphs 1.38-1.63.

An entity shall use valuation techniques that are appropriate in the circumstances

and for which sufficient data are available to measure fair value, maximising the

use of relevant observable inputs and minimising the use of unobservable inputs.

[IFRS 13.61] This relevant data used is dependent on the inputs used in the fair

value hierarchy and valuation technique applied.Step 8: Determination of and making comparability adjustments where appropriate.

Step 9: Interpretation and use of data collected, determination of the arm’s length

remuneration.

Interpretation and use of data collected, calculation of a Fair Value.

Page 149 of 180

Selected Comments on OECD Guidelines Presented by:

Richard Ginsberg CA, CBV

November 14, 2011

Working Party No. 6’s Special Session on the

Transfer Pricing Aspects of Intangibles

Page 150 of 180

Foreward

This presentation contains general information only and none of Deloitte Touche

Tohmatsu, its member firms, or affiliates (“Deloitte”), by means of this

presentation or its publication, rendering accounting, business, financial, tax,

legal, investment or other professional advice or service. Some of the opinions

expressed within this presentation are my own and do not necessarily represent

positions, strategies or opinions of Deloitte, nor The Canadian Institute of

Chartered Business Valuators. This is not an official presentation from Deloitte.

The presentation is for general information purposes only and should not be

considered as a substitute for professional advice and counsel.

OECD TP WP6: Comments on OECD proposed guidelines 2 Page 151 of 180

3 OECD TP WP6: Comments on OECD proposed guidelines

Key Comment Areas

Valuation Standard Financial Reporting Conclusion Introduction Approach

1. Developing a valuation standard

2. Use of financial reporting valuations for Financial Reporting purposes

3. General approach to valuing intangibles

Page 152 of 180


Developing a Valuation Standard


There is a significant professional body of knowledge from which to draw valuation

expertise: CICBV ASA IVSC AICPA IASB FASB

Members 1,500 CBVs 2,200 BV

members 67 organizations

3,100 ABVs

(CPAs

accredited in

business

valuation)

NA NA

Valuation

Standards Valuation

Accreditation

Training

Definition of Value

Adopt Create

Defer to a pre-existing Valuation Standard

and/or Definition

Commission valuation profession to develop

an OECD-specific standard

• Fair Value Measurement standard under

IAS13

• Recoverable Amount under IAS36

• CICBV, ASA, IVSC

• Fair market value standard

1 2

Leverage the expertise of these bodies to

either

OECD guidelines should refer to a distinct valuation standard, whether created or adopted

Page 153 of 180


Usefulness of Purchase Price Allocations as a Reference


Valuation of intangibles for Financial Reporting can be a useful reference for transfer pricing,

but requires some careful considerations:

Identification basis Financial Reporting Considerations for OECD

Legal/Contractual or

Separable

• Legally or contractually identifiable

• Can be separated

• Goodwill incorporates any residual

premium paid above tangible and

identifiable intangible assets

• A tax reorganization may involve the transfer of assets that are

not yet identifiable for financial reporting purposes (i.e. future

technology development rights, an intercompany contract for

routine or other services), but have value.

• These valuable assets are inherently imbedded in goodwill for

accounting purposes but can be unlocked via an inter-company

reorganization

Finite versus Indefinite

Lived

• Focus on matching principle

• Amortization of „existing‟ assets over their

useful lives

• Indefinite lived assets not amortized but

tested for impairment annually

• A tax reorganization may involves the transfer of assets that

have an indeterminable useful life, that for financial reporting

purposes may be subsumed into goodwill

• An identifiable intangible for financial reporting may only reflect

the amortizable portion of value transferred in a reorganization

Marketplace Participant

• Valuation inputs reflect marketplace

participant assumptions

• Represents an „exit value‟

• Entity-specific synergies included in

goodwill, if at all

• Does not consider value-in-use or value-to-owner, if different

than a marketplace participant

• Entity-specific synergies included in goodwill if paid for

• Entity-specific synergies may not have been paid for, and

therefore, unreported value may exist

Materiality

• Financial statements reflect only the

material intangibles on a consolidated

basis

• Aggregations can occur at an operating

segment level

• Does not consider inter-company

intangibles (I.e. inter-company contracts,

licensing arrangements, etc.)

