Transfer Pricing: Dilemma of intangibles

Transfer Pricing: Dilemma of intangibles


Dezan Shira and Associates

Dezan Shira and Associates

310 week ago — 8 min read

Summary: Your firm is a part of the international trade system. If you are deeply embedded in its framework, then transfer pricing could impact your bottomline. Here is all you need to know about transfer pricing.


Transfer pricing is the process of applying a fair market value price, to an international transaction between two associated enterprises (AE) - where one enterprise participates in the management, control or capital (ownership) of the other enterprise. This fair market value price is referred to as the Arm’s Length Price (ALP) in transfer pricing scenarios. The international transactions between AEs can consist of goods, services, intangibles, loans or guarantees.


For example, Company A, established in USA, may have a subsidiary in Cayman Islands. The parent company and the subsidiary will be considered as AEs. Company A may require “services” from the subsidiary, for which it’ll pay a service charge. This service charge will be added to the profits of the subsidiary on which zero corporate tax will be applied, as Cayman Islands is a tax haven. Similarly, the price of transfer of goods, from subsidiary to Company A, might be deliberately valued less, to show low taxable income in USA. To prevent this, tax authorities in both regions will assign an ALP to the transaction, which would have been assigned if the transaction was taking place between two independent enterprises.


Globalisation has led to a huge increase in formation of AEs across the globe. Almost 60% of international trade takes place via international transactions between AEs.

Transfer pricing laws are laid down in all countries by their respective governments with the aid of guidelines from Organisation of Economic Cooperation and Development (OECD) and other countries’ tax authorities.


However, various ambiguities have emerged in the past years regarding the identification and valuation of transactions of intangible property. Examples of trade intangibles are patents, trade names and trademarks. Marketing intangibles are symbols, logos, distribution lists and proprietary market and customer data.


In this article, we discuss about the ambiguities and the complex tax implications associated with transaction of intangible properties.

  • Economic Ownership

Tax authorities around the world have started acknowledging the concept of economic ownership of intangibles. When an intangible property is provided by a foreign enterprise to an AE, for utilising in its own country operations, the AE usually pays a running royalty based on the number of units produced or sold to the enterprise. The AE can be recognised as the economic owner of the intangible as it is bearing the economic burden of building and maintaining the intangible and is reaping the monetary (sales revenue) or non-monetary benefits (goodwill, increased visibility) from it. The foreign enterprise, on the other hand, is recognised as the legal owner of the intangible property as the intangible is registered in the enterprise’s name with the given government authorities.

Considering that the maintenance and the usage of the intangible is done by the economic owner and not by the legal owner, it is debated that instead of paying a running royalty, a one-time payment at the time of the transaction should act as sufficient remuneration. Subsequently, transfer price should be set for only that amount, which will then be included in the taxable income of the legal owner instead of multiple payments due to the running royalty.


  • Cost Contribution

Attributing a cost to the development of an intangible is difficult due to its very incorporeal nature. Development of an intangible by multiple parties makes it even harder for tax authorities to determine the individual contribution of the parties. Hence, it is always recommended to enterprises to form cost contribution agreements beforehand. However, in the absence of such an agreement, the AE using the intangible is usually required to pay the full compensation to the multiple legal owners.

  • Double Taxation

In the event that a cost contribution agreement hasn’t been made for the development of the intangible, multiple payments are made by the AE to the developing parties in different tax regions. As the payments are included in the taxable income of all the parties, it leads to multiple taxation of a single asset.

  • Marketing Intangibles – Brand Promotion

International transactions involving marketing intangibles are often carried out between foreign enterprises and their AEs. These intangibles are used by the AE for extensive marketing campaigns and other efforts to promote and sell products or services in its country. Tax authorities quantity such marketing efforts as Advertising, Marketing and Promotion (AMP) expenses.

Tax authorities maintain that promotion of products via these marketing intangibles inadvertently leads to brand promotion of the foreign enterprise. They deem brand promotion to be a service provided by the AE to the foreign enterprise which should be paid for, by the foreign enterprise. Additionally, the provision of service should be recognised as an international transaction and its ALP should be calculated.

The following complications arise in this scenario:

  1. Characterising brand promotion as a service provided even if brand promotion was incidental.

  2. Providing concrete proof of brand promotion taking place above the product promotion.

  3. Finding a method for measuring brand promotion.

  4. Deriving appropriate transfer price for the service provided.

If the brand promotion done is counted as a service, the compensation paid for it would be an added expense for the foreign enterprise. Furthermore, the amount paid would be an additional income for the AE, on which tax would be levied.

One method to identify and measure brand promotion is the Bright Line Test (BLT)

Bright Line Test (BLT)

AMP expenses incurred by the AE are measured with those of the comparable companies.

  • If the expenses incurred by the AE are equal or less than the average expenses of the comparable companies, the expenses are categorised as routine and for product promotion.

  • If they exceed the average comparable amount, i.e. above the bright line, the expenses are categorised as non-routine expenses incurred for brand promotion.

The non-routine expenses incurred are to be compensated by the foreign enterprise for the service provided.



Enormous taxation complexities are involved in the transactions associated with the intangible assets. Non-availability of standard guidelines makes this these transactions even more cumbersome to understand. Tax courts tackle each transfer pricing issue case by case and give rulings and case laws. It is recommended that companies should remain updated about these issues and about the related case laws.


As there are no official laws regarding transactions of intangible property, the companies can offer their own stance on the international transactions of intangibles to the tax courts to avoid double taxation and unnecessary taxable payments, with the help of TP advisors who can represent them. Firms and their advisors can offer their method of identification and/or valuation of the intangible, provided they can submit a rational explanation with documented proof.


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Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the views, official policy or position of GlobalLinker.

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Dezan Shira and Associates

Dezan Shira & Associates is a pan-Asia, multi-disciplinary professional services firm, providing legal, tax and operational advisory to international corporate investors....

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