International
A Tentative Improvement:
Comments on OECD Discussion Draft on the
Transfer Pricing of Intangibles
This article analyses the OECD Discussion Draft
on transfer pricing of intangibles released in
2012. The author compares the new Draft with
the existing OECD transfer pricing guidelines on
intangibles. Improvements and imperfections
within the Draft have been highlighted.
1. Introduction
In 2010, the OECD began a new project of revising the
current chapter VI, “Special considerations for intangible
property”, of the Transfer Pricing Guidelines for Multina-
tional Enterprises and Tax Administrations1 (the OECD
Guidelines).
As chapters I-III of the OECD Guidelines have been sub-
stantially revised and an additional chapter IX on Business
Restructurings has been added, it is necessary to revise
the existing chapter on intangibles to accommodate new
transfer pricing rules and techniques included in those
updated chapters, in particular in terms of comparability
analysis. Furthermore, with the development of technol-
ogy and communications, an updated chapter on intan-
gibles is needed to take into account the emergence of new
forms of intangibles and complex exploitation of intangi-
bles by multinational enterprises.
In June 2012, the OECD released its first discussion draft
on transfer pricing of intangibles (the Discussion Draft)
for public comments.2 In this article, the Discussion Draft
will be analysed by comparing it with the existing OECD
Guidelines. Improvements and imperfections will also be
discussed.
2. In General: A Well-Structured Discussion Draft
In 2011, the OECD invited public comments on the
scope of the potential revision of the chapter on intangi-
bles. The definition, identification and valuation of intan-
gibles emerged as the aspects most in need of addressing
* PhD candidate, School of Law, King’ s College, London.
1. OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax
Administrations (2010) (OECD Guidelines), International Organizations’
Documentation IBFD.
2. OECD Ctr. for Tax Policy and Admin., Discussion Draft: Revision of
the Special Considerations for Intangibles in Chapter VI of the OECD
Transfer Pricing Guidelines and Related Provisions (6 June- 14 Sept.
2012), available at www.oecd.org/ctp/transferpricing/50526258.pdf and
International Organizations’ Documentation IBFD. See also www.oecd.
org/ctp/transferpricing/transferpricingaspectsofintangibles-newsande-
vents.htm, accessed on 13 Dec. 2012.
136 INTERNATIONAL TRANSFER PRICING JOURNAL MAY/JUNE 2013
Electronic copy available at: http://ssrn.com/abstract=2322431
Jingyi Wang*
in the revised chapter.3 The Discussion Draft is structured
accordingly.
There are four main sections in the Discussion Draft. The
first three sections consider three threshold questions,
namely identifying intangibles; identification of parties
entitled to intangible-related returns; and transactions
involving the use or transfer of intangibles. Accordingly,
these three sections attempt to answer questions as to what
are intangibles for transfer pricing purposes; the deter-
mination of ownership of intangibles (legal or economic
ownership); and identification of intangibles in related
transactions. The last section, “Determining arm’ s length
conditions in cases involving intangibles”, demonstrates
the application of the arm’ s length principle to associated
transactions involving intangibles, where the valuation of
intangibles has been explained.
In general, this is a well-structured Discussion Draft. After
looking into the details included in each section, one can
see that various aspects have been addressed in line with
comparability analysis. If they follow this new Discus-
sion Draft, enterprises engaged in associated transactions
involving intangibles can obtain instructive guidance for
preparing contemporaneous documentation and deter-
mining transfer pricing methods.
2.1. Definition of intangibles for transfer pricing
purposes
In the Discussion Draft, an “intangible” is described as
“something which is not a physical asset or a financial asset,
and which is capable of being owned or controlled for use
in commercial activities”.4 The Discussion Draft offers the
following regarding the definition of intangibles for trans-
fer pricing purposes:
–– “Intangibles that are important to consider for trans-
fer pricing purposes are not always recognised as
intangible assets for accounting purposes”.5
–– “The determination that an item should be regarded
as an intangible for transfer pricing purposes does
not determine or follow from its characterisation for
general tax purposes”.6
3. www.oecd.org/ctp/taxadministration/publiccommentsreceivedonthe
scopingofanewprojectonthetransferpricingaspectsofintangibles.htm,
accessed on 30 Oct. 2012.
4. OECD Ctr. for Tax Policy and Admin., supra n. 2, para. 5
5. OECD Ctr. for Tax Policy and Admin., supra n. 2, para. 6.
6. OECD Ctr. for Tax Policy and Admin., supra n. 2, para. 6.
© IBFD
 A Tentative Improvement: Comments on OECD Discussion Draft on the Transfer Pricing of Intangibles
–– “The existence of [legal, contractual, or other forms of
protection of an intangible] is not a necessary condi-
tion for an item to be characterised as an intangible
for transfer pricing purposes”.7
–– “Separate transferability is not a necessary condition
for an item to be characterised as an intangible for
transfer pricing purposes”.8
–– “It is important to distinguish intangibles from
market conditions or other circumstances that are not
capable of being owned, controlled or transferred by
a single enterprise”.9
–– “The identification of an item as intangible is separate
and distinct from the determination of the value of the
item or the return attributable to the item under the
facts and circumstances of a given case”.10
These exceptions render the definition of intangibles
broad, vague and not restrained by any other relevant
rules. The Discussion Draft even asserts that “the guid-
ance contained in this chapter is intended to address trans-
fer pricing matters exclusively. It is not intended to have
relevance for other tax purposes”.11 If so, is it possible to
conclude that the opposite is also right, i.e. intangibles for
other tax purposes are not relevant to transfer pricing pur-
poses either?
