Intangibles in the World of Transfer Pricing: Identifying - Valuing - Implementing

By Martin Schmitt

Intangible assets are becoming increasingly important as value drivers for multinational companies. It is a strategic question how to allocate intangibles within the multinational corporation. It needs to be defined by whom and under which conditions they can be utilized. Typical IP migration models such as licensing, joint development and transferring are becoming a focal point within tax audits across the globe. Hence,defining an intangibles system that fulfils the tax requirements is of utmost strategic importance for multinational corporations. A central question is how to value intangibles in line with the arm’s length principle as is required internationally for transfer pricing purposes.

Edited by leading transfer pricing and valuation experts in Europe, this comprehensive book offers practitioners an effective road map for identifying, valuing and implementing intangibles for transfer pricing purposes under consideration of both the OECD and local perspectives. It is therefore a must-have book for transfer pricing and valuation practitioners on all levels of experience.

The book starts with an introduction to the role of intangibles in the world of transfer pricing including typical intangibles migration models. It describes common intangible assets across all types of industries, including e.g. automotive, consumer goods and software.Using several numerical examples, the book then covers state-of-the-art valuation methods including how to apply these methods in practice in a way consistent with the OECD Transfer Pricing Guidelines. The different country chapters written by local experts provide country-specific guidance on the legal framework concerning intangible assets from a transfer pricing and valuation perspective. Finally, the book covers practical advice on the implementation of an intangible assets system.

This book offers invaluable guidance to practitioners seeking tools to apply the arm’s length principle in theworld of intangibles.

• Language: English
• Publisher: Springer
• Release date: Jan 25, 2021
• ISBN: 9783319733326

Book preview

Editors

Björn Heidecke, Marc C. Hübscher, Richard Schmidtke and Martin Schmitt

Intangibles in the World of Transfer Pricing

Identifying - Valuing - Implementing

1st ed. 2021

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Logo of the publisher

Editors

Björn Heidecke

Deloitte GmbH, Hamburg, Germany

Marc C. Hübscher

Deloitte GmbH, Hamburg, Germany

Richard Schmidtke

Deloitte GmbH, Munich, Germany

Martin Schmitt

Deloitte GmbH, Frankfurt am Main, Germany

ISBN 978-3-319-73331-9e-ISBN 978-3-319-73332-6

https://doi.org/10.1007/978-3-319-73332-6

© Springer Nature Switzerland AG 2021corrected publication2021

This work is subject to copyright. All rights are reserved by the Publisher, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed.

The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use.

The publisher, the authors and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication. Neither the publisher nor the authors or the editors give a warranty, expressed or implied, with respect to the material contained herein or for any errors or omissions that may have been made. The publisher remains neutral with regard to jurisdictional claims in published maps and institutional affiliations.

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Preface

All over the world, German bread is valued for its unique diversity. The knowledge of raw materials, baking procedures and the awareness of tradition is passed on from generation to generation by the master and journeymen to the apprentice. In the baking craft, centuries-old traditions are united with the latest insights and practices, states UNESCO¹ in its Nationwide Inventory of Intangible Cultural Heritage for Germany. Not only is bread itself accorded, but also the baking techniques, recipes, and knowledge together. Traditional bakeries profit from their long traditions and expertise. They benefit from the existence of valuable intangibles.

This not only applies to traditional bakeries, but also to multinationals’ trust in valuable intangibles as sources of sustainable profit and market share. Several studies have pointed out a positive relationship between intangibles and economic performance.² A positive relationship is especially found in developed countries where the intangibles are better protected. The reason for this is that intangibles provide a competitive advantage that cannot be copied easily.

Knowing the relevance of intangibles for the success of multinationals has at least three consequences: companies focus on the development and maintenance of intangibles, governments debate how to foster the development of intangibles within companies, and individuals invest more in human capital by studying for higher educational degrees to obtain higher paid jobs.

The increasing relevance of intangibles from a business perspective has resulted in an increasing focus on intangibles in the world of transfer pricing as well as on a global tax agenda with think tanks such as the OECD, the UN, the World Bank, the IMF, and governments alike. Hence, guidance is needed on how to deal with intangibles in the world of transfer pricing considering the latest developments on an OECD level but also within local countries.

