‘DEMPE’ No Substitute for Functional Analysis: McDonald

The Tax Management Transfer Pricing Report ™ provides news and analysis on U.S. and international governments’ tax policies regarding intercompany transfer pricing.

By Kevin A. Bell

Don’t focus too much on new language in OECD guidelines that refer to development and exploitation of intangibles, a U.S. Treasury economist warned tax administrations, multinational companies and their advisers.

The amended guidelines introduce a new analysis and a new acronym—DEMPE, for the “development, enhancement, maintenance, protection and exploitation” of intangibles—that has given the concept too much weight, MIchael McDonald, an economist in Treasury’s Office of Tax Analysis, told a conference March 28.

“One concept that not only runs through the intangibles chapter but the rest of the guidelines is ‘let’s not get hung up on labels,’” he said. “When you get hung up on labels, sometimes you take your eye off the ball.”

DEMPE “is a qualitative tool to help assist a functional analysis,” McDonald said at a global transfer pricing conference in Paris sponsored by Bloomberg BNA and Baker McKenzie LLP.

The OECD’s October 2015 final report on transfer pricing, under its project to combat tax base erosion and profit shifting, provides that members of a multinational group “be compensated based on the value they create through” DEMPE functions.

Legal Ownership

In his capacity as a U.S. delegate to the Organization for Economic Cooperation and Development working party, McDonald was a key author of the October 2015 final report on BEPS Actions 8, 9 and 10 that rewrote the OECD’s transfer pricing guidance on intangibles, including Chapter 6 of the OECD transfer pricing guidelines.

McDonald, chair of the OECD’s Working Party No. 6 on the Taxation of Multinational Enterprises, said that in addition to DEMPE activities, “legal ownership is a fact that must be recognized.” However, legal ownership “doesn’t necessarily tell us anything about what is the appropriate remuneration to parties that contribute value.”

Contributions to Value

All contributions to value must be appropriately remunerated for transfer pricing purposes, McDonald said. To that end, the working party noted specific contributions of value that might be particularly relevant when it comes to intangibles—the notion of developing, enhancing, and maintaining an intangible.

Chapter 6 of the transfer pricing guidelines provides that the ultimate allocation of returns to intangibles is accomplished by compensating members of a multinational group according to the principles of Chapters 1 to 3 of the OECD guidelines, he said.

“Don’t tell me that legal ownership trumps everything,” McDonald said. “It needs to be more than that. But I’m sorry—this is not a revolutionary concept. This is transfer pricing 101. Everyone in this room has been doing that for 20 years if you have been doing transfer pricing appropriately.”


In coming up with a list of important functions that tend to be relevant for intangibles, “we came up with something that can be acronymized,” McDonald said. That fact, he indicated, may have given the concept too much weight.

“We created another label. It was inadvertent. What we didn’t want in my opinion is for this new DEMPE label to become a thing, to become a target, to become something that ultimately becomes a quantitative method.”


McDonald said the working party tried to provide guidance saying the relative importance of these functions completely depends on the facts. “If you are acquiring an intangible for a third party, that might be the only important thing, and you don’t really need to talk about some of these other functions. They might not have a lot of relative value.”

However, the working party noted a type of situation where looking at the DEMPE functions might be particularly important, he said—the notion of self-developed intangibles. “Clearly there is a need to remunerate ultimately all of the contributions of value. But it wasn’t meant to be monolithic.”

DEMPE was meant to focus on particularly difficult paradigms as an application of general guidance, McDonald said. “I really think its value and placement in the intangibles chapter is as a qualitative tool to try to understand the transaction. We are trying to accurately delineate the transaction. We are trying to understand what we need to do in a functional analysis to try to ultimately price the transaction.”

‘Wrong Road.’

McDonald added, “I think we go down the wrong road when we talk about DEMPE as a quantitative method.”

He emphasized the need to “stay away from labels to the extent that DEMPE is a label, and DEMPE becomes something that trumps an appropriate functional analysis, and is in fact its own magnet for trying somehow to allocate the profits of a multinational among its associated enterprises.”

That path “is actually fraught with danger,” he said.

To contact the reporter on this story: Kevin A. Bell in Washington at kbell@bna.com

To contact the editor responsible for this story: Molly Moses at mmoses@bna.com

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