Technology and intangibles: TP considerations for fintechs
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Technology and intangibles: TP considerations for fintechs

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Avik Bose, Vrushang Sheth and Kristin Phang of Deloitte explore current trends in the fintech industry and typical TP issues for fintechs.

Global socio-economic events have shaped the growth of and changes in the fintech industry. Following the global financial crisis of 2008, there was a rise in alternative business models within the banking sector such as digital banks. During the COVID-19 pandemic, there was a surge in the use of digital payments, allowing new payments and digital wallet companies to enter the market. During the post-pandemic recovery, platform lenders and microfinancing players emerged as an alternative and accessible source of funds, particularly for small and medium enterprises (SMEs).

Start-up activity varies among regions, and Asia Pacific has proven to be a key market with emerging fintech players focused on improving access to financial products for individuals and businesses. The future of fintechs in Asia Pacific amidst the current economic environment is both promising and challenging. While economic and regulatory challenges can present obstacles, they can also create opportunities for fintech companies to innovate and address emerging needs. Many Asian countries have large unbanked or underbanked populations. Fintech companies can play a crucial role in expanding financial inclusion by providing accessible and affordable financial services to underserved communities.

As each fintech responds to changes in the economic environment, operating models evolve and value chains shift. It is therefore imperative for fintechs to ensure that their TP policies are aligned to the value creating activities within their multinational groups.

The following section features some observations on trends and TP issues from Deloitte’s experience with different fintechs across Asia Pacific.

Banking services – microfinancing platforms and digital banks

The development of technology and greater market connectivity has allowed online microfinancing platforms to connect SMEs with lenders, facilitating quicker and more efficient forms of financing. Typically, the platform provider does not assume any credit risk as the provider collects fees from the borrowers and lenders based on a percentage of funds borrowed and a percentage of interest income received respectively. However, some platform providers extend financial guarantees to the lenders and charge guarantee fees to cover their exposure to default risk. Platform providers may also extend their own funds as loans to SME borrowers, which is referred to as ‘balance sheet lending’.

The key TP issues for platform providers include compensation for R&D activities, licensing of the platform, provision of capital for balance sheet lending activities, cross-border guarantees and centralisation of business support services. Often, given the nature of this business, the majority of the ‘people functions’ are in a hub, with minimal staff focused on marketing activities in the local jurisdictions. However, a centralised operating model which leaves only routine profits with the local entities could be challenged by local tax authorities and needs careful TP consideration in articulating the value provided by the platform or the centralised R&D and business support services.

Conversely, market support payments received from the central entrepreneur by local entities that incur start-up losses may result in TP and tax risk for the microfinancing entrepreneur. This is because tax authorities in its jurisdiction may consider these payments to have an enduring benefit for the local businesses and treat this as a non-deductible capital expenditure.

Digital banks rely heavily on IT infrastructure and systems which are generally proprietary in nature. Such systems combined with data analytics tools and customer data constitute the most valued intangible within digital banks. Accordingly, it is common to see a centralised entity developing such systems and tools that benefits all its group affiliates and the affiliates contributing local market data for effective design and promotion of products.

This gives rise to a key TP question regarding the value and therefore the compensation of the centrally developed systems and tools, vis-a-vis local customer data fed into the central system. As for financing risk, since digital banks primarily operate online and often use innovative technology and data-driven approaches, digital banks face unique financing risks compared to traditional brick-and-mortar banks. For example, the underwriting function is sometimes automated, leading to higher reliance on technology for risk assessment. In such scenarios, technology infrastructure becomes critical and accordingly the TP methodology for charging such technology needs to be documented in a robust manner.

Incubation of IP

Incubators are entities that have heavy upfront investment in R&D, as they are often concurrently pursuing development of different products/technologies. In the fintech space, given the significant upfront investment, coupled with an average sprouting timeframe between two to three years, banking establishments or large technology players may be better placed to undertake these activities. Commonly incubated technology by banks could range from integrated e-commerce platforms that provide one-stop solutions for SMEs, to software interfaces that could be linked to retailer applications to generate and analyse critical customer data to sell banking products. Once the incubated IP reaches a certain stage of maturity, the venture may be carved out as a separate business or wholly/partially sold to a third-party investor.

TP issues for incubators mainly centre around the valuation of the IP, particularly when the venture is carved out as a separate business and sold to an affiliate. Often, the technology is unique or not fully developed at the time of its transfer, and it is extremely difficult to gauge the full market potential for valuation purposes. Such technology potentially qualifies as a “hard to value intangible”, which covers intangibles which, at the time of their transfer between associated enterprises:

  • No reliable comparables exist; and

  • The projections of future cash flows expected to be derived, or the assumptions used in valuing the intangible are highly uncertain, making it difficult to predict the level of ultimate success of the intangible at the time of the transfer.