The example given for “other tax purposes” is article 12
(“royalties”) of the OECD Model Tax Convention on
Income and on Capital (OECD Model). The Discussion
Draft asserts that the definition of “royalties” in the Com-
mentary on Article 12 of the OECD Model is “not intended
to provide any guidance on whether, and if so at what price,
the use or transfer of intangibles would be remunerated
between independent parties”.12 However, the fact that
other tax rules do not refer to transfer pricing issues explic-
itly does not mean they are not applicable or relevant to
transfer pricing at all.
The examples given for the non-relevance of article 12 (roy-
alties) are payments related to goodwill or going concern
value which may be characterized as payment for intangi-
bles for transfer pricing purposes but which will not be rec-
ognized for article 12 purposes. Nevertheless, the status of
goodwill and ongoing concern is a major controversy, and
the determination of their compensation is contentious.
The treatment of goodwill and ongoing concern varies
with different subjects like accounting, taxation, manage-
ment etc. Depending on the assumption as to what con-
stitutes goodwill or ongoing concern, different valuations
can be obtained. The issue of goodwill is even more com-
plicated than marketing intangibles. If no consensus can
be reached on the definition of goodwill, the OECD should
be cautious before including both goodwill and ongoing
concern as intangibles for transfer pricing purposes.
7. OECD Ctr. for Tax Policy and Admin., supra n. 2, para. 7.
8. OECD Ctr. for Tax Policy and Admin., supra n. 2, para. 7.
9. OECD Ctr. for Tax Policy and Admin., supra n. 2, para. 8.
10. OECD Ctr. for Tax Policy and Admin., supra n. 2, para. 9.
11. OECD Ctr. for Tax Policy and Admin., supra n. 2, para. 12.
12. OECD Ctr. for Tax Policy and Admin., supra n. 2, para. 12.
© IBFD
Electronic copy available at: http://ssrn.com/abstract=2322431
Another example that “proves” the non-relevance of article
12 is payments for technical services which are treated as
royalties for purposes of article 12, but are not recognized
as compensation for transfer pricing purposes. Payments
for technical services are deemed to be royalties in article
12, which is a matter of law rather than a matter of fact.
Developing countries tend to treat technical services fees
as royalties, but this is not universally accepted. These two
less persuasive exceptional examples do not prove the
OECD’ s argument.
For both taxpayers and tax authorities, the purpose of
transfer pricing is to determine a price for associated
transactions. Considering that royalties are one of the
major means of compensation to remunerate for the use
or transfer of intangible property, how can the guidance
totally ignore the existence of article 12? It would be rare
if a payment characterized as royalties for use or transfer
of intangible property for transfer pricing purposes were
not recognized as royalties for withholding tax purposes,
or vice versa.
Unlike the current guidance, under which intangibles are
divided into trade intangibles and marketing intangibles,
the new Discussion Draft:
does not turn on these categorisations (such as trade intangibles
and marketing intangibles, soft intangibles and hard intangibles,
routine and non-routine intangibles and other classes and catego-
ries). No attempt is made in these Guidelines to delineate various
classes or categories of intangibles.13
The existing distinction drawn between trade intangibles
and marketing intangibles does not provide much useful
guidance in taxing other intangibles, but rather compli-
cates the treatment of intangibles and triggers many dis-
putes between tax authorities and taxpayers. No artificial
categorization of intangible assets should be regarded as
a positive step towards sorting out the existing chaos in
taxing transactions involving intangibles between related
parties. This can be seen as a major improvement.
The Discussion Draft examines several major types of
intangibles using relatively detailed illustrations, includ-
ing:
–– patents;
–– know-how and trade secrets;
–– trademarks, trade names and brands;
–– licences and similar limited rights in intangibles;
–– goodwill and ongoing concern value;
–– group synergies;
–– market-specific characteristics; and
–– assembled workforce.
The Discussion Draft asserts that the above examples
are only for clarifying the provisions of section A.1. of
the Draft, which offers general guidance on identifying
intangibles, without intending to be comprehensive or to
provide a complete listing of items that may or may not
constitute intangibles.14 Although the Draft contends that
there may be numerous items not included in this listing
13. OECD Ctr. for Tax Policy and Admin., supra n. 2, para. 13.
14. OECD Ctr. for Tax Policy and Admin., supra n. 2, para. 14.
INTERNATIONAL TRANSFER PRICING JOURNAL MAY/JUNE 2013 137
Jingyi Wang
which may be intangibles for transfer pricing purposes,15
no single example is mentioned. Nevertheless, it is appro-
priate for the Discussion Draft to point out that intangibles
should be “viewed in the context of the comparability anal-
ysis (including the functional analysis) of the controlled
transaction with the objective of better understanding
how intangibles and items not treated as intangibles con-
tribute to the creation of value”.16 This statement should
be particularly significant when dealing with controver-
sial intangible items.