• Tax reorganizations often involve multiple business units with

disaggregated ownership of intangibles

• Stratifications that may not be relevant or applicable for

financial reporting, may be relevant for transfer pricing

• Inter-company contracts, arrangements, or other intangibles

may be highly relevant

OECD guidelines should neither endorse nor disavow valuation of intangibles for financial reporting

purposes – their usefulness will depend on specific facts and circumstances

1

2

3

4

Page 154 of 180


Approach to Intangible Value Measurement


Illustrative Example – Situational Overview

• Assume that an MNE group acquires an independent Company A for a price of 100, out of which

70 is allocated to the value of identified intangible assets and 30 is allocated to goodwill.

• It is assumed in this example that the value of tangible assets is negligible.

• Assume that following the acquisition, the identified intangible assets are transferred from

Company A to an associated Company H and that Company A is converted into a contract

research entity.

• In this new capacity, Company A will continue its research and development activities on behalf of

Company H, with the latter bearing the risk of failure of those activities and being the owner of the

future intangibles that may eventually result from them.

• The question may arise whether the determination of an arm‟s length price for the transfer of

intangibles from company A to H should take into account part or all of the goodwill that has been

recognized for an amount of 30 upon the acquisition of A by the MNE group.

• OECD draft guidelines appear to prioritize a ‘Definitional’ or Bottom-up approach to determining

intangible value – 1) identify and define the intangible; 2) measure the value of that intangible

• Instead, we recommend the prioritization of an ‘Enterprise’ or Top-down approach – 1) measure the

value transferred; 2) allocate that value to separate intangibles

• To illustrate the difference and potential issues to consider, we would like to re-visit the illustrative

example previously presented in November 2011:

Page 155 of 180


Definitional or Bottom-Up Approach


Definitional approach is susceptible to overlooking the transfer of undefined intangibles (i.e.: goodwill)

Goodwill

30%

Intangibles

70%

Company A

(Limited Risk Developer)

$30

Company H

(IP Owner)

$70

Company A

Transfer of Intangibles

Company A

Company H

Goodwill

$30

Intangibles

$70

Page 156 of 180


Top-Down Approach: Valuation Process


A Top-down approach to the determination of the value allocation between Company A and

Company H as a six step process:

Value of Goodwill

Transferred

Pre-Reorganization

Post-Reorganization

Value of Intangibles

Value Transferred

Company A

Company H

1 Determine the value of Company A prior to

any reorganization

2 Determine the value of Company A on a

proforma basis, post-reorganization

3 Deduct the post-reorganization value of

Company A from the pre-reorganization value

4 Determine the value of any intangibles owned

by Company H on a pro-forma basis

5 Deduct the value of Company H intangibles

from the value transferred

6 Deducted the value of Company H goodwill

from the pre-reorganization goodwill value of

Company A

Value of Goodwill

Pre-Reorganization

Value of Goodwill

Retained

Company A

Page 157 of 180


Value Summary


Goodwill

$30

Intangibles

$70

Company A

$17 million

Company H

(IP Owner)

$83 million

R&D Contract

$10 million

Workforce

$7 million

Goodwill

$13 million

Technology

$70 million

Company A

Company A

Company H

Future

Development

Rights

$5 million

Workforce

$8 million

Top-down approach results in $13 million of additional intangible value allocated to Company H

Not captured in

Definitional Approach

Page 158 of 180


Key Considerations


1. Create or Adopt a distinct valuation standard of reference

2. Neither endorse nor disavow the valuation of intangibles for financial

reporting purposes

3. Adopt a Top-down approach to value determination for the transfer of

intangibles rather than a definitional approach

Page 159 of 180


QUESTIONS? Richard Ginsberg CA, CBV

Deloitte

[email protected]

Page 160 of 180

Use of Financial Valuation Techniques for

Transfer Pricing Purposes

Working Party No.6 of the OECD Committee on Fiscal Affairs - Paris

14 November 2012

Pim Fris & Emmanuel Llinares

Special Consultant & Senior Vice President

Page 161 of 180

1

A few preliminary remarks

1. Intangibles definition and valuation (Section A)

– Market valuation (e.g., stock market prices) can reflect intangible identification and valuation that one may not

necessarily be in a position to apprehend (value chain analysis should enable to avoid this)

Risks that Section A of the draft Chapter VI is interpreted too narrowly when following a deterministic approach only

and misses important intangibles. Intangibles should be defined as something “reflecting entitlement to or an expectation of

future profits”

2. The transactions involving intangibles (section C)

– Transfer of intangibles as part of a transfer of a business are not really dealt with by Chapter IX

– The bridge to be made between value an activity / business and value of individual intangibles is to be made more

explicitly in Chapter VI: a transaction C.2.(iv) needs to be added

3. Bridging the gap between individual asset and collective business value creation (section D)

– A satisfactory identification of intangibles should be achieved by looking at these two levels of valuation

