Transfer pricing and intangibles

VIJAY IYER | Updated on: Sep 18, 2011

Issues pertaining to intangibles have been a significant bone of contention between taxpayers and tax administrations.

Transfer Pricing, simply put, refers to pricing of transactions between group companies in different countries. The increasing complexity in this area can be gauged from the 2010 Global Transfer Pricing Survey, conducted by Ernst & Young, where more than 74 per cent of the multi-national enterprises (MNEs), believed that transfer pricing will be absolutely critical to their organisations during the next two years. Further, one third of the MNEs surveyed identified transfer pricing as one of the most important tax challenges facing their group.

Indian tax authorities, like several others, have tightened transfer pricing laws, improved vigilance, enhanced enforcement and armed its tax officials with greater powers of investigation. The Director General of Income Tax (DGIT) communicated at a public conference, that transfer pricing cases will be scrutinised by the Comptroller and Auditor General of India (CAG), since they have revenue implications for the exchequer. Taxpayers may therefore brace themselves for greater audit activity in the coming days.


Recent audits have seen increased focus on transactions pertaining to use or transfer of intangible property. In this regard, tax authorities have sought detailed information on the description of intangible property received, its uniqueness, details of the process, product, covered by the intangible property, agreement rights to receive upgrades / modifications, useful life of the intangible, information on the availability of such intangibles in the open market and prices and the cost of development of the intangibles. They have also been challenging taxpayers on the cost-benefit analysis of the receipt / use of intangibles, quantification of the benefits and the comparison of profits before and after the use of the intangible.

As the name suggests, intangibles are subtle, elusive, and mobile, thereby complicating questions of pricing and ownership. In the absence of specific guidance on definition, identification, and valuation of intangibles for transfer pricing purpose, issues pertaining to intangibles have been a significant bone of contention between taxpayers and tax administrations.


The Organisation for Economic Cooperation and Development (OECD) is attempting to bridge this gap and has released a scoping paper for a project that will examine various issues related to transfer pricing for intangible property.

The scope of the above project will include work on a framework for analysis of intangible-related transfer pricing issues.

The OECD guidelines currently do not contain any universal definition of intangibles. The project intends to address issues pertaining to definition of intangibles, including the relevance of definitions of intangibles used in accounting, valuation, and legal standards.

The Working Party for the project intends to review specific categories of intangibles, such as the pricing of R&D services, and when a cost-plus method or a method other than cost-plus may be acceptable for pricing of R&D services.

Indian tax authorities, in recent transfer pricing audit proceedings, have raised the issue of ‘arm's length return' to entities that aren't legal owners of intellectual property, but are seen to have economic ownership. The notion of economic ownership, as opposed to legal ownership, will also be examined in the OECD Project, along with the valuation of the intangibles.


Though the OECD Guidelines are not binding on the Indian tax administration (since India isn't a part of the OECD), the results of this project, in the absence of any guidelines in the Indian regulations, would serve as a useful paradigm while analysing various aspects of transfer pricing, at least for the taxpayers. However, the primary responsibility for ensuring appropriate transfer pricing analysis and documentation lies with the taxpayer only.

(The author is Tax Partner, Ernst & Young. )

Published on September 18, 2011
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