Determining the arm’s length price (ALP) of transactions involving intangibles or intellectual property (IP) will be highly challenging for multinational enterprises (MNEs). This is because of the unique characteristics of IP such as the ease of transfer via a contractual arrangement, the difficulty in finding comparable arrangements and the importance of intangibles in generating revenues for businesses.
The transfer pricing analysis of intangibles must start with a thorough identification of the commercial or financial relations between the Related Parties or Connected Persons and the conditions and economically relevant circumstances attached to those relations. Transfer pricing advisers can help you navigate the complexity of such an analysis.
The UAE Transfer Pricing Guide offers valuable insights that can be used to simplify the process of determining an arm’s length charge for intangibles. Read ahead to learn more about the Guide’s key highlights related to determining an arm’s length price for IP:
IP Treated as Intangibles under Transfer Pricing
The UAE Transfer Pricing Guide lists the below assets as intangibles for the purposes of transfer pricing:
- Know-how and trade secrets
- Trademarks, trade names and brands
- Rights under contracts and government license
- Licenses and similar limited rights in intangibles
Items Not Treated as Intangibles under Transfer Pricing
The following types are not treated as intangibles under the UAE transfer pricing regime:
- Group synergies
- Market-specific characteristics
- Assembled workforce
Identify intangibles to Set Arm’s Length Price
It is crucial to determine the entity or entities within an MNE Group that are entitled to share in the returns derived from exploiting the IP. The identification and examination of intangibles are relevant in two general types of transactions:
- Transactions involving the transfer of intangibles or rights in intangibles
- Transactions involving the use of intangibles in connection with the sale of goods or the provision of services
DEMPE for Transfer Pricing of IP
In the next step, MNEs must identify which entity or entities within the Group should ultimately bear the costs, investments and other burdens associated with the Development, Enhancement, Maintenance, Protection and Exploitation (“DEMPE”) of intangibles.
Although the legal owner of an intangible may receive the proceeds from the exploitation of the intangible, other members who contribute to the DEMPE of the intangibles are entitled to be compensated for their contributions under the Arm’s Length Principle.
Steps in the Transfer Pricing Analysis of IP
The following actions need to be performed for analysing transactions involving intangibles between Related Parties or Connected Persons:
- Identify the IP used or transferred
- Identify the full contractual arrangements, with a special focus on determining legal ownership of intangibles based on the terms and conditions of legal arrangements
- Identify the parties performing functions, using assets, and managing risks related to DEMPE of the intangibles using the Functional Analysis, in order to determine the economic ownership of the intangibles
- 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 actually controls the risks in practice, and has the financial capacity to assume the risks relating to the DEMPE of the intangibles
- Characterize the actual Controlled Transactions related to the DEMPE of the 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
- Determine the Arm’s Length Price for these transactions consistent with each party’s contributions of functions performed, assets used, and risks assumed
Tax Gian can help you with IP Transfer Pricing
Determining the arm’s length charge of transactions involving intangibles is regarded as one of the most complex aspects of transfer pricing in the UAE. MNEs can navigate this by seeking the advice of the best transfer pricing advisers in Dubai such as Tax Gian, a brand of Jitendra Tax Consultants (JTC).
Tax Gian and its associate Jitendra Chartered Accountants (JCA) have been revolutionising the UAE regulatory compliance landscape for over two decades. We have a team of highly qualified tax experts who can guide businesses on all aspects of the UAE transfer pricing regulations. Call us today to avail yourself of comprehensive transfer pricing advisory services in the UAE.