Transfer of innovative business in international settlements: key global transfer pricing aspects

Increasing globalization is connected with not only threats but also with numerous opportunities. Multinational companies create innovations and know-how, which can be shared with other group entities or transferred to affiliates in other countries.

During the transfer of intangible assets, it is crucial to analyze the pros and cons of the planned relocation. Remember that expansion into new markets requires analysis from the transfer pricing side.

Consider both perspectives

When transferring intangible assets to related parties, ensure the arm’s length approach from the perspective of both parties to the transaction.

If you conduct innovative business and plan transactions involving intangible assets, first consider the global perspective of the entire group. What to keep in mind?

1. Establish a group strategy for innovations.
2. Prepare value-added chain analyses for intangible assets.
3. List the TP methodology procedures for entities involved in transactions related to the transfer of innovative assets.

However, the local perspective is also crucial when performing assets’ transfers: both from the buyer/licensee’s and the seller/licensor’s side. Ensure the compliance of the transaction not only  with global but also with  local transfer pricing regulation’s perspective to safeguard the entities involved in the transfer of innovations.

Global Perspective on Intangibles: OECD Guidelines

A global perspective on intangibles is also provided by the OECD Transfer Pricing Guidelines, which indicates what the “intangibles” really are. Accordingly, innovation in the area of intangible assets can include, among others:

• Patents,
• Know-how,
• Software licenses.

All these assets can be subject to international transactions, including those conducted between related parties.

The essence of DEMPE analysis

The transfer of assets, including innovative ones, requires determination of  arm’s length settlements between the parties to the transaction. Taxpayers often struggle to value intangible assets. The DEMPE analysis can help to determine which entities within the transaction perform respective functions  such as:

• Development,
• Enhancement,
• Maintenance,
• Protection, and
• Exploitation.

DEMPE functions should be considered from the global perspective in order to define rules and establish procedures for the settlement of transactions involving innovative assets. Consistency for all group entities is crucial. Apply consistent guidelines across the group for conducting analyses of the DEMPE functions.

Intangible assets as the target of tax authorities

Multinational corporations often are audited in respect to potential shifting of profits between entities using intangible assets. As transferring of such assets is relatively easy and can be done “digitally”. Selling or licensing intangibles to any entity around the world is far simpler than transferring material goods.

Tax authorities worldwide are aware of these practices and actively work to reduce profit shifting from high-tax jurisdictions to lower-tax ones. The most obvious effect of profit shifting is lost tax revenue. Therefore, transfers of intangible assets and their valuation are often the subject of proceedings in front of tax authorities globally, involving transactions between domestic and foreign entities.

Case in point: Ireland vs. Perrigo (November 2020)

An Irish company transferred intellectual property rights for a pharmaceutical product to  its U.S. affiliate. The tax authority audited the transfer and found out that the taxpayer had misclassified the sale of the intellectual property rights as a commercial transaction. Therefore, the authority recharacterized it as a capital transaction and re-estimated the taxable income for the Irish company, which had to pay €1.6 million as outstanding tax. The court upheld the decision of the authority.

Avoid unpleasant consequences

To avoid unpleasant consequences when the tax authorities raise their doubts, analyze and secure the transfer of innovations on the basis of transfer pricing regulations. You can rely on our support.

Our experience 

Polish companies are increasingly entering foreign markets, including the U.S. This often involves sharing or transferring of innovations, particularly in the IT and new technology industries. The transfer or sharing of intangible assets requires appropriate care from the transfer pricing perspective.

At MDDP, our experts have extensive experience supporting companies in international expansion, including the transfer of innovations. Our services are specified on our website.

Pricing of intangible assets: our services

Our services cover  development of IC-settlements models between international related parties, including transfer pricing analyses. We are also engaged in verification of contracts for planned IC-settlements, considering both global and local perspective. Our services protect our clients from tax risks at every level.

Effective tax planning for intangible property is crucial for creating and maintaining shareholders’ value. Such services support companies building value, protecting products, and provide you with competitive advantages. Comprehensive and global tax planning is the best way to mitigate and manage tax risks.

Contact us

Discover how our expertise and solutions can revolutionize your transfer pricing strategy on both global and local levels. Contact us today to explore the full potential of effective transfer pricing risk management. Let us help you achieve unparalleled success!