This handbook aims to help practitioners in tax, legal, and finance departments, tax advisors, tax administrations, and tax inspectors, but also academics and students, to navigate through intangibles in the world of transfer pricing. The focus is practical guidance with examples. This handbook is also intended to support and enrich the debate on a tax policy level.

The handbook focuses on six parts, each with several chapters. Part I provides an overview of the definition and identification of intangibles. The DEMPE concept introduced by the OECD is explained. Applied to intangibles the DEMPE acronym stands for development, enhancement, maintenance, protection, and exploitation. Typical models for how intangibles are traded within multinationals are presented. Relevant examples of intangibles in selected industries are provided. Part II explains how arm’s-length prices for intangibles can be derived in typical transactions such as outright sale, licensing, contract R&D, and joint development. The nitty-gritty of the valuation is provided in Part III, providing an overview of state-of-the-art valuation techniques as well as their fundamentals such as planning data and interest rates. Part IV summarizes the relevant legislation from a tax perspective for over 20 countries, with a focus on transfer pricing. Part V gives practical guidance on how to implement a system with intangibles. The interfaces to inter alia customs and M&A transactions are shown. This handbook reflects changes in legislation applicable on April 1, 2020.

We would like to thank Springer for publishing this handbook. We appreciate that all authors and contributors have spent many hours and days drafting the chapters, alongside their normal jobs and often in their spare time, to produce really excellent articles. We thank Nina Werner, Marc Heine, Henrik Abeln, and Alan Frostick (Frostick & Peters, Hamburg) for their assistance in proofreading and editing this handbook. Finally, we would like to thank our girlfriends and families for understanding and being patient while we were writing it. You have been a massive support for us.

As this is the first edition of this handbook, we would be grateful for any comments and feedback. Especially in a digital era of simple likes and dislikes, we would appreciate more detailed debate on the rights or wrongs on all issues surrounding intangibles in the world of transfer pricing, maybe with a tasty slice of fresh bread and a lavish dab of butter.

References

Marrocu, E., Paci, R., & Pontis, M. (2012). Intangible capital and firms productivity, Working paper University of Cagliari.

Oliner, S. D., Sichel, D. E., & Stiroh, K. J. (2007). Explaining a productive decade, brookings papers on economic activity, economic studies program. The Brookings Institution, 38(1), 81–152.

O’Mahony, & Vecchi. (2009). Output, input and productivity measures at the industry level: The EU KLEMS database. The Economic Journal, 119(538), 374–403.

