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Intangible assets for technology companies |
Many multinational groups face an enormous challenge when they need to attribute value to the various intangibles in their value chain. A typical modern company uses various intangibles – and these are often developed by various entities across the world. It is often simply not clear what the value of each intangible is, or how valuable the contribution of each party is. From a transfer pricing point of view this can be challenging, as contributions have to be remunerated. Expert surveys can be a potential solution.
The OECD has long recognised the value of soft 'intangibles' that go much further than traditional intellectual property (IP). However, the latest BEPS publications have given new impetus to the idea. As tax authorities start to adapt their thinking over the coming year, taxpayers will need to show that the intangible contributions of all parties are appropriately remunerated in their transfer pricing.
All industries will be affected by this, but in particular the IT and data industry will need to rely on novel methods. For example, in the automotive industry development is often well tracked and sufficiently plannable to use costs for a reliable split factor for the anticipated benefits of an intangible. For example, a profit split based on capitalised costs, can be acceptable if gestation and amortization periods have been accounted for.
For technology companies the issue is more difficult. The value chain of new technology companies often includes data gathering, data analysis, a platform technology, content creation and marketing. These are all heavily interdependent. For example, content creation relies on the data analysis, while data gathering often relies on the platform. In many cases these activities are conducted by different entities, sometimes in a relatively informal context.
While sound from a business perspective, this possesses a certain challenge for transfer pricing. Normal benchmarked license agreements are typically not possible for this sort of 'soft' and deeply integrated IP.
The solution can be to actually assess the various activities through the people who are closest to the business: inside and outside industry experts. The challenge is to identify the relevant profit level indicators, to ask the right questions, and to identify a relevant group of inside experts.
An expert survey generally follows three steps. First, expert surveys necessitate the choice of a relevant group of external and internal experts. In many cases, internal experts are sufficient, other cases require external surveys. To select experts a series of interviews with operational personnel is conducted in order to understand the business and the relevant experts. Once internal experts are identified, surveys can be repeated easily.
The second step consists of drafting the actual survey, based on the understanding gained in the first phase, and sending the questionnaire to the relevant experts. The questions have to be carefully selected. Typically, profit drivers and success factors have to be determined. The type and number of questions has to be sufficient in order to obtain reliable results. An economic study of this type asked 10 detailed questions to a group of 30 internal experts.
The final step is to analyse the results and translate them into a formula. For example, calculating automatically the range of royalty rates.
We have assisted in the implementation of such systems for clients in several industries. The systems can be easily applied, have been accepted by all tax authorities, and facilitated the relation with tax authorities. They reduced tax payments and the effective tax rate.
Philip de Homont (philip.de.homont@nera.com) and Alexander Voegele (alexander.voegele@nera.com), NERA Economic Consultants in Frankfurt.