In the following discussion, the illustrations provided
by the Discussion Draft will be reviewed to determine
whether any new intangible asset has been included under
the new definition.
Patents, know-how and trade secrets, trademarks, trade
names and brands. The first three categories are tradition-
ally recognized intangible assets. The definition of patents,
know-how and trade secrets, trademarks, and trade names
complies with current guidance. A “brand” is clarified as
“a combination of intangibles including, among others,
trademarks, trade names, customer relationships, reputa-
tional characteristics, and goodwill”.17
Licences and similar limited rights in intangibles. In the
fourth group, rights granted by licensing contracts and
similar contractual arrangements are recognized as intan-
gible assets for transfer pricing purposes, which is new
vis-à-vis the existing OECD Guidelines. The recogni-
tion of licensing rights or other contractual rights as sep-
arate intangible property has already been seen in the US
domestic transfer pricing regulations.18
The rest of the intangible items included in the Discus-
sion Draft are controversial topics indeed. Although, at
this stage, the inclusion of these less clear items can provide
an opportunity for public discussion, it is not easy to reach
a consensus as regards these topics; the illustrations, for
example, in the Discussion Draft are far from satisfactory.
Goodwill and ongoing concern. As acknowledged by the
Discussion Draft, the term goodwill can be used to refer
to a number of different concepts in different contexts.19
For example in an accounting context, goodwill is sub-
categorized into internally generated goodwill and exter-
nally acquired goodwill. “Internally generated goodwill is
not recognised as an asset because it is not an identifiable
resource (i.e. it is not separable nor does it arise from con-
tractual or other legal rights) controlled by the entity that
can be measured reliably at cost”.20
The value of goodwill will be determined in the process of
business combination or mergers and acquisitions, where
goodwill is acquired externally. The value of goodwill is
15. OECD Ctr. for Tax Policy and Admin., supra n. 2, para. 14.
16. OECD Ctr. for Tax Policy and Admin., supra n. 2, para. 14.
17. OECD Ctr. for Tax Policy and Admin., supra n. 2, para. 19.
18. US: Treasury Regulations sec. 1.482-4(b)(4) (franchises, licenses or
contracts).
19. OECD Ctr. for Tax Policy and Admin., supra n. 2, para. 21 (three different
definitions of goodwill in different contexts have been mentioned).
20. International Accounting Standards Board, International Financial
Reporting Standards (International Accounting Standards Board 2011),
at A941.
138 INTERNATIONAL TRANSFER PRICING JOURNAL MAY/JUNE 2013
Electronic copy available at: http://ssrn.com/abstract=2322431
usually represented by the excess value after deducting
the value of other identifiable assets from the value of the
whole enterprise.21 Normally, for an enterprise carrying on
an ordinary business operation, there is no need to iden-
tify the excess value. Transfer pricing focuses on ordinary
transactions between related parties. Externally acquired
goodwill is of less relevance in a transfer pricing context.
The discussion of ongoing concern is split between
the Discussion Draft and the Business Restructurings
chapter,22 where an ongoing concern is defined as “a func-
tioning, economically integrated business unit”, the trans-
fer of which entails “the transfer of assets, bundled with
the ability to perform certain functions and bear certain
risks”.23 The description of ongoing concern in the Discus-
sion Draft, given as “the value of the assembled assets of an
operating business over and above the sum of the separate
values of the individual assets”, does not seem consistent
with the definition given in the Business Restructurings
chapter. According to the description in the Discussion
Draft, ongoing concern represents a residual value rather
than the value of the operating business unit as a whole.
These two divergent understandings of ongoing concern
will lead to different valuations, which is clearly problem-
atic.
Regarding the valuation of goodwill and ongoing concern
in the business restructuring context, the guidance pro-
poses that the valuation methods that are used in acquisi-
tion deals between independent parties may prove useful
for valuing the transfer of an ongoing concern between
associated enterprises.24 However, the Discussion Draft
asserts “in most instances, accounting and business valu-
ation measures of goodwill and ongoing concern value are
not relevant for purposes of transfer pricing analysis”. 25 The
Discussion Draft once more isolates itself from normal
business practices by not specifying which accounting and
business valuation measures are irrelevant, or alternatively
providing explicit instructions on which special valuation
methods should be used for valuing goodwill and ongoing
concern for transfer pricing purposes.
A specified aspect of goodwill is mentioned in the Dis-
cussion Draft:
when the reputational value sometimes referred to by the term
goodwill is transferred to or shared with an associated enterprise
by means of a trademark or other licence that reputational value
should be taken into account in determining an appropriate roy-
alty. To assure that such values are taken into account in appropri-
ate situations, goodwill and ongoing concern value are treated as
intangibles within the meaning of section A.1.26
Can it be inferred that goodwill and ongoing concern
are relevant for transfer pricing purposes only when they
can be reflected in royalties paid for trademarks or other
licences? If true, this may lead to a potential problem of
21. G.V. Smith & R.L. Parr, Valuation of Intellectual Property and Intangible
Assets (3rd ed, J. Wiley & Sons 2000), at 26.
