The Tax Regime Of Intangible Transfer Pricing:Recent Developments And Implications

The transfer pricing of intangibles has been an important vehicle of profit shifting to achieve tax evasion by multinational enterprises in recent years.Because of the uniqueness and exclusivity of intangibles,the application of the traditional Arm's Length Principle has been seriously challenged.To cope with this kind of challenge,governments and international organizations begin a series of reform and innovation of the transfer pricing system of intangibles.The historical background of this article is the important influences of the BEPS Action Plan on the transfer pricing taxation of intangibles;the main object of investigation is the transfer pricing taxation of intangibles in the U.S.and the OECD Transfer Pricing Guidelines.The issues covered in this article include the recognition of the transaction involving intangibles,definition of intangibles,the transfer pricing of marketing intangibles and transfer pricing methods for intangibles.Through systematic review,comparison,analysis and evaluation of the formation,application and development of the transfer pricing rules of intangibles in above fields,this article proposes resolutions to the transfer pricing legislation in China.Besides introduction and concluding remarks,this article consists four chapters,among which:The first chapter researches on the formation,development and application of the three principles of the recognition of the transaction involving intangibles,which include the principle of economic substance,options realistically available and the commercial rationality standard.The expansion in the scope of the application of the traditional Arm's Lenghth Principle is reflected in the scope of transfer pricing examination by the tax authorities from price determination to transaction structure,while the introduction of above principles allows tax authorities to disregard or re-characterise the controlled transaction under certain conditions.This chapter analyses the lastest development of the above principles in the 2015 New OECD Transfer Pricing Guidelines,and points out that it still needs to be improved.The second chapter researches on issues relating to the definition of intangibles.Through the study of the relevant regulations and practice in the U.S.on the definition of intangibles as well as the relevant rules in the OECD Transfer Pricing Guidelines,this chapter analyses the mainstream view of the international community and development trend on the issue of definition of intangibles.In addition,this chapter dissects the soft intangibles,such as goodwill,going concern value,assembled workforce/workforce in place and group synergies,which are the focuses of controversy involving the definition of intangibles,reviews the new development of the definition of intangibles in the 2015 New OECD Transfer Pricing Guidelines and its influence on developing countries.Although location saving is not intangibles for transfer pricing purposes in the 2015 New OECD Transfer Pricing Guidelines,but it is considered as a comparability factor in the comparability analysis,by which developing countries can strive to obtain excess profit from the geographical advantage.At the end of this chapter discusses lastest development in the legislation of the definition of intangibles in China,suggestions to improve and perpect the legislation are porposed.The third chapter discusses the issue of the transfer pricing of marketing intangibles in three fields,including scope and definition of marketing intangibles,ownership of marketing intangibles,compensation to marketing intangibles.There has been a trend to expand the definition of marketing intangibles in recent years,while the bright-line test has not yet become a universally recognized judgement criterion of marketing intangibles creation,which inevitably triggers controversy in practice.On the issue of the ownership of marketing intangibles,the development of regulations and practice in U.S.is presented,which offers reference to the development of the New OECD Transfer Pricing Guidelines.On the issue of compensation to marketing intangibles,this chapter researches on two situations of compensation to marketing intangibles:(1)compensation to marketing activities undertaken by enterprises that do not own the trademarks or tradenames that they are promoting;(2)compensation to distributor in co-branding cases.The development trend of the regulations of the transfer pricing of marketing intangibles in developing countries represented by India provides useful reference and inspiration to relevant legislation in China.The fourth chapter researches on the transfer pricing methods for intangibles.First this chapter compares the Best Method Rule in the U.S.and the Most Appropriate Method Rule in the OECD Transfer Pricing Guidelines,and discusses the recent development of rules of the selection of the transfer pricing methods.Then this chapter analyses the feasibility of the application of the transactional profit split methods in the context of global value chains.Countries are cautious about the application of the transactional profit split methods,objectg to its expanding application.There are still some difficulties to be solved in the application of the transactional profit split methods in practice.But for developing countries,the development of rules for the application of the transactional profit split methods in the context of global value chains will have a significant impact on the distribution pattern of international tax interests.Developing countries should actively participate in the formulation of rules,and protect tax sovereignty of their own.