In these circumstances, revenue authorities could potentially consider ex-post outcomes as presumptive evidence about the appropriateness of the ex-ante pricing arrangements. Further complexity may arise if third party investors subsequently value the business at a significant premium compared to the price at which the IP was originally transferred, potentially causing tax authorities to challenge the initial transfer price for the IP.

Given these complexities, advance pricing agreements (APAs) with tax authorities should be considered as a potential solution to achieve certainty on TP outcomes. Alternatively, different business models could be implemented by incubators that may not require disposal of the IP, reducing the complexities of the valuation process and the associated uncertainty. Alternative business models may include licensing arrangements such as those evident between third parties in the pharmaceutical, software and biotech sectors.

Cryptocurrency operations

TP issues in cryptocurrency businesses arise due to several unique characteristics of the industry. These characteristics include the volatility and valuation of cryptocurrencies, regulatory uncertainties, evolving business models and the potential for complex cross-border transactions.

In relation to the brokerage of cryptocurrencies, an analysis of TP risks (specifically concerning the price volatility of cryptocurrencies) is critical in determining the arm’s length brokerage and other related fees. Multinational organisations involved at an earlier stage in the value chain, such as cryptocurrency mining, often operate on a centralised model where the central entrepreneur undertakes significant risk and investments and rewards ‘routine’ mining activities on a cost-plus basis. On the contrary, the appropriateness of a ‘cost plus’ model for entities engaged in mining activities is debatable, as tax authorities may argue that a higher remuneration in the form of a profit/revenue split is more appropriate, as these activities are considered as significantly value adding.

High frequency trading

High frequency trading involves the use of algorithmic software to place high volume trades based on inputs such as financial data and market events. Software is generally housed on servers with low latency connection to the relevant exchanges. Elements of the hardware may be provided by third-party service providers. Typically, the traders with the fastest execution speeds are the most profitable.

TP issues within the high frequency trading business include the value of the technology and its contribution to driving profit, and therefore the TP outcome. There needs to be careful consideration of whether the hardware (and more specifically the location of the hardware and proximity to the exchange) might result in a taxable presence in-country, and if so, what income should be allocated to it. There are several factors to consider when determining an appropriate TP policy, such as the trader’s input into designing a trading strategy, the contribution of the developers of the algorithmic software and the rights associated with trading at the location.

Other contemporary TP issues

A major TP issue relating to the fintech sector revolves around the deployment of human capital. Given the nature of the fintech industry, specifically the importance of remote working options as a benefit for attracting key talent, it would not be uncommon for key management personnel to work out of local entities in different jurisdictions. From a TP perspective, this questions whether the presence of key management personnel involved in the development of the IP creates a right to ownership in multiple jurisdictions that necessitate implementation of profit or revenue split TP models. This would need to be resolved with a detailed assessment of the teams in each location and the respective functions performed by those teams in each country.

The analysis of the situation may be further complicated by additional commercial circumstances, such as the relocation of key management personnel during the IP development stage itself. Without careful assessment of the involvement of the key personnel and their contribution in strategic development, enhancement, maintenance, protection and exploitation (DEMPE) activities, fintech businesses could face an unexpected tax risk across multiple jurisdictions.

Another key challenge to the fintech sector arises from regulatory licenses and other regulatory restrictions. Some countries may require special regulatory licenses for payment solution businesses, data warehousing and compliance with cross-border data transfer regulations. One key observation is the increased focus on regulation to report and monitor cryptocurrency trading activities. These regulations could potentially restrict business operations and, apart from posing commercial challenges, could bring cross-border transactions within close focus of local authorities. Countries that have stringent foreign exchange restrictions often require cross-border transactions to fit within permitted transaction categories. While services fees or royalty payments could still be permissible, mechanisms to remunerate IP owners/entrepreneurs, such as profit splits, may not be straightforward to implement in such cases.


As illustrated, there are a range of TP issues that fintechs need to consider. The analysis of the value related to intangible assets is key given that technology is the core of the fintech industry, and tax authorities are highly focused on TP issues related to intangibles. There are many IP-related TP questions such as compensation for licensing, valuation of IP at sale, and location of DEMPE activities. New regulatory measures and contemporary issues such as global mobility presents complexities for assessing and managing TP risks. More than ever, it is critical for fintechs to actively manage their TP policies and plan ahead.

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