22. OECD Guidelines (2010), ch. IX Transfer pricing aspects of business
restructurings, paras. 9.93-9.95.
23. OECD Guidelines (2010), ch. IX, para. 9.93.
24. OECD Guidelines (2010), ch. IX, para. 9.94.
25. OECD Ctr. for Tax Policy and Admin., supra n. 2, para. 22.
26. OECD Ctr. for Tax Policy and Admin., supra n. 2, para. 22.
© IBFD
 A Tentative Improvement: Comments on OECD Discussion Draft on the Transfer Pricing of Intangibles
double charging trademarks or other brand-related intan-
gibles, as it is less possible to disaggregate the element of
goodwill from a successful trademark.
Compared with prices paid for generic products, transac-
tions involving the use or transfer of well-known brands
are usually compensated by premium prices. The reputa-
tion embedded within the trademarks or trade names con-
tributes to or represents the goodwill of the brand owners.
If goodwill and ongoing concern are to be included as
intangible property for transfer pricing purposes, more
specific guidance should be provided for determining
arm’ s length prices for the use or transfer of goodwill and
ongoing concern.
As the Discussion Draft admits that “goodwill and ongoing
concern value cannot be segregated or transferred sepa-
rately from other business assets”,27 an alternative way
would be to take account of goodwill and ongoing concern
in comparability analysis.
Group synergies. Without delineating a definition of group
synergies, only a few forms of group synergy have been
enumerated, including streamlined management, elimi-
nation of costly duplication of effort, integrated systems,
purchasing power, etc.28 It is acknowledged that although
such features may have an effect on the determination of
the arm’ s length conditions of controlled transactions,
because they are not owned or controlled by a single
enterprise, group synergies are not intangibles for trans-
fer pricing purposes. They should be taken into account
as comparability factors in the comparability analysis.29
Market specific characteristics. Similarly, because market
specific characteristics, such as the high purchasing power
of households, low prevailing labour costs, proximity to
markets, favourable weather conditions and the like, may
not be owned, controlled or transferred by an individual
enterprise, such items are not intangibles for purposes of
transfer pricing and should be considered in the compa-
rability analysis,30 probably as part of the economic cir-
cumstances.
Assembled workforce. Assembled workforce is explained as
“a uniquely qualified or experienced cadre of employees”,31
the explanation of which in the Discussion Draft is fairly
confusing. The Discussion Draft contends that the exist-
ence of such an employee group may affect the arm’ s length
price for services provided by the employee group or the
efficiency with which services are provided or goods are
produced by the enterprise.
The one example of assembled workforce as an intangi-
ble for transfer pricing purposes raised by the Discus-
sion Draft (allegedly in a particular circumstance) is a
long-term contractual commitment to make available
the services of a particular group of uniquely qualified
employees,32 although the Draft stresses that the transfer
27. OECD Ctr. for Tax Policy and Admin., supra n. 2, para. 21.
28. OECD Ctr. for Tax Policy and Admin., supra n. 2, para. 23.
29. OECD Ctr. for Tax Policy and Admin., supra n. 2, para. 23.
30. OECD Ctr. for Tax Policy and Admin., supra n. 2, para. 24.
31. OECD Ctr. for Tax Policy and Admin., supra n. 2, para. 25.
32. OECD Ctr. for Tax Policy and Admin., supra n. 2, para. 26.
© IBFD
or secondment of isolated employees does not, in and of
itself, constitute the transfer of an intangible.33
However, the Discussion Draft is only asserting the pos-
sible inclusion of “assembled” workforce. What about the
status of a single experienced employee? If the exclusion
of group synergies and market-specific characteristics is
because they cannot be owned or controlled by a single
enterprise, it is unlikely for an enterprise to own or control
an assembled workforce; rather, the employment contracts
between employees and employers can be owned or con-
trolled by an enterprise. The contract can be regarded as an
intangible asset. Nevertheless, a simple transfer of employ-
ment contracts of assembled workforces would be rare.
The transfer of employees usually happens for the purpose
of providing relevant services. Compensation to the skilled
and experienced workforce will be reflected in premium
prices for the services provided. Whether compensation
should be paid separately for the transfer of the assembled
workforce is questionable. This confusion can be sorted
out by clarifying the boundary between the provision of
services and the transfer or use of relevant intangibles.