Björn Heidecke

Marc C. Hübscher

Richard Schmidtke

Martin Schmitt

Hamburg, GermanyHamburg, GermanyMunich, GermanyFrankfurt am Main, Germany

Contents

Part I Intangibles in the World of Transfer Pricing

Definition and Identification of Intangibles 3

Dulce Miranda

Allocation of IP for TP Purposes 11

Susann Karnath

Overview of IP Migration Models 27

Martin Schmitt, Anna-Katharina Christen and Merten Zenker

Empirical Evidence on Various Models 49

Jost Heckemeyer, Pia Olligs and Michael Overesch

What Is Different?​:​ Intangibles in the Mid-Market 61

Alexander Reichl

Understanding the Reporting of Intangibles from a Business Perspective 75

Thomas M. Fischer and Kim T. Baumgartner

Intangibles in Different Industries 115

Marc C. Hübscher and Niklas Martynkiewitz

The Miracle of Brand Value Creation:​ Where Does the Value Come From?​ 141

Anton Nagatkin, Roman Kral and Janine Stockmeier

Valuation:​ Understanding, Assessing, and Documenting 163

Marc C. Hübscher and Björn Heidecke

Part II Finding the Arm’s Length Price for Intangibles

Structuring a License System 181

Tim Eggebrecht, Markus Kircher and Julia Kaiser

Contract Research and Development 199

Richard Schmidtke, Benjamin Protte and Janis Sussick

Pool Concept 215

Richard Schmidtke, Benjamin Protte and Janis Sussick

Transactional Profit Split Method 231

Heike Schenkelberg and Anna Rottke

Part III The Nighty Gritty Details on Valuation

Please Mind the Gap:​ Arm’s Length Prices and Fair Market Value 263

Björn Heidecke

Market Approach 273

Marc Hayn and Oliver Schlegel

Relief from Royalty 283

Marc C. Hübscher and Stella Ehrhart

MEEM 299

Andreas Becker

Incremental Cash Flow Method 315

Marc Hayn and Oliver Schlegel

Cost Approach 325

Stefan Brauchle, Marcel Merkle, Magdalena Treyer and Daniel Schlänger

Calculating Planning Data and Its Plausibility 345

Marc C. Hübscher and Björn Heidecke

Discount Rates 355

Marc C. Hübscher and Björn Heidecke

Part IV Country Perspective of Intangibles from a Transfer Pricing Perspective

Introduction 367

Björn Heidecke, Marc C. Hübscher, Richard Schmidtke and Martin Schmitt

Austria 369

Karin Andorfer and Andreas Gregshammer-Salomon

Belgium 391

Ann Gaublomme, Maria Panina and André Schaffers

Brazil 407

Cristiane Drumond Vieira and Luis Fernando Cibella

Canada 419

Bruno Amancio de Camargo and Émilie Granger

China 441

James Yi Min Zhao and Claire Fan Yi Liu

East Africa 451

Fred Omondi and Doris Gichuru

France 459

Julien Pellefigue and Jean-Edouard Duvauchelle

Germany 475

Björn Heidecke

Ghana 493

Taiwo Okunade, George Ankomah, Arowolo Oluseye and Udo Abarikwu

India 497

Anis Chakravarty, Amit Dattani and Dilip Sutar

Italy 513

Aldo Castoldi, Giovanni Quattrin and Federico Mariscalco Inturretta

Mexico 525

Jorge González García

Middle East 535

Mourad Chatar, Jan Van Abbe and Alex Law

Nigeria 549

Taiwo Okunade, Joseph Alatishe, Arowolo Oluseye and Udo Abarikwu

Poland 553

Iwona Georgijew, Robert Nowak, Tomasz Adamski and Aleksandra Skrzypek

Russia 561

Yulia Sinitsyna, Dmitry Kulakov, Nikita Piskovets and Anastasia Kopysova

Spain 577

Ramon Lopez de Haro, Alejandro Pons Mestre and Jon Diaz de Durana

Sweden 593

David Godin and Michael Lindgren

United Kingdom 603

John Henshall, Daniela Griese, Phil Henderson and Shaun Austin

CJEU Court Cases:​ IP and Taxation 621

Patrick Uwe Wittenstein

Part V Implementing Intercompany Intangible Systems

Withholding Tax Aspects of License Models 639

Thomas Jansen

A Legal Review of IP Migrations 661

Stefan Wilke and Klaus Gresbrand

IP from an M&​A Tax Perspective 691

Andrea Bilitewski and Mark Heinemann

Intellectual Property from a Customs Perspective 705

Bettina Mertgen and Philipp Hamann

Correction to:​ Brazil C1

Cristiane Drumond Vieira and Luis Fernando Cibella

Footnotes

1

https://​www.​unesco.​de/​en/​culture-and-nature/​intangible-cultural-heritage/​nationwide-inventory-intangible-cultural-heritage

2

Marrocu, Paci, and Pontis (2012); Oliner, Sichel, and Stiroh (2007); O’Mahony and Vecchi (2009).

Part IIntangibles in the World of Transfer Pricing

© Springer Nature Switzerland AG 2021

B. Heidecke et al. (eds.)Intangibles in the World of Transfer Pricinghttps://doi.org/10.1007/978-3-319-73332-6_1

Definition and Identification of Intangibles

Dulce Miranda¹  

(1)

Deloitte Legal, Madrid, Spain

Dulce Miranda

Email: [e-mail]

Keywords

IntangiblesHTVIIntellectual propertySoftwareTrademarksTrade secretsPatents

What Will the Reader Learn?

How can an intangible be defined for transfer pricing purposes?

How can intangibles be identified?

What relevance for transfer pricing has the protection of intangibles?

How do intangibles and services interact?

1 Introduction

Within the core of multinational groups operating in the global economy, ownership of intangible assets, their assignment or license, and the benefits derived from using or licensing the assets between different group entities form the basis for and affect the distribution of the group’s tax burden. This might lead to an allocation of profits derived from the use of intangibles that is not in line with economic reality.

Actions 8 and 10 of the BEPS Project were designed to address these practices, as they could give rise to a considerably negative impact on tax collection in some countries. The underlying objective of these actions is for profits to be reported for tax purposes in the country in which the economic activities generating the profits actually took place, i.e., where the value was created.

