This article describes the challenges that the digital
transformation of the economy poses for transfer pricing. In
the next article of the series, it will show how these
interdependencies can be translated into new transfer pricing
The digital revolution has changed how companies operate.
Vastly increased information flows have enabled companies to
access data previously unattainable as information is gathered
directly from customer interactions or sensors.
From a transfer pricing perspective, one of the most
important changes stems from increased feedback mechanisms:
value chains become value networks as information is gathered
and dispersed from different interaction points. This is then
processed and used in many departments and companies for
immensely different purposes. This makes it more difficult to
separate the value creation of the individual group companies,
especially due to the synergies created between the
We encountered an example of these effects in the
agrochemical industry. A producer of herbicides expanded its
relatively traditional business into new digital offerings. The
group already had well-known brands, production expertise, and
customer relationships with farmers around the globe. However,
the group is now starting to offer field management software
that allows farmers to estimate yields to plan and target the
use of the herbicides more efficiently. In addition, there are
plans to potentially use automated drones for various
monitoring and tending processes in fields.
All these activities are driven by different entities within
the group and are highly intertwined. The software is developed
by a new start-up within the group, which relies on the R&D
experience by the group's laboratories, and is advertised to
the farmers by the sales entities using local client
relationships and the global brand.
On the other hand, the software sends back information to
the groups data centers where it is then processed and
structured by some of the group's data scientists and then used
by both the R&D centers to improve the core products
as well as by the sales entities to better target their
campaigns. The software start-up development entity in the
group also uses customer feedback to improve the software.
While there are some direct revenues created from the licensing
of the software to farmers, much of the value creation happens
in this network of effects.
As can be seen from this example, it is not only that new
intangibles are created, but that intangibles are increasingly
interlinked and influencing each other. For transfer pricing,
this is a particular challenge, as it becomes more difficult to
pinpoint the exact impact of one company within this value
network and its appropriate remuneration. While many companies
contribute to the business success, it is obvious that these
contributions are very different, both in nature and likely in
The OECD has published guidelines that prescribe that the
creation and impact of intangibles must be analysed in greater
detail regarding their development, enhancement, maintenance,
protection and exploitation (DEMPE), and the entities involved
in these steps.
In this case, it could be seen that this poses a particular
challenge for digital business models as the DEMPE process is
not linear at all, and involves not just activities, but also
intangibles that are contributing to (and benefiting from)
other intangibles. Therefore, we need to interrelate these
intangibles and DEMPE contributions and their economic impacts
in detail by mapping and explaining their relations.
New transfer pricing systems will need to reflect these
trends and fairly reflect the joint value creation to digital
business models. Due to the high complexity and unforeseeable
operating results, standard transfer pricing methods with
guaranteed fixed margins will lose their usefulness. Our next
article will show how transfer pricing methods could be applied
in the context of the digital transformation.
Yves Hervé (firstname.lastname@example.org) and Philip de Homont (email@example.com)
NERA Economic Consulting
Tel: +49 69 710 447 502 and +49 69 710 447 508