2.2. Identification of parties entitled to
intangible-related returns
The Discussion Draft recommends that legal registrations
and relevant contracts be the starting point for determin-
ing the allocation of entitlement to intangible-related
returns between related parties.34 Nevertheless, the reli-
ability of the contractual arrangements lies in the extent of
alignment between contractual arrangements and conduct
of parties, i.e. emphasizing the substance-over-form prin-
ciple. “The parties’ conduct should generally be taken as
the best evidence concerning the true allocation of entitle-
ment to intangible-related returns”.35
In order to justify the entitlement to intangible-related
returns, where the parties’ conduct is aligned with the
terms of relevant registrations and contracts, the parties
entitled to intangible-related returns should perform the
relevant functions,36 assume relevant risks37 and bear as-
sociated costs.38
Although there is no distinction drawn between trade
intangibles and marketing intangibles, compensation for
marketing activities still finds its way into the Discussion
Draft in terms of determining an arm’ s length compensa-
tion for marketing functions performed by parties who
are not the owner of trademarks or related customer-ori-
ented intangibles.39 Compared with the current guidance,
which exaggerates the importance of marketing activities,
the Discussion Draft acknowledges the possibility of com-
pensating the distributor/marketer as a service provider.40
33. OECD Ctr. for Tax Policy and Admin., supra n. 2, para. 26.
34. OECD Ctr. for Tax Policy and Admin., supra n. 2, para. 30.
35. OECD Ctr. for Tax Policy and Admin., supra n. 2, para. 37.
36. OECD Ctr. for Tax Policy and Admin., supra n. 2, para. 38.
37. OECD Ctr. for Tax Policy and Admin., supra n. 2, para. 42.
38. OECD Ctr. for Tax Policy and Admin., supra n. 2, para. 46.
39. OECD Ctr. for Tax Policy and Admin., supra n. 2, para. 49-52.
40. OECD Ctr. for Tax Policy and Admin., supra n. 2, para. 49.
INTERNATIONAL TRANSFER PRICING JOURNAL MAY/JUNE 2013 139
Jingyi Wang
In general, the Discussion Draft contends that it will often
be the case that the return on marketing functions, risks,
assets and costs will be sufficient and appropriate.41 Where
there is no arrangement to compensate for the distributor/
marketer, an arm’ s length reimbursement for the functions
performed, risks assumed, assets used and costs incurred
should be decided according to what an independent dis-
tributor would obtain in comparable circumstances.42
Possible compensation plans could include a decrease in
the purchase price of the product or a reduction in the
royalty rate.43 Similar consideration also applies to con-
tract research and development and contract manufactur-
ing arrangements.44
There are 11 examples in the Annex of the Discussion
Draft used to explain the sections45 which show similar-
ity to the national instructions of transfer pricing of intan-
gibles provided by Australian46 and US tax authorities.47
These examples envisage different scenarios, ranging from
ones that are straightforward to ones that are complicated.
A transfer pricing adjustment is suggested when there is
a circumstance not consistent with the arm’ s length prin-
ciple. In these examples, the expenditure incurred for mar-
keting may or may not be comparable with what would be
incurred by comparable independent enterprises – which
does not necessarily result in a transfer pricing adjustment.
However, it seems that a transfer pricing adjustment
would be effected only when a distributor has a signifi-
cantly lower profit margin than comparable independent
marketers or distributors, usually caused by not receiving
appropriate compensation for excessive marketing expen-
diture.48 The section titled “Selecting the most appropriate
transfer pricing method” emphasizes this when it states:
“[I]n connection with a transaction involving the use or
transfer of intangibles, it is important to consider the eco-
nomic consequence of the transactions, rather than pro-
ceeding on the basis of an arbitrary label”.49
2.3. Transactions involving the use or transfer of
intangibles
A third threshold issue discussed in the Discussion Draft
is “the identification and proper characterisation of the
specific controlled transactions involving intangibles”.50
Transactions involving intangibles are generally divided
into two categories:
–– transactions involving the use of intangibles in con-
nection with sales of goods or services;51 and
41. OECD Ctr. for Tax Policy and Admin., supra n. 2, para. 50.
42. OECD Ctr. for Tax Policy and Admin., supra n. 2, para. 51.
43. OECD Ctr. for Tax Policy and Admin., supra n. 2, para. 51.
44. OECD Ctr. for Tax Policy and Admin., supra n. 2, para. 52.
45. OECD Ctr. for Tax Policy and Admin., supra n. 2, Annex Examples to
illustrate the guidance on special considerations for intangible property,
examples 1-11 illustrating the provisions of ch. VI.B.
46. www.ato.gov.au/businesses/content.aspx?doc=/content/68495.
htm&pc=001/001/015/023&mnu=0&mfp=&st=&cy, accessed 6 Nov.
2012.
47. US: Treasury Regulations sec. 1.482.
48. OECD Ctr. for Tax Policy and Admin., supra n. 2, Annex, example 5.
49. OECD Ctr. for Tax Policy and Admin., supra n. 2, para. 107.
50. OECD Ctr. for Tax Policy and Admin., supra n. 2, para. 57.
51. OECD Ctr. for Tax Policy and Admin., supra n. 2, para. 59-61.
140 INTERNATIONAL TRANSFER PRICING JOURNAL MAY/JUNE 2013
–– transactions involving transfers of intangibles.52
The Discussion Draft draws a distinction between trans-
actions involving the use of intangibles and the transfer
of intangibles, which was not considered in the existing
OECD Guidelines.
