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| Transfer Pricing Alert | 6 February 2012 |
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This article first appeared in the International Tax Review on 3 January 2012 and is being sent to you with permission from, and our thanks to, the publisher at the International Tax Review.
OECD: An intangible future for intellectual property
At the forefront of tax policy development for intangible assets is the OECD's Working Party No 6 and Michelle Levac, the group's chairwoman, spoke exclusively to International Tax Review about how intangible assets are assessed and what difference, realistically, the new guidelines will make when they are finally published.
Intangible assets, and the broader issue of intellectual property (IP), are increasingly causing problems for revenue authorities and multinational enterprises (MNE) around the world. As companies conduct more related-party transactions and find more ingenious ways to do business, it is becoming more difficult for revenue authorities to ask the right questions and correctly assess companies' tax liabilities.
The OECD's Working Party No 6 hopes to change that. Its guidance on intangibles, as it stands, is relatively brief, for such a complex area of taxation. This inevitably leads to interpretation issues among governments and taxpayers and, subsequently, a higher number of disputes.
To overcome these issues and, hopefully, save both sides significant money in resources, the OECD is consulting with business and other interested parties to provide more examples and a definition that is more easily interpreted by global revenue authorities, leaving less room for error. Taxpayers can expect to see draft guidance by March 2013, though business consultants at the meeting have asked for something to work on by 2012.
Evolution
While tax practitioners are beginning to grind to a halt on the issue of intangibles, hence the call for clearer guidance, there has been an evolutionary path up to this point.
"We are better equipped to identify transactions," said Levac, who is also a transfer pricing specialist at the Canada Revenue Authority. "There's better risk assessment. We are enhancing the relationship between transfer pricing and valuation and we have over 50 business valuators within the CRA."
Marketing intangibles This group of intangible assets is creating the biggest problems for taxpayers and revenue authorities. "It's created by transactions that happen between related parties that wouldn't happen in an open market and we need hypothetical examples that reflect commercial reality," said Levac. Levac said there are pricing issues involved with R&D, especially when a new intangible is transferred just before it is commercialised. "There's need to value that beforehand."
Interpretation concerns A great deal of attention is being paid to the OECD's intangible project. Like the restructuring project before it, it will take time and cover a number of different issues. There is a lot of pressure on Working Party No 6 to produce workable guidelines and useful examples. "My biggest concern is to add as much value as possible [to the project] in order to minimise the risk of double taxation," said Levac. "We have to come to a consensus but we not [reach one] on all possible issues." Levac also said another challenge is ensuring that everyone can understand the same thing from the same words. This could lead to large-scale debate after draft guidance is released, as governments and taxpayers around the world discuss what each word in the guidance means to them. During the tax update by the Committee of Exerts at the UN in Geneva in October 2011, members debated for a number of hours on the implications of using the word should against the word could in guidelines. China, for instance, places different emphasis on these words to the UK. The OECD will want to make sure it doesn't isolate any of the developing countries on this issue otherwise it could lose more ground to the UN as the authoritative voice in transfer pricing and tax policy. "Each word used in the development of the guidance is carefully considered. We don't, at the outset of the project, [all] understand the same things from words," said Levac. Levac said there is reluctance among Working Group members to use terms in the guidance that are used in practice for different purposes, such as economic ownership. "So we have to draft around this. This makes the guidance more difficult to draft," she said.
Working examples "We have been really pressed to work with examples," said Levac. "We have the support from the whole group to work [on these]." At the end of the Working Party's last meeting, with interested business parties in November 2011, BIAC - the business advisory committee to the OECD - said it could help the Working Party to provide examples in good time. "We are getting more comfortable about producing useful guidance," said Levac.
Non-member countries As the UN is gaining more notoriety for its efforts in tax policy and countries, especially non-OECD countries, are debating where their loyalties lie, it is important that the OECD recognises the need to make these countries, such as Brazil, Russia, India and China (BRIC), feel represented and included. Levac said she had received very positive feedback from some of these countries and said she was surprised to hear what had happened at the UN. "I'm optimistic we won't face the same challenges in this project because of their [BRIC] feedback and actice participation."
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Matthew Wall CA CBV
Transfer Pricing Expert
416.737.2276 |
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MDW Consulting Inc. is the
Canadian member of the Altus Alliance, an international associate of transfer pricing professionals. Please contact us if you have any transfer pricing questions or concerns.
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