In particular, Action 8 sets out the criteria for avoiding base erosion and profit shifting in connection with the movement of intangibles within multinational groups. This is done by adopting a clear definition of the different intangible assets encompassed by the concept of intangibles, ensuring that the profits associated with the assignment and use of intangibles are properly allocated and reflect the reality of value creation, and by the development of specific rules or measures for hard-to-value intangibles.

2 Definition of Intangibles

Given that intangible assets contribute to the generation of economic profit in intragroup transactions, any analysis of a related-party transaction involving intangible assets must start by precisely identifying the assets.

Therefore, the identification of intangibles becomes a salient and essential issue for companies, given that they form the basis for the functional analysis that must be carried out later.

Chapter VI of the Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations defines intangible as something (i) which is not a physical or a financial asset; (ii) which is capable of being owned or controlled for use in commercial activities, and (iii) whose use or transfer would be compensated had it occurred in a transaction between independent parties in comparable circumstances.¹ I must say that, although it does not purport to be a legal definition, the necessary fulfillment of all three requirements or characteristics is very useful for identifying intangibles and for determining whether certain assets should be classified as intangibles for the purposes at hand.

In this sense, allow me to cite an example of issues that, though they need considering when determining the price of a transaction between related parties, should not be classified as intangibles from this particular standpoint: synergies between group companies. Such synergies help to reduce costs, integrate systems, and optimize the purchasing power of entities within a group and therefore are relevant from the point of view of transfer pricing, but do not fulfill the definition of intangibles as set out above, given that synergies are neither owned nor controlled by any entity. Therefore, under these circumstances, they cannot be considered an intangible.

For identification, the OECD Transfer Pricing Guidelines not only offer a definition of intangible, but also provide an open list of what can be considered an intangible asset for transfer pricing purposes. This list includes patents, know-how and trade secrets, trademarks, trade names and brands, rights under contracts and government licenses, licenses and similar rights in intangibles, goodwill, and ongoing concern value. Even so, this is not a closed list and it could be extended with any other immaterial asset that meets the requirements for being classified as an intangible asset.

We have referenced the OECD definition of intangibles set out in the Transfer Pricing Guidelines. However, it is important to note that other international regulations also define principles for identifying and valuing intangibles. For example, the International Financial Reporting Standards (IFRS). In particular, IFRS 3 Business Combinations is an international standard for accounting activity, resulting from a joint undertaking between the International Accounting Standards Board (IASB) and the US Financial Accounting Standard Board (FASB).

In particular, the objective of IFRS 3 is to "improve the relevance, reliability and comparability of the information that a reporting entity provides in its financial statements about a business combination and its effects." Consequently, it is applied to transactions that meet the definition of a business combination but not to the acquisition of an asset or group of assets that does not constitute a business.²

With respect to the concept of intangible assets, the Standard establishes that identifiable assets acquired in a business combination must be recognized and for that purpose, it clarifies what is meant by identifiable intangible assets as those that meet either of the following two requirements:

It is separable: the asset is capable of being separated or divided from the entity and sold, transferred, licensed, rented, or exchanged, either individually or together with a related contract, identifiable asset, or liability.

It arises from contractual or other legal rights.

IFRS 3 includes examples of identifiable intangible assets under the following five categories:

(a)

Marketing-related: intangible assets used primarily in the marketing or promotion of products or services, such as trademarks, trade names, service marks, collective marks, and certification marks; trade dress; newspaper mastheads; domain names; and non-competition agreements.

(b)

Customer-related: intangible assets such as customer lists; order or production backlogs; customer contracts and related customer relationships; and non-contractual customer relationships.

(c)

Artistic-related: intangible assets such as plays, operas, and ballets; books, magazines, newspapers, and other literary works; musical works such as compositions, song lyrics, and advertising jingles; pictures and photographs; video and audio-visual material including motion pictures or films, music videos, and television programs.

(d)

Contract-based: intangible assets such as licensing, royalty, and standstill agreements; advertising, construction, management, service or supply contracts; lease agreements; construction permits; franchise agreements; operating and broadcast rights; servicing contracts; employment contracts; rights of use such as drilling, water, air, timber cutting, and route authorities.

(e)

Technology-based: intangible assets such as patented technology; computer software; unpatented technology; databases; and trade secrets.

However, as indicated above, the identification and valuation of intangibles is not generally for tax purposes in such cases, rather for an external third party, from the point of view of the company.