Transactions involving the use of intangibles. Intangibles
may be used in the process of manufacturing; marketing
products sold to related parties; or the provision of services
to other group members.53 Stated another way, the use of
intangibles involves the implementation of intangibles:
products manufactured or activities conducted benefit
from the implementation of the intangibles without
involving the transfer of the intangibles. In this case, intan-
gibles implemented should be taken into account simply
as comparability factors, rather than as the subject matter
of the transaction itself. Transactions involving the use of
intangibles may be priced according to the main transac-
tions, for instance, sales of goods or provision of services.
Transactions involving transfers of intangibles. The meaning
of “transfer” has been clarified to mean either a transfer
of all the rights in the intangibles or a transfer of limited
rights in the intangibles. The former situation is often seen
in an outright sale of an intangible asset, while the latter
case usually arises in licensing arrangements. Both situ-
ations are the focus of the transfer pricing of intangibles.
Transactions involving transfers of intangibles have been
further divided into three subcategories:
–– transfers of intangibles or rights in intangibles;
–– transfers of combinations of intangibles; and
–– transfers of intangibles in combination with other
business transactions.
The three subcategories are divided not according to differ-
ent types of intangibles or rights in intangibles transferred
in related transactions, but based on combinations of dif-
ferent intangibles, or with other goods or services being
transacted. Regarding the combination of different trans-
actions, the decision to disaggregate these package trans-
actions depends on the nature of the subjects involved. A
clearer characterization of transactions involving intangi-
bles indicates a deeper understanding of the subject and a
more accurate identification of comparables. As empha-
sized in the Discussion Draft, “the ultimate objective is
to identify the prices and other conditions that would be
established between unrelated persons in comparable
transactions”.54
2.4. Determining arm’ s length conditions in cases
involving intangibles
2.4.1. Specific comparability features
In this part, specific features of intangibles have been
elaborated for purposes of comparability analysis. Four
other comparability factors (functional analysis, contrac-
tual terms, economic circumstances and business strate-
52. OECD Ctr. for Tax Policy and Admin., supra n. 2, para. 62-75.
53. OECD Ctr. for Tax Policy and Admin., supra n. 2, para. 59.
54. OECD Ctr. for Tax Policy and Admin., supra n. 2, para. 75.
© IBFD
 A Tentative Improvement: Comments on OECD Discussion Draft on the Transfer Pricing of Intangibles
gies) are generally treated in a similar way among different
types of transactions. Although it is difficult to produce
a straightforward definition of intangibles, it is possible
to identify the common features of intangibles. Provid-
ing guidelines in this way makes it easier for enterprises
when selecting comparables and transfer pricing methods.
The specific features mentioned in the Discussion Draft
include: exclusivity; extent and duration of legal protec-
tion; geographic scope; useful life; stage of development;
rights to enhancements, revisions and updates; and expec-
tation of future benefit. In each aspect, the Discussion
Draft explains how these factors influence the value of an
intangible.
In particular, regarding the expectation of future benefit,
the Discussion Draft asserts that “intangibles that provide
a basis for high profit products or services are not likely
to be comparable to intangibles that support products or
services with only industry average profits”.55 The author
believes that the standard is unduly rigorous, as associ-
ated transactions in dispute usually involve the kind of
intangibles yielding higher returns than generic products
with average profits. According to this standard, taxpayers
and tax authorities are less likely to identify a qualifying
comparable for associated transactions involving unique
intangibles. This would result in limiting the application
of the comparable uncontrolled price method.
2.4.2. Selecting the most appropriate transfer pricing
methods
It is sensible for the Discussion Draft to point out that
“caution should be exercised in adopting a transfer pricing
methodology that too readily assumes that all residual
profit from transactions after routine functional returns
should necessarily be allocated to the party entitled to
intangible-related returns”.56
Besides intangibles, there may be other factors contribut-
ing to the profit, for example, risks, specific market char-
acteristics, location, business strategies and MNE group
synergies.57 This statement is consistent with the applic-
ation of functional analysis elaborated in chapters I-III of
the OECD Guidelines.
The existing OECD Guidelines on intangibles take an
aggressive approach to the allocation of all residual profit
to intangibles in related transactions. The Discussion Draft
proposes a method of pricing and allocation of profit from
related transactions involving intangibles based on a com-
prehensive functional analysis. This also reflects what
independent parties would consider in their arm’ s length
transactions.
In selecting the most appropriate transfer pricing methods
for transactions involving the use or transfer of intangibles,
the Discussion Draft is cautious about applying valuation
techniques used in other contexts for transfer pricing pur-
poses. The assumptions and other motivations underlying
55. OECD Ctr. for Tax Policy and Admin., supra n. 2, para. 101.
56. OECD Ctr. for Tax Policy and Admin., supra n. 2, para. 108.
57. OECD Ctr. for Tax Policy and Admin., supran. 2, para. 108.
© IBFD
particular applications of valuation techniques should be
examined in order to choose a valuation method consis-
tent with the arm’ s length principle.
