OECD Project on Intangibles May Prompt Broader Definition, Former OECD Official Says

An initiative by the Organization for Economic Cooperation and Development to revisit its definition of "intangibles" for transfer pricing purposes likely will lead to language that is broader than legal or accounting definitions of the concept—but not so broad as to encompass a number of variables that could not be legally protected, a former OECD official said Jan. 27.

"There is a lot of frustration among tax authorities about the scope of what is an intangible; and in fact, there is a lot of confusion because we often, in the transfer pricing world, tend to confuse intangibles with value drivers, or value enhancers or competitive advantages," said Caroline Silberztein, former head of the transfer pricing unit in the OECD Centre for Tax Policy and Administration.

Now with Baker & McKenzie LLP in Paris, she spoke in a webinar jointly sponsored by the law firm and Bloomberg BNA.

Businesses often speak of such attributes as locations, market premiums, barriers to entry, and other advantages as intangibles, she said, but not everything that provides value to a business is something that is "transferrable and can be protected either legally or economically."

Though it is not yet clear what the revised guidance will say, Silberztein deemed it "very likely" that the OECD definition of intangibles for transfer pricing purposes will be "broader than just the legal or accounting definitions of intangible assets, in particular because it tries to capture notions of goodwill and soft intangibles."

"On the other hand," she said, "it is going to be important to make sure that not everything that provides value to the business is regarded as a compensable and transferable intangible."

OECD Project to Address Intangibles.

The effort to revisit the definition of intangibles is part of a broader OECD project arising from its 2010 rewrite of its transfer pricing guidelines, which included a new Chapter 9 providing guidance on the transfer pricing aspects of business restructurings. The discussion of business restructurings made clear, she said, that "there was still some disagreement and lack of consensus and guidance on some very key aspects of the transfer pricing of intangible transactions."

The OECD Committee on Fiscal Affairs launched a new project to address transfer pricing issues related to intangibles, outlined in a Jan. 25, 2011, scoping paper (19 Transfer Pricing Report 963, 1/27/11).

The project is focusing on creating an analytical framework for intangibles issues. In addition to the issue of definitions, it also is addressing:

  • specific issues, such as R&D, services, and marketing;
  • identification of transfers;
  • economic ownership; and
  • valuation.

So far, Silberztein said, the discussion on valuation has led to the conclusion that while the five methods of valuation recognized by the OECD still are potentially viable for the valuation of intangibles, in practice, they may be insufficient. For example, Silberztein said, methods that rely on the use of comparables will fall short when comparables are lacking to apply to the intangibles in question.

Alternatives to Traditional Valuation.

Thus, the OECD is considering whether other kinds of valuation methods, used for accounting valuation or financial valuation purposes—such as discounted cash flow and other profit-based or "forward-looking methods"—should be given greater recognition in transfer pricing guidelines.

Given concerns about the migration of intangibles, particularly to lower-tax jurisdictions, she said, "it is to be expected that valuation based on forward-looking, profit-based methods … will become more and more important in practice."

But a number of questions have arisen over this concept, she said.
One "point of tension," Silbersztein said, "will be to what extent may a tax authority use such a method as a substitute for one [of the] more traditional transfer pricing methods which may have been used by the taxpayer?"

Other questions relate to the uncertainty of valuations arising from methods based on future profits. Inevitably, she said, the taxpayer is going to make the determination based on predictions. But when the taxing authority conducts an audit, a few years after the fact, it will have at its disposal both the predictions and the actual figures.

"Are they going to trust the predictions, are they going to be willing to use the actual figures? Would that be hindsight? Or are there situations where the taxpayer should, from the beginning, build in … a renegotiation clause or contingency clause because they knew from the outset that the valuation was uncertain?"

A Bid for Greater Simplification.

The intangibles project is just one of a number of initiatives the OECD has launched to address concerns in the transfer pricing arena, according to Mary C. Bennett, former head of the Tax Treaty and Transfer Pricing Division of the OECD, who also spoke during the webinar. Bennett recently joined Baker & McKenzie's Washington, D.C., office.

"More and more the discussion at the OECD has been turning to the need to look at how transfer pricing has been applied in practice and, in particular, whether there are options to simplify the administration of transfer pricing from the perspective of both taxpayers and tax administration," Bennett said.
The OECD, in a project announced in March 2011, is looking at existing guidance to see if it could be amended to encourage simplification, including through the use of safe harbors (19 Transfer Pricing Report 1102, 3/10/11).

The current guidance is not encouraging about the use of safe harbors, she said, but many countries use them.

"One of the objectives of this work is to look at the use of these alternatives and see what the best practices are and whether the guidelines could be amended to make better use of the good developments that have arisen," she said.

"Similarly, there is likely to be a look at streamlined documentation requirements as an option that could help simplification—and perhaps streamlined [advance pricing agreement] and [mutual agreement] processes for smaller or simpler cases."

Bennett cited a recent report from the OECD's Forum on Tax Administration, which discusses ways to improve the administration of transfer pricing, including such issues as how to select the right cases, how to maintain progress in the examination of transfer pricing, how to make sure good decisions are reached, and how to provide resources to the examination function (20 Transfer Pricing Report 816, 1/26/12).

By Dolores W. Gregory