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Dear readers:

The Global Transfer Pricing practice of Deloitte Touche Tohmatsu Limited is pleased to present this collection of articles on transfer pricing for industries, the first International Tax Review guide of its kind.

Transfer pricing practitioners are increasingly focused on industry-specific factors driving the pricing of intercompany transactions. We expect this trend to accelerate. In response to this shift in the marketplace, Deloitte has formed an extensive Transfer Pricing Industry programme, integrating Deloitte Tax's technical knowledge with the deep industry insights of Deloitte Consulting.

Traditionally, transfer pricing issues are considered either in terms of geography – analysing a country's transfer pricing regime – or by topic, such as the transfer pricing of intangibles or documentation. In this guide, we look at transfer pricing through the prism of industry, recognising that specific industries are particularly affected by some aspects of transfer pricing that do not pose significant challenges for others.

In this guide, we include articles on seven distinct industries: technology, energy, life sciences, media and entertainment, consumer products, manufacturing and financial services.

Our first article addresses the issues high-tech companies face when they enter into cost sharing arrangements (CSAs) to develop intellectual property, as they frequently do. Under the cost sharing rules in the United States, when one party contributes pre-existing intellectual property (IP) to a CSA, the other party is required to make an arm's-length payment for the right to exploit those assets. The regulations provide several methods for valuing the contributed pre-existing IP, which involve determining the useful life of those assets. However, there is some disagreement within the transfer pricing community as to how useful life is determined, an issue that becomes even more pronounced in the case of high-tech companies, which some analysts believe operate in an environment of "instant obsolescence."

IP is also an important feature of oil and gas companies. Transfer pricing regimes usually require that when IP is transferred across borders, appropriate compensation must be paid to the owner of the IP. But that is sometimes easier said than done in the oil and gas industry, where intangibles are often developed by groups including scientists at universities, industry consortia and oilfield services firms. In an environment where IP ownership may be ambiguous, allocating a price to the IP poses a challenge.

The life sciences industry also must address transfer pricing issues involving intangible property, but in a somewhat different context. Historically, life sciences companies managed their IP on a product or portfolio basis, treating all constituent parts of the IP – patents, technical data from clinical trials, regulatory approvals, manufacturing know-how, and trademarks, for example – as a bundle of rights. Because of changes in the industry, the transfer pricing challenge today, for many companies in this sector, is to be able to identify and evaluate the different component parts of the IP product separately.

In the transfer pricing world, the lack of comparables is a common taxpayer complaint, but in the media and entertainment industry, this shortage is exacerbated by the fact that the application of the comparable uncontrolled transactions method is based primarily on internal comparable transactions that are not publicly disclosed. To shed some light onto what drives revenue and profitability in the film industry, Deloitte collaborated with Nash Information Services to analyse movie data and calculated three indicators from a studio's perspective: total revenue to studio, total cost to studio, and return on investment. The results of this research are presented in our article in this guide.

Perhaps no industry has undergone more notable changes in recent years than the consumer products sector, a transformation driven primarily by the advent of the internet and mobile devices, which have altered how consumer product manufacturers and retailers operate and interact with consumers. Conforming to traditional transfer pricing structures in the age of digital globalisation could result in unintended tax consequences, from tax assessments to penalties, or even double taxation. Our article in this guide provides some insights into how to navigate the new world of a digitised consumer products industry.

The manufacturing sector, by virtue of its size and influence on the global economy, and because it involves most types of cross-border transactions – transfers of tangible and intangible property, the provision of services, and financial transactions – is of particular interest to global tax authorities. Our article in this guide discusses key trends in five primary industries in the manufacturing sector, and provides an overview of new transfer pricing challenges arising from the transformation of the sector.

Finally, our article on transfer pricing in financial services explores the reasons why the industry has gone, in the span of five years, from being "one of the last areas a tax authority would challenge," to one of the first ones to be reviewed.

We hope this innovative, industry-driven approach to transfer pricing provides you with useful insights into leading practices for your business. If you have any questions, or would like to engage in an industry-focused transfer pricing discussion, please contact the Deloitte transfer pricing professionals featured in this guide.

Kristine Riisberg
Global and US Transfer Pricing
Industry Program Leader

Todd Wolosoff
Global and US Transfer Pricing
Practice Managing Partner