A reason given for the Discussion Draft’ s reluctance to fully
rely on accounting principles for valuation is “this inherent
conservatism [of the accounting principle which] can lead
to definitions that are too narrow for transfer pricing pur-
poses and to valuation approaches that are not necessarily
consistent with the arm’ s length principle”.58 However, as
discussed in the definition section above, the definition
of intangibles provided in the Discussion Draft is paral-
lel to the definition of intangibles included in the inter-
national accounting principles. Most examples of specific
intangible assets provided in the Discussion Draft are also
covered by general accounting principles, although there
are several controversial items which go beyond the scope
of the definition of traditional intangibles; their status
cannot be easily decided. This debate can be traced to the
issue of divergence and convergence between account-
ing and taxation. In the Discussion Draft, transfer pricing
rules diverge from general accounting principles.
Valuation techniques based on costs
The Discussion Draft limits the application of valuation
techniques based on costs because “there is little reason
to believe that there is any correlation between the cost
of developing intangibles and their value or transfer price
once developed”.59 Profit projection based on costs may
be less reliable when transactions involving intangibles
yield significantly high profits, which are far beyond the
costs incurred for researching and developing the intan-
gible property. This is often the case where the intangi-
bles involved are “Section D.1.(vi) intangibles”, which are
defined as follows:
An intangible (i) that is not similar to intangibles used by or avail-
able to parties to potentially comparable transactions, (ii) whose
use in business operations (e.g. in manufacturing, provision of
services, marketing, sales, or administration) is expected to yield
greater future economic benefits than would be expected in the
absence of the intangible, and (iii) whose use or transfer would
be remunerated in dealings between independent parties, will be
referred to as a Section D.1.(vi) intangible.
However, the treatment of the cost of developing intan-
gibles included in the current OECD Guidelines is more
practical and reasonable:
[...] the amount, nature, and incidence of the costs incurred in
developing or maintaining the intangible property might be ex-
amined as an aid to determining comparability or possibly rela-
tive value for the contributions of each party, particularly where
a profit split method is used. However, there is no necessary link
between costs and value.60
The cost of developing intangibles can be used as an indi-
cator of the value of intangibles. For example enterprises
incurring higher investment in developing intangibles will
expect higher returns from transactions involving intan-
gibles, especially when an enterprise spends significant
58. OECD Ctr. for Tax Policy and Admin., supra n. 2, para. 110.
59. OECD Ctr. for Tax Policy and Admin., supra n. 2, para. 112.
60. OECD Guidelines, ch. VI, para. 6.27.
INTERNATIONAL TRANSFER PRICING JOURNAL MAY/JUNE 2013 141
Jingyi Wang
amounts of time and capital in researching and developing
some new intangibles. Even though cost cannot be used
directly as the value of an intangible, it should be taken
into account in the comparability analysis.
2.5. Determining arm’ s length prices for transactions
involving the use or transfer of intangibles
Following the division of transactions involving the use or
transfer of intangibles, the Discussion Draft provides guid-
ance on the determination of arm’ s length prices for these
two types of transactions. When sufficiently reliable com-
parables can be identified, the Discussion Draft offers brief
instructions for applying one of the five OECD transfer
pricing methods, depending on the specific facts and cir-
cumstances.61 For other transactions where reliable intan-
gibles are not available, profit split methods and relevant
valuation techniques are suggested as possible measures
for determining arm’ s length prices.
The Discussion Draft’ s preference for profit split methods
is consistent with its discussion of conducting a compa-
rability analysis. The Draft shows that when conducting
a comparability analysis, the options realistically avail-
able to each of the parties to the transaction should be
considered,62 as “a one-sided comparability analysis does
not provide a sufficient basis for evaluating a transaction
involving the use or transfer of intangibles”.63
Amongst the five OECD transfer pricing methods, the
only two-sided methods are the comparable uncontrolled
price method and the profit split method, while the other
three methods (i.e. the cost-plus, resale price and trans-
actional net margin methods) are all so-called one-sided
approaches. The application of these three one-sided ap-
proaches is through the identification of the tested party,
which is often “the one [that] has the less complex func-
tional analysis”.64 Therefore, when there is no comparable
independent transaction where the comparable uncon-
trolled price method is not applicable, the Discussion
Draft recommends the profit split method as the alterna-
tive transfer pricing method.
Valuation techniques
Valuation techniques applicable for transfer pricing pur-
poses when comparables cannot be identified should meet
the requirements of:
giving due regard to these Guidelines, to the specific facts of the
case, to generally accepted valuation practices, and with appro-
priate consideration of the validity of the assumptions underlying
the valuation and the consistency of those assumptions with the
arm’ s length principle.65
The valuation technique based on the discounted value
of projected future cash flows is briefly introduced in the
Discussion Draft.
61. OECD Ctr. for Tax Policy and Admin., supra n. 2, paras. 119-124,
134-138.
62. OECD Ctr. for Tax Policy and Admin., supra n. 2, para. 80.
63. OECD Ctr. for Tax Policy and Admin., supra n. 2, para. 81.
64. OECD Guidelines, ch. III, Comparability analysis, para. 3.18.
65. OECD Ctr. for Tax Policy and Admin., supra n. 2, para. 147.
142 INTERNATIONAL TRANSFER PRICING JOURNAL MAY/JUNE 2013
The Discussion Draft emphasizes the importance of
the underlying assumptions in determining valuation
parameters,66 and it promotes good practice for:
taxpayers and tax administrations making use of valuation tech-
niques in determining arm’ s length prices for transferred intan-
gibles should explicitly set out each of the relevant assumptions
made in creating the valuation model, should describe the ba-
sis for selecting valuation parameters, and should be prepared
to defend the reasonableness of such assumptions and valuation
parameters.67
In particular, the Discussion Draft discusses several key
parameters in estimating the discounted value of projected
future cash flows, including:
–– accuracy of financial projections;
–– assumptions regarding growth rates;
–– discount rates;
–– useful life of intangibles and terminal values; and
–– assumptions regarding tax rates.