– Valuation of individual intangibles and assessment of the relative entitlement thereto of the parties concerned can be

done with help of a Value Chain Analysis (VCA). To this end Chapter I, section D.1 needs to be extended. VCA is too

implicit in the guidance of Chapters I, II and III of the Guidelines

– The recommendation of NERA Economic Consulting in its comments has been to complement the valuation of

individual intangibles by an analysis of the collective value creation of the business concerned

– An assessment of relative entitlement of the different parties involved to the value of the intangibles in the specific case

can be done by means of a bargaining analysis, based on bargaining positions informed by the outcome of a Value

Chain Analysis

Page 162 of 180

2

Commonly used financial valuation

techniques for intangibles

Market comparables (e.g., multiples) approach Can be applied

Method relies on the use of comparable “one shot” transactions (sale of an asset) or inference from

intangibles sensitive stock prices

Main challenge: Comparability of the third party transactions or market data being relied upon –

opportunistic and case- or deal-specific issues need to be identified

Income Based approach Commonly applied

Discounted cash flow method and real options method (when factoring in information access over time)

Starting point (and an important challenge): Modeling of cash flows associated with the intangible

Profit split methods and Comparable Uncontrolled Price / Transaction method are often applied in order

to determine these cash flows

Valuation obtained from Income Based Approach can be “reverse engineered” to infer intangible-related

cash flows and intangible-related transfer prices

Replacement costs Can be applied

Paragraphs 112 and 113 discourage the use of simple return on costs approach

However, return on historical costs does not correspond to replacement costs

When properly applied, the replacement costs approach can provide useful insight on the value of an

intangible (for example when valuing know-how associated with a workforce or in the context of

deriving a bargaining range)

Application of this method notably involves determining the opportunity costs required for a party to re-

develop an intangible of equal value

In (complex?) intangible related valuations, the use of a bargaining range will be helpful

Page 163 of 180

3

The Bargaining Range and

realistically available options

Minimum Intangible Owner Would Accept:

0% or €0

Based on: Added profits from using the intangible and the economic costs of the

next-best alternative

Based on profits from realistically available alternatives

Maximum Intangible User Would Pay:

?% or €? ?% or €?

Bargaining Range

(e.g., royalty rate in % of sales

or “one shot” value)

What are the options realistically available to the transacting parties?

CUPs and or comparable asset transactions can be point of references (not systematically in the range depending on

comparability)

In the absence of reliable comparables, (residual) profit split method and income approaches should enable the estimation of

both ends of the range

Replacement costs (including opportunity costs) approach can be looked at to estimate maximum willingness to pay in some

circumstances

Bargaining theory can be used to narrow the range or determine a transaction price - realistically available options should be

documented whilst the decisions reg arding the transaction are being made Page 164 of 180

Contact Us

© Copyright 2011

NERA Inc.

All rights reserved.

Beijing

Sébastien Gonnet

+86 10 6533 4395

Chicago

Harlow Higinbotham

+1 312 573 2803

Frankfurt

Alexander Voegele

+49 69 133 8532

Geneva

Emmanuel Llinares

Jean-Sébastien Lénik

+41 22 819 94 94

London

Pim Fris

+44 20 7659 8500

Los Angeles

Nihan Mert-Beydilli

+1 213 346 3000

Madrid

Victoria Alonso Cantero

+34 91 212 64 00

New York City

Stuart Harshbarger

+1 212 345 3000

Paris

Emmanuel Llinares

Jean-Sébastien Lénik

+33 1 70 75 01 95

Toronto

Jennifer Shulman

+1 416 783 3355

Page 165 of 180

SESSION XII

DETERMINING ARM’S LENGTH ROYALTY RATES FOR LICENSING TRANSACTIONS

Speakers:

Brian CODY, KPMG

Ednaldo SILVA, RoyaltyStat LLC

David JARCZYK, ktMINE

Page 166 of 180

Determining Arm’s Length

Royalty Rates for Licensing

Transactions and

Comparability Standards for

Intangibles

Public Consultation on Transfer

Pricing Discussion Drafts


12 – 14 November 2012

Page 167 of 180

© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of

independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm

has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG

International have any such authority to obligate or bind any member firm. All rights reserved.

1

ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR

WRITTEN BY KPMG TO BE USED, AND CANNOT BE USED, BY A

CLIENT OR ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OF

(i) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER

OR (ii) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER

PARTY ANY MATTERS ADDRESSED HEREIN.

