Intangibles are key sources of differentiation for businesses and typically, they help drive revenue, manage cost or both. As a result, many businesses make significant investments in developing, enhancing, maintaining and protecting unique and valuable intangibles to help drive their businesses. For example, businesses in the technology industry are likely to make significant investments in Research & Development (R&D) to develop breakthrough technologies to help differentiate their businesses from competitors; while businesses in the consumer markets industry may make significant investments in advertising and product promotions to develop the value of a brand. Thus, where an entity enters into an intangibles transaction with a related party, it is imperative that an analysis is performed to determine the appropriate compensation to the owner(s) of that intangible.

However, considering that intangibles are not physical assets, it is challenging to identify these assets, determine the owner(s) and perform reliable valuation of the price to be charged for licensing or transferring these assets to related parties. These reasons make it the most complex type of related party transactions to analyse in Transfer Pricing (TP), thereby posing a source of high risk exposure to taxpayers.

In a bid to provide some direction in analysing intangibles transactions, the revised TP Regulations provided some guidance on determining the value of intangibles transactions and their treatment. This article reviews this guidance, its implications, recommends ways to mitigate the TP risks faced by taxpayers and suggests changes to the TP Regulations to mitigate the incidence of double taxation risk on taxpayers and help improve the ease of doing business in Nigeria.

What is an intangible?

Although the revised TP Regulations did not define intangibles, paragraph 6.6 of the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (OECD Guidelines) defines intangibles as "something which is not a physical asset or a financial asset, which is capable of being owned or controlled for use in commercial activities, and whose use or transfer would be compensated had it occurred in a transaction between independent parties in comparable circumstance."

The key features in the definition above have to be met for an asset to be characterized as an intangible. These conditions are critical in distinguishing between intangibles and location specific factors e.g. lower cost of labour in a particular jurisdiction that drive profits, proximity to consumers in a particular jurisdiction etc.

According to the OECD Guidelines, intangibles may be broadly categorised into marketing and trade intangibles. Marketing intangibles relate to marketing activities that aid in the commercial exploitation of a product/service and/or has an important promotional value for the product concerned. Examples include trademarks, trade names, customer lists, customer relationships etc.

On the other hand, trade intangibles are intangibles that are not marketing intangibles. Examples include, patents, know-how and trade secrets, rights under contracts and government licences etc.

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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.