Nevertheless, according to the Discussion Draft, an
obvious problem with the application of valuation tech-
niques in a transfer pricing context is that the valuation
could be achieved without referring to comparables at all,
although the techniques are applicable under the prereq-
uisite that there are no sufficiently reliable comparables.
Although the Discussion Draft stresses that caution should
be exercised when determining underlying assumptions
and valuation parameters, it does not provide explicit guid-
ance on what assumptions are appropriate in valuing asso-
ciated transactions involving intangibles. These assump-
tions should be consistent with the arm’ s length principle.
The five OECD transfer pricing methods rely on com-
parables in varying degrees of importance. Some such
methods rely on comparables more than others. Where
sufficiently reliable comparables cannot be identified, tax-
payers are required to rely on what would have been agreed
between independent parties, in order to make sure that
the application of any of the transfer pricing methods is
consistent with the arm’ s length principle. A similar
requirement should also be imposed on the application
of valuation techniques in a transfer pricing context.
What is the role of valuation techniques in a transfer
pricing context? To what extent can the application of
valuation techniques replace a transfer pricing method, if
this is allowable? How can one ensure that the application
of valuation techniques is consistent with the arm’ s length
principle? These essential questions should be answered by
the OECD Guidelines; otherwise the OECD Guidelines
will deviate from the arm’ s length principle.
66. OECD Ctr. for Tax Policy and Admin., supra n. 2, para. 150.
67. OECD Ctr. for Tax Policy and Admin., supra n. 2, para. 151.
© IBFD
 A Tentative Improvement: Comments on OECD Discussion Draft on the Transfer Pricing of Intangibles
3. Conclusion
More than a decade has passed since the OECD
released its existing guidelines on transfer pricing
of intangibles. This new Discussion Draft has been
structured in a systematic way to present the OECD’ s
opinions on the three most important questions,
namely the definition, identification and valuation
of intangibles involved in associated transactions.
Compared with the existing Guidelines, the guidance
has been significantly expanded.
A new definition of intangibles for transfer pricing
purposes has been provided which is parallel to
the usual definition of intangibles included in
international accounting principles. Nevertheless,
some of the examples mentioned in the Discussion
Draft are controversial, such as goodwill and ongoing
concern, and assembled workforce. The Draft does
not provide persuasive reasoning for recognizing
these contentious items as intangible property for
transfer pricing purposes. In particular, goodwill and
ongoing concern are more “intangible” than other
intangible items, the interpretations of which vary
with different subjects like accounting, taxation,
management etc., and from country to country.
Although the Draft does not differentiate trade
intangibles and marketing intangibles (which can be
seen as a major improvement), the potential inclusion
of goodwill, ongoing concern and assembled
workforce as intangibles for transfer pricing purposes
could lead to drastic disputes between different
jurisdictions.
Associated transactions involving intangibles
have been identified in two subcategories, namely
transactions involving the use of intangibles in
connection with sales of goods or services and
transactions involving transfers of intangibles.
“Transfers of intangibles” has been clarified to include
transfers of intangibles or rights in intangibles;
© IBFD
transfers of combinations of intangibles; and transfers
of intangibles in combination with other business
transactions. Dividing the associated transactions
involving intangibles in this way presents a clearer
understanding of these special transactions which
is fundamental to the resolution of the issue. Proper
characterization is of importance in identifying
comparables, deciding transfer pricing methods and
preparing contemporaneous documentation.
Regarding valuation, the Discussion Draft suggests
the potential application of valuation techniques
when comparables cannot be identified. Valuation
techniques based on costs have been discouraged,
as the Draft takes the position that there is no
connection between the costs of developing
intangibles and the eventual valuation of and profits
brought about by the intangible property. Valuation
techniques based on the discounted value of projected
future cash flows have been introduced in the Draft,
which also discusses relevant specific valuation
parameters and underlying assumptions.
Although the application of valuation techniques can
act as an alternative measure for deciding the arm’ s
length prices of associated transactions, the question
of how to implement the arm’ s length principle in
the valuation process should be taken into account.
However, the Discussion Draft leaves unanswered the
important question of how to ensure that the essential
comparability analysis is reflected in the valuation
process.
Aside from these specific criticisms, however, the
Discussion Draft presents a systematic and logical
analysis of the transfer pricing of intangibles.
Nevertheless, the improvement is tentative, as there
are many controversial aspects. Before releasing the
final chapter on the transfer pricing of intangibles,
these questions require more consideration.
INTERNATIONAL TRANSFER PRICING JOURNAL MAY/JUNE 2013 143