You (and your employees, representatives, or agents) may disclose to any

and all persons, without limitation, the tax treatment or tax structure, or

both, of any transaction described in the associated materials we provide to

you, including, but not limited to, any tax opinions, memoranda, or other tax

analyses contained in those materials.

OECD - Public Consultation on Transfer Pricing Discussion Drafts

Page 168 of 180





2

Determination of royalties for license arrangements – Licensor’s share not

equal to the entire excess or residual profit earned by the licensee

One of the key reasons that uncontrolled parties enter into licenses is to shift the risk associated

with the exploitation of the intangible from the licensor to the licensee. In return for accepting this

risk, the licensee generally receives a share of any intangible profit arising from the successful

exploitation of the intangible, and may incur losses if it is unsuccessful in exploiting the intangible.

Discussion Draft defines the intangible related return attributable to a particular intangible as “the

economic return from business operations involving use of that intangible after deducting (i) the

costs and expenses related to the relevant business operations; and (ii) returns to business

functions, assets other than the particular intangible in question, and risks, taking into account

appropriate comparability adjustments.” (Paragraph 28)

Consistent with this definition, there are many potential sources of a licensee’s excess or residual

profits/losses besides intangibles and “routine” business functions, including:

– Location savings and other comparability factors identified in the Discussion Draft ;

– Economies of scale or scope;

– Varying levels of capacity utilization across the business cycle; and

– More generally, the realization of risk not associated with intangibles.

The payment made between the licensee and the licensor – royalty – is not equal to total profits

less a routine return, but rather must account for the licensee’s economic contributions and allow

for the opportunity of the licensee earning above (or below) routine returns.


Page 169 of 180





3

Variety of viable intangible valuation methods exist and may be applied

depending on the particular facts and circumstances of the transaction

Discussion Draft provides some mixed signals on the role of valuation techniques in

evaluating the transfer pricing of intangibles, detailing the application of discounted cash

flow methods to transfer pricing while at the same time indicating that certain valuations

(such as those done for purchase price accounting) have “no” relevance for transfer pricing.

– Techniques used in financial statement analyses, however, are no different in substance

from valuation approaches used in economics and business generally.

– Similarly, the guidance on choosing between the income method and cost method should

emphasize the need to use the method that is most appropriate, given the specific facts.

– Other approaches may be more appropriate than these traditional method depending on

data availability and other considerations.

Residual profit split – Potentially useful, traditional method accepted in the OECD

Guidelines, which deserves additional consideration (i.e., detailed example) in the

Discussion Draft.

So-called “rule of thumb” – An anecdotally-appealing approach that, nonetheless, lacks

empirical rigor.

Whatever valuation methods is employed, it must nonetheless must address issues of asset

life, discount and amortization rates, allocation of excess or residual income to non-

intangibles, data reliability (particularly of financial projections), other similar considerations.


Page 170 of 180





4

Third-party licensing arrangements can provide invaluable insights into the

evaluation of the arm’s length nature of intercompany transactions

Third-party license arrangements identified on commercial or internally maintained databases are

often disregarded in their entirety due to perceived differences or lack of information regarding

comparability factors, including the exact nature of the intangibles, useful life, stage of

development, and expectation of future benefits.

Such differences notwithstanding, third-party license arrangements should be viewed as:

– A key source of potential information on terms that are common in transactions among

uncontrolled entities – helping to inform whether or not specific types of business arrangements

are arm’s length – and specific information on pricing.

– Particularly helpful when dealing with transactions involving intangibles that are not key drivers

of profits – e.g., licenses of accounting software, the license of relatively routine technology and

knowhow, the license of trademarks that are used to differentiate the goods bearing such marks

from purely generic products, but which do not support unusually high profits.

License arrangements can also provide insights into which of the legal entities (licensor vs.

licensee) is entitled to returns from the use of the intangible property and other salient

considerations, including:

– Payment method and terms (e.g., fixed royalty rate vs. royalties that vary with profit);

– Allocation upon termination of the arrangement of any potential incremental intangible value

created over the course of the license; and,

– Oversight carried out by the licensor over the course of the arrangement.


Page 171 of 180

The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.

The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International.

Thank You

Brian Cody

Principal

KPMG LLP

+1 312 665 1912

[email protected]

Page 172 of 180

The content of these slides is not for public distribution and may not be copied or distributed without the Author’s permission. All Copyrights Reserved.

Use of Information from Databases

OECD Presentation

Ednaldo Silva, Ph.D.