Moreover, it is important to note that the recognition or nonrecognition of such intangible assets for accounting purposes is not crucial for the transfer pricing purposes at hand. In fact, it is common for intangibles that arise from in-house development, research, or from advertising and promotion activities to not be classified as intangible assets for accounting purposes. Even so, the defined intangibles for transfer pricing purposes should be cross-checked with other available definitions of intangibles such as for accounting purposes.

Nevertheless, once an intangible is identified the next step is to define whether it is a hard-to-value intangible (HTVI).

According to the relevant definition in the OECD Transfer Pricing Guidelines,³ this term covers intangibles that "at the time of their transfer between associated enterprises, (i) no reliable comparable exists, and (ii) at the time the transaction was entered into, the projections of future cash flows or income expected to be derived from the transferred intangible are highly uncertain, making it difficult to predict the level of ultimate success of the intangible at the time of the transfer."

There are certain intangibles that, due to their characteristics, present valuation problems at the moment the related transaction takes place. This is the case, for example, with a product whose likelihood of effective use is uncertain and would not be immediately manufactured, such as a patent on an active ingredient of a new medicine still under clinical trials (that has yet to obtain marketing authorization); or a product that is only partially developed, such as software, at the time the assignment takes place.

In fact, any type of intangible asset may be classified as an HTVI in such circumstances. These scenarios make it difficult for tax administrations to determine the factors that the taxpayers considered when pricing an HTVI asset in a transaction between related entities, and whether or not the price was established on an arm’s length basis.

Therefore, if an HTVI is involved in a transaction, it will be necessary to apply the kind of contractual measures that independent enterprises would have implemented, aimed at adjusting price deviations during the development of the contractual relationship (shorter agreement terms, milestone payments, running royalties, e.g., ranges of royalties, etc.).

This matter will not be further analyzed in this section, as there is another chapter in this document devoted to HTVIs.

3 Identification of Intangibles

Having defined intangible assets, how to identify the intangibles involved in a transaction should now be analyzed.

This identification is fairly straightforward when the rights are registered. It is important to note that, for example, for rights over a trademark,⁴ a patent, or a design to exist they must be duly registered.⁵ For these types of rights, the legal owner and the intangible can be easily identified.

The situation is more complex with intangibles that do not require registration. Such cases must, therefore, be analyzed from a legal standpoint, taking into consideration legal statutes and case law, in order to determine whether an exclusive right exists, its protection, legal ownership, etc. This is particularly relevant for know-how and trade secrets.

In the course of their activities, companies develop information that is commercially valuable and that is treated as confidential in order for the companies that control such information to have a competitive advantage. In general, SMEs and start-ups rely on secrecy more than larger companies, as they usually lack the resources to obtain and manage a portfolio of patents or to defend against patent infringement. Therefore, competitiveness increasingly depends on trade secrets. But what features must information have to be qualified as a trade secret?

Transfer Pricing Guidelines⁶ establish the following:

Knowledge and trade secrets are proprietary information or knowledge that assist or improve a commercial activity, but that are not registered for protection in the manner of a patent or trademark. Knowledge and trade secrets generally consist of undisclosed information of an industrial, commercial or scientific nature arising from previous experience, which has practical application in the operation of an enterprise. Knowledge and trade secrets may relate to manufacturing, marketing, research and development, or any other commercial activity.

Furthermore, the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS), which is an international convention that lays out the minimum standards for many forms of intellectual property applicable to World Trade Organization members, defines⁷ trade secrets as information that (i) is secret, in the sense that is not generally known or easily accessible, (ii) has a commercial value because it is secret, and (iii) the person that controls it has taken reasonable measures to keep such information secret.

However, the protection of undisclosed information is not homogeneous in all countries. Some countries have specific legislation on trade secrets while others protect trade secrets as intellectual property rights, and still others rely on unfair competition law.

In view of the foregoing, in 2016 the European Parliament and Council approved Directive (EU) 2016/943 for protection of undisclosed knowledge and business information against unlawful acquisition, use, and disclosure. The definition of a trade secret that is set out in this Directive⁸ is almost identical to the one provided in the TRIPS agreement.

Consequently, trade secrets exist and are protected without any kind of registration, provided the information fulfills the requirements for legal protection. Accordingly, it is necessary to refer to the regulations established in each country and the related case law and to verify the characteristics that information must have and requirements it must meet to be protected as a trade secret.

