United States: OECD Intangibles Discussion Draft

On June 6, 2012, the Organisation for Economic Co-operation and Development (OECD) released a discussion draft on potentially updating the provisions of Article 6 of the OECD Transfer Pricing Guidelines (Guidelines). The draft was released by Working Party No. 6 for purposes of comment, and does not reflect a consensus of the member countries.

The draft contains two principal elements: (1) a proposed revision of Chapter 6 of the Guidelines and (2) a proposed revision of examples in the Annex to Chapter 6.

A summary of the content of the 2012 draft follows.

Definition of "Intangibles"

The term "intangible" is intended to address something that is not a physical asset or a financial asset, and that is capable of being owned or controlled for use in commercial activities. Rather than focusing on accounting or legal definitions, the thrust of a transfer pricing (TP) analysis should be the determination of the conditions that would be agreed upon between independent parties for a comparable transaction.

Intangibles that are important to consider for TP purposes are not always recognized as such for accounting purposes (for example, due to expensing rather capitalizing costs). In addition, the enhancement to value that may arise from the complementary nature of a collection of intangibles when exploited together is not always reflected on the balance sheet. Accordingly, characterization for accounting purposes is not determinative for transfer pricing purposes.

Similarly, the availability and extent of legal, contractual or other forms of protection may affect the value of an item and the returns that should be attributed to it, but this does not drive characterization for transfer pricing purposes.

Identification of an item as an intangible is distinct from the determination of the value of the item or the return attributable to the item.

Labels used to describe trade or marketing intangibles, "soft" or "hard" intangibles, routine or non-routine intangibles, and other such categories are not determinative for TP purposes. The discussion draft notes a variety of types of items that could be considered as constituting intangibles. Of particular interest are goodwill and going concern value (deemed to be intangibles), as well as group synergies and market specific circumstances (deemed not to be intangibles, as not owned or controlled).

Parties Entitled to Intangibles-Related Returns

The outcome of specific cases should reflect the functions performed, assets used and risks assumed by the parties. Thus, legal ownership or the bearing of costs related to intangible development, standing alone, should not entitle an entity within a multinational enterprise (MNE) group to an intangibles returns without more. Rather, returns should follow relative contributions.

Entitlement to intangible-related returns should be determined on the basis of the relevant facts and circumstances of each case.

The intangible-related return is the economic return from business operations involving use of that intangible after deducting:

  • Costs and expenses related to the relevant business operations
  • Returns to business functions, assets other than the particular intangible in question, and risks, taking into account appropriate comparability adjustments

Registration and contractual arrangements are the starting point for analysis. For such items to have importance, there must be alignment with the functions, risks and costs relating to the intangibles in question.

Arm's Length Compensation for Functions Performed

In determining whether a specific party is entitled to an intangible return for the functions it performs, it must be determined whether it performs "control functions."


In extraordinary circumstances, contractual allocations of entitlement to intangible-related returns may be disregarded by tax authorities "notwithstanding the fact that the registrations and contractual entitlements are fully in alignment with the functions, risks and costs related to the development, enhancement, maintenance and protection of the intangibles." This "disregard" element rings of "general anti-avoidance" concepts.


To be entitled to intangible-related returns, a party should in substance, and with "alignment":

  • Perform and control important functions related to the development, enhancement, maintenance and protection of the intangibles, including functions performed by unrelated parties
  • Bear and control the risks and costs related to the function
  • Bear and control risks and costs associated with maintaining and protecting its entitlement to intangible-related returns

Transactions Involving the Use or Transfer of Intangibles

There must be an identification and proper characterization of the specific controlled transactions involving intangibles. There are two general types of transactions.


Intangibles may be used in connection with controlled transactions where there is no transfer of the intangible or of rights in the intangible (such as in the manufacture or marketing of goods, performance of services, and so on).


Rights in intangibles may be transferred in controlled transactions, including all or limited rights. There can also be a transfer of a combination of intangibles.

Determining Arm's Length Conditions (comparability)

The general principles of the Guidelines are to be used to identify the pertinent conditions relating to the use in question. In this regard, attention is to be given to the "options realistically available to each of the parties to the transaction." For this purpose, the perspectives of each of the parties to the transaction must be considered. A one-sided comparability analysis does not provide a sufficient basis for evaluating a transaction involving the use or transfer of intangibles:

It will often be the case that a price for a transaction can be identified that is consistent with the realistically available options of each of the parties. The existence of such prices is consistent with the assumption that MNE groups seek to optimise resource allocations, at least on an after tax basis. If situations arise in which the minimum price acceptable to the transferor, based on its realistically available options, exceeds the maximum price acceptable to the transferee, based on its realistically available options, it may be necessary to consider whether the actual transaction should be disregarded ... .

