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Dear readers,

The global transfer pricing practice of Deloitte Touche Tohmatsu Limited is pleased to present a collection of articles on different aspects of transfer pricing particularly focused on intangibles.

As OECD's transfer pricing guidance in Actions 8, 9 10 and 13, issued as part of the Base Erosion and Profit Shifting (BEPS) Project, continue to take centre stage in transfer pricing planning and documentation, in this guide, we provide valuable insights into some of the most significant challenges that multinational corporations (MNCs) face with respect to transfer of intangibles and, in particular, in identifying and assigning value to intangibles.

In the first article, Applying the profit split method, Alan Shapiro, Eunice Kuo and Anis Chakravarty, discuss the OECD's non-consensus discussion draft on proposed changes to the transactional profit split method. They observe that the tone of the discussion draft suggested the broad applicability of profit splits to integrated value chains. Their main takeaway, however, from the supplemental guidance on value chain analyses provided in the discussion draft is the casting of a value chain analysis as a delineation tool for a specific transaction, rather than as a justification to apply a profit split on every integrated MNE operating through a global value chain. This is a significant change in direction from the non-consensus draft on profit splits, which suggested the latter rather than the former.

In the second article, The OECD hard-to-value intangible guidance, Philippe Penelle attempts to understand where the concepts in the hard-to-value intangible (HTVI) guidance came from, and explains what the views of the US government have historically been in connection with the arm's-length nature of such concepts. That discussion will encompass a simple theoretical discussion of the use of ex post results to assess the arm's-length nature of ex ante pricing as a means to set up one commonly cited reason to believe that the HTVI guidance may, in fact, go beyond the arm's-length principle, as commonly understood or interpreted. Ultimately, the article provides useful insights as to what to expect from the OECD HTVI guidance, based on lessons learned from the US experience with the commensurate income standard and the periodic adjustment rules.

The third article focuses on OECD guidance on transfer pricing documentation (Action 13) which requires multinational corporations to identify where and how value is created in business operations. In their article, Value chain analysis, Shanto Ghosh and Arindam Mitra outline the key approach to a value chain analysis and how one may apply economic principles to determine the ex post split of the consolidated contribution margin in a global value chain taking into consideration the economic risks being borne by the various entities within an MNC. Their novel methodology allocates the ex post contribution margin (or revenue) among the sub-units of an integrated supply chain based on the relative modified operating leverage of the sub units. The result is a reasonable arm's-length approximation of the allocation of profits within an MNC that are aligned by the creation of value within the MNC's integrated supply chain.

Although the guidance in the non-consensus discussion draft on proposed changes to the transactional profit split method provides a reasonable foundation on which the OECD member states can build upon in the next release, which is expected in the next few months, it is hoped that OECD will provide additional clarification in a number of areas, including better coordination with its valuation guidance on intangibles.

Navigating the world of transfer pricing is not easy. We hope this guide provides you with useful insights into the transfer pricing of intangibles. If you have any questions, or would like to engage in a discussion, please contact the Deloitte transfer pricing professionals featured in this guide.

Mark Nehoray


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