Study On Legal Problems Of Transfer Pricing Of Intangible Property

The economic globalization has brought about the rapid development ofmultinational enterprises, which usually get enormous profit and competitionsuperiority through some internal transactions with associated enterprises around theworld. During the process of the transactions above，using and transferring ofintangible property has increasingly become the core issue. Multinational enterprisespursue profit maximization on a global scale by transferring profits to the low-taxregions,which is mainly through making inappropriate compensation or royalty ratefor the use of intangible property, in order to avoid the tax burden.Apparently, thetransfer pricing of intangible property,which is on the purpose of tax evasion, willincur international disputes on double taxation problem.As a consequence, manycountries are focusing on the issues of transfer pricing of intangibles.The mainly difficult problem, in the field of transfer pricing of intangibleproperty, is the choice of appropriate method. In the aspects of traditional transactionmethod, neither comparable uncontrolled price mothed(CUP) nor resale price methodcan be used precisely with lacks of comparable transactions in business activities ofintangible property. Meanwhile, the use of cost plus method is also facing a obstaclethat the cost of intangible property may be have mere influence on its marketing price.Under these circumstances, Organization for Economic Co-operation andDevelopment (OECD) and some developed countries bring forward the transactional profit method, which is mainly on the comparison of the profit status of controlledtransactions with uncontrolled transactions’ profit situation. Among this methodsystem, transactional net margin method (TNMM) and comparable profit methodcould only be used on the existence of similar uncontrolled transaction and precisedata.In contrast,many countries have acknowledged the profit split method as theproper and effective way for transfer pricing of intangible property. For meeting thearm’s length principle’s requirements, profit split method is dedicate to allocate theprofit,which is from the controlled transactions of intangible property, betweenassociated enterprises rationally by function analyses. Besides,many countries alsoregard the method of intangible property valuation as the breakthrough in dealing withtransfer pricing of intangible property.Reaching advance pricing agreements(APAs)，with contents of transfer pricing of intangible property，has already been thedestination for taxpayers and tax administrations.In recent decades, the vitality of China’s market economic system increasinglyattracted a large number of multinational investments, more and more foreigninvestors have entered China’s market, which also involves internal controlledtransactions of intangible property,such as trademark franchise and transferring ofpatents.Multinational transactions promote China’s economic development, at thesame time, multinational enterprises also use some means of transfer pricing ofintangible property, including the transfer of profits to tax havens,to avoid taxliabilities.This also means deeply erosion of China’s tax benefits. With regard to this,China has actively developed various types of measures for transfer pricingadjustment, and which is especially on transfer pricing methods.Although China’sspecific transfer pricing methods and the APAs mechanism has been built, it still needconstant practice for promotion.The first part of this thesis is mainly on the statements and analysis of OECD andsome countries’ definitions and characterizes of intangible property, in order tomaking the foundations for studying of methods for transfer pricing of intangibleproperty.The second part tries to compare arm’s length principle with Global Formulary Apportionment,for clearing the advantages and disadvantages of these twoprinciples. Then, studying the adaption of traditional transaction method andtransactional profit method when they are adopted in transfer pricing of intangibleproperty.In this section,profit split method’s importance in measuring transfer pricingof intangible property and the foundations of profit splitting will be probed in. Themethod of intangible property valuation and APAs mechanism will be discussed infinal.The third part introduces the development of legislation for transfer pricing ofintangible property in China, and trying to make some recommendations for thedeficiencies of the existing legislation.