[email protected]

November 14, 2012

Page 173 of 180



Databases are integral to transfer pricing administration and taxpayer compliance because they

are the only source of external comparables.

U.S. Treas. Regs. § 1.482-4(c)(4), Example 3, contains a hypothetical case in which the IRS

“uses a database of company documents filed with the Securities & Exchange Commission

(SEC) to identify potentially comparable license agreements between uncontrolled taxpayers.”

Inspired by this example, we started the RoyaltyStat database in 1996 from license agreements

filed with the SEC and launched an interactive website on January 2, 2000. Today, we have over

13,750 unredacted license agreements, and we add about 2,000 new agreements per year.

RoyaltyStat today includes over 2,500 pharmaceutical agreements, over 1,000 medical device

agreements, over 1,000 software agreements, and over 500 computer hardware and

semiconductor agreements. This large number of agreements, which can be used to support

the transfer of intangibles, is substantial compared to the number of publicly-traded

companies used as comparables for the transfer of tangible goods and the provision of

services.

1 Page 174 of 180


Some claim the arm’s length principle is impractical because comparables cannot be found.

However, the development and growth of RoyaltyStat and other databases provide evidence

against this claim.

The license agreements in RoyaltyStat can be searched online by industry, agreement type,

description of the intangible (which in RoyaltyStat is a structured and standardized field, not a

product of copy and paste), exclusivity, territory, and other important filters. These agreements

reflect the licensing of intangibles in many countries, including OECD members and

developing countries.

License agreement databases can be used to determine the arm’s length royalty rates for the

majority of intangibles in the marketplace. They can be used also to determine safe harbors as

part of the OECD effort to simplify transfer pricing in routine cases. When comparables

cannot be found to use the CUP method, such as for blockbuster intangibles (e.g., drugs,

software), taxpayers can use the residual profit split method.

2 Page 175 of 180


A useful database that can be used to support the transfer of intangibles must contain a full-

copy of each disclosed license agreement, because the intangible property, including all rights

conferred and contractual obligations, must be compared and adjustments can be made where

appropriate, such that an arm’s length royalty rate can be computed in a manner that can

sustain audit scrutiny or controversy.

RoyaltyStat is a dynamic source of information because it’s constantly updated. This database

offer publicly disclosed, verifiable information and can be used to:

1) Find comparable royalty rates and determine safe harbors. Comparables make the

argument for using formulary apportionment less compelling;

2) Provide an alternative to the use of secret comparables;

3) Protect corporate taxpayers against transfer pricing adjustments; and

4) Safeguard tax administrators from making adjustments that can be denied in appeals

or tax court for being “arbitrary, capricious or unreasonable.”

Under the existing arm’s length paradigm, transfer pricing cannot be supported without

comparables, and comparables cannot be found without a reliable database that is constantly

updated by experienced professionals.

3 Page 176 of 180

© Copyright 2012 ktMINE. All rights reserved. W: ktMINE.com

David R. Jarczyk

President & CEO, ktMINE

[email protected]

Working Party No. 6 Public Consultation

Page 177 of 180


The CUP Method…In A Practical Way

Page 178 of 180


▲License Agreement Intelligence

− Over 70,000 unredacted and redacted license agreements

− Provides transparency to third-party deal structures, functions performed,

risks assumed, and payment terms

− Example questions:

• Do third parties share significant fluctuation in the foreign exchange rates?

• Would a licensee ever pay to register the licensor's trademark in the licensed

territory?

• How do third parties share rebates?

• Would a licensee bear warranty risk and product liability risk for its territory?

• Would third parties set a royalty rate to increase as the sales of the licensee

increase?

▲Royalty Rate Intelligence

− Over 13,000 unredacted license agreements

− Identifies comparable royalty rates

− Example question: what is a reasonable royalty rate for this situation?

Databases…Global Benchmarks

Page 179 of 180


Factors of Comparability

Internal Market Royalty Rates External Market Royalty Rates

Determine Existence of Market Royalty Rates

Assess Comparability

Functions & Risks Born by Licensor vs. Licensee

Rights to Receive Updates & Modifications

Profit Potential Uniqueness of IP Business Relationship Between Licensor &

Licensee

Duration Territory & Field of Use Exclusivity & Restrictions

Interdependent Comparability Factors

Establish Defensible Market Royalty Rates

Page 180 of 180

Documents

PROGRAMME PUBLIC CONSULTATION ON TRANSFER PRICING ... · programme . public consultation on transfer pricing discussion drafts . 12-14 n. ovember . 2012. oecd c. onference . c. entre