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The implementation of the OECD's BEPS Project represents a fundamental change in taxation from the legalistic approach, under which tax minimisation is a generally accepted practice, to the fairness based approach where tax liability in each country should be a fair representation of the economic activities in that country.
Corporate sources say senior-level executives including CEOs and CFOs (C-Suite) have become more involved in tax and transfer pricing over the past year. The driving force behind this is the rollout of OECD BEPS measures in domestic laws, foremost among them country-by-country reporting, which kicked off for many countries in 2017.
The Organisation for Economic Co-operation and Development (OCED) has obtained the agreement of the 129 members of the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS) to a framework that sets out the process for reaching a new global agreement for taxing multinational companies.
Intangibles: Re-engineering substance
At a time when an increasingly number of companies are restructuring their intellectual property (IP) assets to meet the requirements of having substance in every country following the BEPS project, ITR has spoken to the tax directors of 64 multinational enterprises (MNEs) about effective IP management.
- Nine out of 10 respondents said BEPS Actions 8-10 have affected their operations, while other developments barely came close. The EU's Anti-Tax Avoidance Directive (ATAD) only affected around a quarter of companies, and US tax reform had an influence on fewer than 14%
- There are important sectoral differences between IP strategies due to the unique characteristics of each industry, meaning the response to BEPS varies from sector to sector. In some cases, business models did not change drastically even when BEPS forced companies to transform their IP strategies
- Three quarters of respondents to ITR's survey claimed that their companies have moved IP assets onshore in the past five years. Meanwhile, almost 70% of MNEs confirmed they hold their IP assets in the same jurisdiction as their company headquarters. This is standard practice in some countries but elsewhere it's a new phenomenon. For example, in the US, businesses have traditionally worried about holding their intangibles onshore
- 38% of businesses have changed their transfer pricing methodology for existing transactions and 45.5% of companies have changed their methodology for pricing intangibles. Many companies (42%) favour the comparable uncontrolled price (CUP) method, while others (36%) prefer the transactional net margin method (TNMM)
- The third-most-common method used for pricing intangibles was the profit split method, with around a quarter opting for this strategy. This is despite the problems associated with it, such as the lengthy process of value chain analysis, which in some cases involves interviews and surveys across companies' business operations
- A third of the companies that responded to the ITR survey said they had not changed their methodology after BEPS, although more than a fifth said they would do in the future.
- There has clearly been a shift towards a more functional approach and much greater substance. 85% of companies said the development, enhancement, maintenance, protection and exploitation (DEMPE) analysis of intangibles plays a key role in how they attributed profits for tax purposes
- When it comes to marketing intangibles, 44% said they had changed their approach in light of their DEMPE analysis and 35% of companies are likely to make changes in the future. However, most respondents felt the way companies apply transfer pricing to intangibles is already changing
The BEPS project has had a fundamental impact on how some companies approach the transfer pricing of IP assets, but this does not mean the commercial strategy has changed. If anything, companies are bringing tax and commercial considerations closer together.
To discuss the impact of BEPS on your company, contact our global tax leader.
This article is a summary of the article published on www.internationaltaxreview.com on 31 May 2019 and has been republished with the approval of the Publisher.