Download Transfer pricing of intangibles

Transfer pricing of intangibles
Valuation
Content
● Background
● Valuation methods
○ Income Based
○ Market Based
○ Cost Based
● Changes in new BEPS
What is an Intangible?
● Not a physical or financial asset
● Can be owned or controlled
● Use would be compensated between independent parties
Valuation
● Recognition differs between accounting and transfer pricing purposes
● Hard to value due to missing manufacturing costs
● Derives value from its projected use -> future income generated
● Guidance in BEPS 2015
● Arm's length principle
Valuation methods
Income Based Methods
Market Based Methods
Cost Based Methods
Income Based Methods
• Future cash flows attributable to intangibles are projected and discounted
to the present to establish fair value
• Major weakness: estimating future cash flows
• Methods: Profit Split, Incremental Cash Flow, Price Premium
Income Based
Example: Profit Split
● More as a principle than method by itself
● Splitting profits from intangible assets between divisions
○ contribution to joint earnings
Income Based
Example: Price Premium
Theory: an intangible can warrant a price premium over and above a generic
product
In practice: how much more you can charge for a bike with a Batman logo on
it compared to the same bike without the logo
premium
original
price
original
price
price of
Batman bike
Market Based Methods
Comparable transactions are found and fair value is established based on
them
Major weakness: often comparable transactions are not available
Methods: Comparable Uncontrolled Transaction, Relief from Royalty
Example: Relief from Royalty
Theory: a hypothetical royalty that a company would be willing to pay for the
intangible in an uncontrolled transaction
In practice: a royalty that the company would be willing to pay for the use of
the Batman logo on bikes to a third party (a non-group company)
Cost Based Methods
Two methods: Reproduction Cost, Replacement Cost
Estimates the value of an intangible based on the current cost to
replace/reproduce the intangible
Major weakness: does not take into account future potential
May be used in valuation of early-stage technologies or workforce
Changes of intangibles’ valuation
In 2015 OECD issued guidance on transfer pricing of intangibles under BEPS
Clearer definition of intangibles
Ownership of intangibles
Conditions related to arm’s length and comparative analysis of intangibles
Conclusion
●
Main purpose is to estimate value for transactions based on intangibles to use that
in aggressive tax planning and/or diminish the risk of legal offences
●
Valuation of intangibles is problematic area of transfer pricing
●
Valuation process (purpose & identification -> method selection -> analysis -> value
of intangible)
●
Income based methods most useful in practice