OECD Issues New Guidance for Tax Administrators on the Treatment of Intangible Assets that are Difficult to Value – TRANSFER VALUATION

The OECD has issued another in its series of guidelines aimed at bringing greater legal certainty to transfer pricing regulation to assist taxpayers in preparing transfer documentation. We have been working very intensively on transfer pricing and have identified that legal certainty is one of the biggest pain points for businesses. They often do not know how to properly approach certain controlled transactions and, due to the vagueness of the whole transfer pricing regulation, they are thus exposed to arbitrariness of the tax authorities. We therefore appreciate any further efforts by the OECD to shed more light on this issue.

The Guidance for Tax Administrators on the Application of the Approach to Intangible Assets that are Difficult to Value published on 21 June 2018 (the “Guidance”) aims to improve consistency and reduce the risk of double economic taxation by presenting the principles that should underpin the tax authorities’ application of the approach to the valuation of intangible assets that are difficult to value. The approach of the Guideline generally refers to an assessment of information that becomes available after the transaction (ex-post) as presumptive evidence of the appropriateness of ex ante pricing for hard to value intangible assets. In addition, the revised Guidance addresses the interaction between the approach to hard-to-value assets and the approach to the mutual agreement procedure under the relevant double tax treaty.

The approach to hard-to-value intangible assets chosen by the OECD and incorporated in Section D.4 OECD Guidelines on Transfer Pricing for Multinational Enterprises and Tax Administration, was intended to protect tax authorities from the negative effects of asymmetric information available to them relating to hard-to-value intangible assets. Specifically, the Guidance allows tax administrations to adjust a transaction to a hard-to-value intangible asset when the projected income or cash flows used in the original valuation differ significantly from the actual income or cash flows, but only if certain conditions are met. Those conditions generally relate to the taxpayer’s lack of due regard for what was reasonably foreseeable at the time of the transaction.

The guidance is intended to provide guidance on what to do when applying the approach to hard-to-value assets, taking into account the facts and circumstances of individual cases. The Guidance states that it should be improper to base a revised valuation on actual results without taking into account the likelihood of actual income or cash flows at the time of the transaction.

The guidance is quite broad in its final form and does not offer a prescriptive approach to the adjustments to be made. Rather, there are general principles to be followed, whether consistency of application or refraining from automatic substitution of actual results. The guidance also offers 2 examples.

The guidance also recommends that tax authorities apply audit procedures to identify transactions with hard-to-value intangible assets and evaluate the taxpayer’s assumptions in valuing intangible assets. In order to avoid double taxation and increase tax certainty in transactions involving hard-to-value intangibles, the OECD has provided some clarifications on Advance Pricing Arrangements and dispute resolution. In cases where the transfer of intangible assets is subject to a bilateral or multilateral valuation method agreement, the approach under the Guidance will not apply. Where the approach under the Guideline leads to double taxation, the dispute should be resolved through the mutual agreement procedure under the relevant treaty.

The full text of the new Guidance can be found at http://www.oecd.org/tax/transfer-pricing/guidance-for-tax-administrations-on-the-application-of-the-approach-to-hard-to-value-intangibles-beps-action-8.htm

Our CEO Peter Varga also elaborated on the topic of transfer pricing in more detail in Právne Noviny

AUTHOR: Andrej Choma, transfer pricing specialist