Question

Your client, a US multinational company, is planning to transfer intangible assets, including trade names and trademarks to a low tax offshore subsidiary. This subsidiary would charge royalties to the US and foreign subsidiaries for the use of the intangibles. The company also plans to ship products manufactured by its international subsidiary to various worldwide customers.

A) Briefly summarize the current transfer pricing implications and tax reporting considerations your client should consider for both transactions.

B) What other information would you request from your client?

Answer 1

You are aware that Intangibles are Valuable assets with no physical substance. Examples of Intangible assets include Patents, copy rights, also trade secrets and business reputation as well.

The taxation of Intangibles can be seen from two traditional dimensions of law.

a) Domestic Law.

b) International Law.

From domestic law point of view, the tax treatment depends on cost of development of that intangible asset, treatment of capital expenditure, royalty payments and arm's length price of payments related to intangible.

In case of royalty payment typically the country of payer of royalty withholds tax while in the country of recipient they could obtain some double taxation relief depending on the treaty between the nationals.

In case of non royalty intangibles, no withholding tax is deducted in the country of payer where as income is taxed in the country of recipient of income. This provides multinationals to move their intangibles to low tax jurisdictions.

Transfer Pricing Implications :

In case of Intangibles, the transfer pricing issues can arise when multinationals develop, transfer, acquire and exploit intangibles. So the concept of Development, Enhancement, Maintenance, Protection and Exploitation (DEMPE) has been introduced. Here, the multinationals need to follow number of steps for analysing Intra Group transactions involving intangibles, including :

1. Identifying relevant Intangibles, contractual agreements and relevant parties involved in development of Intangibles.

2. Identifying functions performed, assets utilised, risks involved in Development, Enhancement, Maintenance, Protection and Exploitation of Intangibles.

3. Reviewing consistency between the contractual agreements and conduct of the parties

4. Allocation of Economic returns from the exploitation of intangibles to the parties involved.

5. Determine the Arm's length Price.

Hence, the Introduction of DEMPE approach is fundamental and helpful for businesses to address their tax impacts of Intangibles and align the risk profile with profitability.