Intellectual Property (IP) is a highly significant asset for Multi-National Enterprises (MNEs). IP assets such as patents, copyrights, trademarks and trade secrets require special consideration within the regime of transfer pricing, as they are intangible assets. Transfer pricing refers to the pricing of transactions between related entities within a corporate group, often located in different tax jurisdictions.
MNEs need to ensure that these prices are at arm’s length, which means they should be priced as if they were conducted between unrelated parties in an open market. The OECD Guidelines have recommended certain special rules and considerations while determining the transfer pricing of intangible assets.
Due to its complexity, it is advisable to consult with transfer pricing consultants in Dubai before making any transfer pricing decisions related to IP assets. In this long-form blog, we will explore how transfer pricing rules affect IP and why it is a critical consideration for companies operating internationally.
How to analyse transactions involving IP assets?
The OECD recommends the following steps to analyse transactions involving intangibles between associated enterprises:
- Identify the IP assets with specificity and the specific, economically significant risks associated with the development, enhancement, maintenance, protection, and exploitation of the IP assets (intangibles)
- Identify the full contractual arrangements, with special emphasis on determining legal ownership of IP assets based on the terms and conditions of legal arrangements, including relevant registrations, licence agreements, other relevant contracts, and other indicia of legal ownership, and the contractual rights and obligations, including the contractual assumption of risks in the relations between the associated enterprises
- Identify the parties performing functions, using assets, and managing risks related to developing, enhancing, maintaining, protecting, and exploiting the intangibles by means of the functional analysis, and in particular which parties control any outsourced functions, and control specific, economically significant risks
- Confirm the consistency between the terms of the relevant contractual arrangements and the conduct of the parties, and determine whether the party assuming economically significant risks, controls the risks and has the financial capacity to assume the risks relating to the development, enhancement, maintenance, protection, and exploitation of the intangibles
- Delineate the actual controlled transactions related to the development, enhancement, maintenance, protection, and exploitation of intangibles in light of the legal ownership of the intangibles, the other relevant contractual relations under relevant registrations and contracts, and the conduct of the parties, including their relevant contributions of functions, assets and risks, taking into account the framework for analysing and allocating risk
- Where possible, determine arm’s length prices for these transactions consistent with each party’s contributions of functions performed, assets used, and risks assumed
Key Considerations for IP in Transfer Pricing
You need to consider the following aspects to ensure the IP transactions are priced fairly in line with transfer pricing regulations:
Valuation of IP
Determining the value of the intangible asset is key to ensuring the prices of transactions are at arm’s length. MNEs need to make sure that the price at which IP is transferred or licensed within the corporate group reflects its true market value. MNEs need to apply appropriate valuation methods, considering factors such as royalty rates and the expected income generated by the IP.
Comparable Uncontrolled Price Method
The Comparable Uncontrolled Price (CUP) Method is one of the most commonly used methods in transfer pricing for IP. It involves comparing the transfer price of IP with the prices charged for similar IP in transactions between unrelated parties. Transfer pricing advisers in Dubai can advise MNEs on the appropriate use of the CUP method.
Profit Split Method
The profit split method may be used when multiple entities within the corporate group contribute significantly to the development, enhancement, maintenance, protection, and exploitation (DEMPE) of the IP. This method allocates profits among these entities based on their respective contributions.
Advance Pricing Agreements
Advance Pricing Agreements (APAs) can be beneficial for companies seeking to ensure certainty in their IP transfer pricing arrangements. APAs allow companies to negotiate and agree with tax authorities on the appropriate transfer pricing methods for IP transactions.
Challenges in Comparability
Finding truly comparable transactions for IP can be challenging, as each IP asset is unique. Companies may need to perform detailed analyses and adjust for any differences to establish comparability.
Legal Ownership and Control
The legal ownership of IP and the entity that controls its use can impact transfer pricing arrangements. Ensuring alignment with legal and contractual agreements is crucial.
Royalty Rates and Licensing Fees
Determining appropriate royalty rates and licensing fees for IP is complex. These rates should reflect the value of the IP, market conditions, and the rights granted.
Tax Experts at Tax Gian can Help you with IP Transfer Pricing
When it comes to transfer pricing, IP assets can be challenging for MNEs. MNEs must navigate the complex terrain of transfer pricing rules to ensure that their IP transactions are priced fairly and transparently. Seeking assistance from the best transfer pricing consultants in Dubai such as Tax Gian can help businesses stay compliant.
Tax Gian has a team of highly experienced tax experts who can offer you end-to-end transfer pricing solutions in Dubai. Tax Gian is the flagship brand of Jitendra Tax Consultants (JTC). Since 2001, Jitendra Chartered Accountants, an associate of JTC, has been providing bespoke tax advisory services to its clients. We can help you navigate the complex provisions of transfer pricing. Call us today to avail yourself of comprehensive corporate tax advisory services in Dubai, UAE.