This "options realistically available" criteria, again, feels like an after-the-fact, subjective, General Anti-Avoidance Rule (GAAR)-type criteria. It is a rather obvious open-ended inquiry that raises the question of how an MNE is to prepare documentation on this issue?

The discussion draft contains detailed comments about comparability and potential adjustments with uncontrolled transactions.

TP Method

The general provisions of the Guidelines are generally to be applied. Caution should be exercised to not too readily assume that "all residual profit from transactions after routine functional returns should necessarily be allocated to the party entitled to intangible related returns."

Financial valuation techniques may have application in some contexts.


Where reliable comparables do not exist, a variety of normal elements will need to be addressed to select an appropriate method.


Where reliable comparables do not exist, the discussion draft gives detailed consideration to the use of profit-split methodologies and valuation techniques (such as discounted cash flow and net present value, discount rates, terminal values and tax rates).

When valuation is highly uncertain, there are additional steps that can be taken into account to determine the arm's length pricing.


The discussion draft contains an extensive set of 22 examples, which provide sound context for the principles enunciated.


In a separate discussion draft, Working Party No. 6 addressed whether transfer pricing analysis of intangibles transactions should be undertaken on an ex ante basis, relying on information available at the time of the transaction, or an ex post basis, using information available at the time the tax return is filed.

There are variety of potential issues to be considered in this regard, as to which comments were solicited.

Way Forward

The 2012 discussion draft undertakes to update the intangibles provisions of the Guidelines. As with any such updating, there are inevitably a variety of issues that will need to be addressed in subsequent analysis by the OECD. MNEs will need to evaluate their own TP policies and effective tax rate (ETR) plans to take these factors into account.

The issues include the following:

  • Intangibles definition: Further analysis of so-called soft intangibles (such as goodwill, going concern, value, synergies, and so on). When are such items simply elements of being a member of a MNE group?
  • Disregarding transactions: How can transactions that actually occurred be disregarded? Adjusting the TP is one thing, purporting to disregard the transaction feels like substance versus form of GAAR principles.
  • "Alignment": The concept needs elaboration and explanation. Otherwise, it becomes another level of TP analysis without guidance.
  • "Realistically available options": This appears to be a circular concept. It is an open invitation to examination teams to invoke, in essence, substance versus Form, or GAAR arguments.
  • Financial valuation techniques: There is a tremendous overlap between financial valuation, financial accounting and transfer pricing. It would be helpful for the OECD to spell out how this can be handled, as it occurs in every acquisition.
  • Profit splits: The discussion draft cautions that tax administrations and MNEs not go too quickly to residual profits splits when comps are not readily available. On the other hand, the favorable view of profit-split methodologies in this area seems to be more positive in the discussion draft than in the existing Guidelines. A brief comment reconciling these items may be appropriate.
  • Timing: One element that could be helpful to the OECD deliberation with respect to timing is the U.S. experience in its "commensurate with income" provision (Section 367(d) of the U.S. Internal Revenue Code) enacted in 1986. The United States has struggled with how to apply these provisions, even after almost 30 years on the books.
  • Annual documentation: With all of these newly defined concepts, including concepts of disregarding actual transactions or deeming there to be "realistic alternatives," it would be helpful if the OECD provided guidance as to how MNEs can prepare transfer pricing documentation in a manner to satisfy these requirements without having to essentially document the negatives (i.e., the transactions are not to be "disregarded" or there are no "realistic alternatives.") One approach would simply be to make a laundry list of the issues and opine that the chosen methodology is the most appropriate methodology.
  • MNE planning considerations: Existing advance pricing agreements; ETRs; acceptance of TP policies and ETR strategies in BRICS and other source countries; the ability to absorb foreign country adjustments (bilateral, foreign tax credit or otherwise); difference between financial valuation, financial accounting and TP policies, etc.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Sign Up
Gain free access to lawyers expertise from more than 250 countries.
Email Address
Company Name
Confirm Password
Mondaq Newsalert
Select Topics
Select Regions
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions