Introduction
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Introduction

Dear readers,

The global transfer pricing practice of Deloitte Touche Tohmatsu Limited is pleased to present the 2013 edition of International Tax Review's Intangibles guide, a collection of articles on different aspects of transfer pricing for intangibles or intellectual property.

In 2013, issues relating to the transfer pricing of intangibles continued to dominate the tax landscape, and much of the discussion was driven by the OECD's release in February of a report on base erosion and profit shifting (BEPS), followed by an action plan on July 19. The action plan identified 15 specific areas for further work , one of which specifically calls for "ensuring that profits from intangibles are not divorced from value creation and special measures for hard-to-value intangibles". The OECD again took centre stage on July 30 when it issued a revised Discussion Draft on Transfer Pricing of Intangibles for public consultation.

But all the discussion has not necessarily resulted in consensus, and questions regarding both broad policy issues as well as the nitty-gritty of the taxation of intangibles still abound. In this guide, we deal with both.

Our piece on the convergence of tax and operational factors in intellectual property planning surveys the OECD intangibles initiatives, and one of the lessons it distills is that operational substance has become the lynchpin of successful IP planning. Reaping the benefits of an IP tax structure will depend, to a great extent, on the ability to put operational substance into the legal entity that owns the IP.

While many intangibles issues span across industries, some are particular to specific sectors. In this guide, we include two articles that address these issues as they affect two industries. The first discusses the transfer pricing of intangibles in the media and entertainment sector, which is evolving from a primarily US-centric industry to a globalised one. Thanks to new production technologies, increasing digitalisation of content, and globalisation, production costs and barriers to entry are declining. The challenge for many established companies will be to effectively manage intangible assets when these are created in a decentralised manner across the globe.

Our second industry-specific article provides a framework for identifying the economic or beneficial owner of intangible property, and illustrates its use in a case study of a hypothetical life sciences company.

To lay people, it may come as a surprise that after so many years of debate on the proper way to tax intangibles, so much remains unsettled. One of the reasons for this is that as new industries and business models develop, the old answers may not be a good fit. Case in point – the cloud computing industry. A few years ago, very few people would have known what the cloud is; if you're still not sure what it is, read our article on the subject – it will bring you up to speed.

The same can be said for procurement – it is only in recent years that this business discipline has emerged as a field in its own right, and one that is expected to bring value to the organisation through cost savings. We include an article that explores both the opportunities and the process for procurement functions, tax departments, and other stakeholders in an organization, to collaborate to capture the full value created from the evolution of the procurement function.

Unlike the big picture articles already mentioned, the next two delve into the fine points of intangibles taxation. The first of these two provides an overview of acquisition premiums from a transfer pricing perspective in the context of a cost sharing analysis. The second presents a venture valuation model.

Even though the final US cost sharing regulations were issued in 2011, questions continue to arise. Since the introduction of those regulations, which included a set of "commensurate with income" rules, tax practitioners and commentators have raised concerns that the new CWI rules could conflict with the arm's-length standard. The article provides a general conceptual framework to discuss how different valuation methods relate to CWI rules, and demonstrates that a variant of a specific valuation approach, the venture-valuation model, can resolve some of the challenges that arise in the context of applying CWI rules.

The issues that arise from the transfer pricing of intangibles are almost by definition cross-border – taxpayers and tax authorities across the globe are grappling with the same issues. But sometimes, questions arise that affect specific countries in particular. That is the case with location-specific advantages, the notion that unique market features deserve separate recognition and compensation through appropriate transfer prices. China and India in particular have been vehement proponents of the idea that a portion of any LSAs should accrue to the local entity and be subject to tax in that country, although neither country has yet come up with a systematic approach to identify and quantify LSAs. Our article on LSAs provides an overview of the subject, and makes some predictions for the future.

Navigating the world of transfer pricing of intangibles is not easy; for assistance in this endeavor, please contact your local Deloitte transfer pricing specialist.

Todd Wolosoff

Global and US Transfer Pricing Leader

Andy Newman

Business Model Optimisation – Co-Global Leader

David Cordova

Business Model Optimisation – Intellectual Property Leader

John Wells

Business Model Optimisation – Transfer Pricing Leader

Mike Gilson

Business Model Optimisation – Supply Chain Leader

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