OECD discussion draft on special considerations for intangibles.

September 21, 2012

On September 21, 2012, Tax Executives Institute submitted the following comments to the Organisation for Economic Co-Operation and Development regarding the OECD's discussion draft on the transfer pricing aspects of intangible assets. TEI's comments addressed several issues, including the draft's focus on a functional analysis for allocating intangible related returns, the definition of intangible assets, the approach of multi-national enterprises in organizing intellectual property on a group-wide basis, and the examples in the draft's Annex. The comments, which took the form of a letter from TEI President Carita R. Twinen to Joseph L. Andrus, Head of the Transfer Pricing Unit at the OECD's Centre for Tax Policy and Administration, were prepared by a working group under the aegis of TEI's European Direct Tax Committee, whose chair is Anna Theeuwes of Shell International B.V. Alain Berlier led the working group, and other significant contributors included Alexander Koelbl of General Dynamics, Janice L. Lucchesi of Akzo Nobel Inc., Peter H. Taylor of DuPont International, and Nick Hasenoehrl. Benjamin R. Shreck, TEI Tax Counsel, is staff liaison to the European Direct Tax Committee and coordinated the preparation of the comments.

In 2010, the Committee on Fiscal Affairs (CFA) of the Organisation for Economic Co-operation and Development (OECD) announced a project on the transfer pricing aspects of intangible assets, including a potential revision of Chapter VI of the OECD's Transfer Pricing Guidelines concerning special considerations for intangibles (OECD Guidelines). The OECD published a scoping paper and held three public consultations with interested commentators. At the consultation in November 2011, representatives of the business community suggested that the OECD release an interim draft of its work for further public comment. The OECD released such a draft (Discussion Draft) on 6 June 2012, and requested public comments. In addition, the OECD announced a public consultation on this Discussion Draft, along with two other transfer pricing-related discussion drafts, to be held in Paris on 12-14 November 2012. On behalf of Tax Executives Institute, Inc., I am pleased to respond to the OECD's request for comments on the Discussion Draft.

TEI Background

Tax Executives Institute (TEI) was founded in 1944 to serve the needs of business tax professionals. Today, the organisation has 55 chapters in Europe, North America, and Asia. As the preeminent association of in-house tax professionals worldwide, TEI has a significant interest in promoting tax policy, as well as the fair and efficient administration of the tax laws, at all levels of government. Our 7,000 members represent 3,000 of the largest companies in Europe, the United States, Canada, and Asia.

General Comments on the Draft

TEI welcomes the OECD's effort to address the transfer pricing aspects of intangible assets. Transactions between related parties (however defined) have been a vexing issue for tax authorities and multinational enterprises (MNEs) alike, and thus this is an area ripe for clarification and certainty. Regrettably, while the Discussion Draft elaborates on many issues in significant detail, overall it lacks a unifying vision, pragmatism, and consistency. In addition, the draft seemingly contradicts Chapters 1 to 3 and 9 of the OECD Transfer Pricing Guidelines. In particular, the Discussion Draft does not properly reflect the manner in which MNEs derive economic value from their intellectual property (IP). For example, the comparability analysis discussed in the document refers to a particular method and is not based on a value chain (or economic) analysis.

In TEI's view the OECD Guidelines should recognise that MNEs centralise their critical IP in a particular jurisdiction, or across a few key jurisdictions, for a variety of reasons. These reasons include: basic legal protection (including the ability to sue infringers), centralisation of IP development, funding and administration, risk hedging, a desire to clarify internal business responsibilities, and tax considerations. From a tax perspective, IP concentration simplifies transfer pricing compliance across jurisdictions, reduces the risk of double taxation, and avoids lengthy tax-related disputes over intangible assets generally. In contrast, the Discussion Draft could spawn the dispersion of IP assets and their associated returns across the entire corporate group and, therefore, across many more jurisdictions than where the MNE chooses to locate the legal and/or economic ownership of its IP. The inevitable result would be more transfer pricing disputes between MNEs, the jurisdictions in which they operate and, indeed, even between jurisdictions.

One of the OECD's main purposes, promotion of free trade, is best served by healthy tax competition among its Member States. It is thus surprising that the OECD would seek to stanch such competition by dictating to MNEs how they should structure themselves.

TEI recommends that the OECD Guidelines strongly encourage tax authorities to conduct a holistic (or "top-down") analysis of an enterprise's transfer pricing practices, rather than proceeding on an asset-by-asset basis. That is, tax authorities should first understand and, absent abusive tax planning, accept an MNE's business model and how its group IP affects transfer pricing policies. Unfortunately, it appears that the Discussion Draft would permit tax authorities to disregard contracts between related parties in an MNE, even absent tax abuse. In general, we recommend that the Draft expand its discussion of how intangible assets fit within the MNE's global value chain, which in turn requires an understanding of the business environment in which the group operates. While an asset-by-asset (or "bottom-up") approach may capture the individual resources (intangible or not) of an MNE, it cannot reflect the enterprise's business as a whole, and thus does not reflect the approach taken by an enterprise from a business (i.e., non-tax) perspective.

In addition, the Discussion Draft contains a number of new provisions that will likely increase compliance costs for MNEs and lead to controversy regarding IP ownership. For example, the Draft promotes the use of the profit split method while staying silent about the transactional net margin method (TNMM). TEI recommends that the TNMM be promoted as a much simpler and more pragmatic...