In general in  all jurisdictions the concept of a trade secret is broad, encompassing many different types of information, broken down into two categories:

(a)

Technical information: manufacturing methods, prototypes, non-patented inventions, formulas, drawings, etc.

(b)

Commercial information: lists of suppliers or customers, business strategies, information about prices, etc.

The above paragraphs are dedicated to the identification, but in our opinion, this must be taken further: Merely identifying intangibles considered abstractly is not sufficient; it is necessary to verify that the intangibles are protected, and their protection is valid.

4 Valid Protection of Intangibles

Once intangibles involved in a given transaction have been identified, it is necessary to ensure that the intangibles are properly protected and this protection remains in force. Otherwise, the requirement that its "use or transfer would be compensated had it occurred in a transaction between independent parties in comparable circumstances"⁹ would not otherwise be met or justified, i.e., why would a third party be willing to pay for it if it were not protected? A third party would be unlikely to pay a royalty for an intangible over which no exclusive rights are held and therefore can be utilized free of charge as its use is not prohibited.

Some of the aspects that must be verified to this end are discussed below:

Registration. As previously mentioned, the existence of many intellectual and industrial property rights is governed by the principle of registration, whereby registration has the effect of creating the right. It would not be possible to speak of the existence, for example, of a patent or a trademark¹⁰ if the owner had not applied for registration. However, as this does not apply to all intangibles,¹¹ it is necessary to consult the regulations applicable to each asset in each jurisdiction.

Territoriality. This principle states that rights are granted in each territory, under the requirements set out in that jurisdiction’s legal statutes or in applicable international agreements and conventions. The registration of a particular right in a certain territory implies protection in one territory, but not in others (unless covered by international conventions for certain IP rights). Therefore, it is important to pay attention to this particular issue when analyzing the effective existence of an intangible in a particular transaction.

Validity. The vast majority (but not all) of these rights are subject to time limits, whereby after a certain period has elapsed, the right is extinguished. This period depends on the right in question and the applicable legislation.

Furthermore, the effective existence of a right may be subject to certain legal limits, so it is necessary to consult the regulations that apply to each asset under each jurisdiction. Among the various legal limits in place, the exhaustion of rights should be considered. Within the European Union, for example, rights to a patent, trademark, or copyright do not extend to actions regarding a product protected by that right once the product has been placed on the market within the European Economic Area, by the owner of the right, or by a third party with the owner’s consent.¹²

To conclude, not only do we need to identify an intangible asset, we must also determine its effective existence. Here it is interesting to assess the enforceability of a contract that imposes a payment of royalties for an intangible asset that has expired. The case law in different jurisdictions varies in this respect.¹³

5 Interaction of Intangibles and Services

A further issue that can complicate the matter is the customary concurrence of auxiliary services provided in transactions that involve intangible assets.

Quite often the assignment or license of intangible assets such as trade secrets or patents implies the need for the licensor to provide some kind of technical assistance to the licensee on how to apply or how to use the licensed or assigned information. From the perspective of the first step of identifying intangibles in any agreement, it is crucial to clearly differentiate between the license of the intangible and the provision of technical assistance, training, or any other kind of service or support.

The difference between the two is that the service is the expert assistance a company receives from another company, to better carry out the activity. In other words, technical assistance implies that one of the parties undertakes to carry out an engagement or provide a service to the other party. In contrast, licensing means that one of the parties undertakes to share its specific experience and knowledge with the other party, so the other party can use this information by itself. In the latter, the assignor or the licensor is not involved in the use the assignee or licensee makes of the information provided, as its only obligation is to transmit the information.

Software licensing agreements usually include an arrangement for the provision of services tied to the intangible asset license; e.g., software maintenance services. As regards trademarks, it is common practice for the licensor to undertake to provide marketing services related to the product.

However, the difference is not always so clear cut and it is often complex to distinguish between service provision and license. In order to correctly determine the substance of the arrangement, the different concepts discussed above must be considered in full. In short, it will be necessary to ascertain the extent to which the licensee is authorized to use the intangible asset in question by itself (license), and the extent to which the licensor undertakes to cooperate in some way with the licensee (service).

References

EU regulation 2017/100112 of June 14. (2017). Article 15.1 on the European Union Trade Mark.

OECD. (2017). Transfer Pricing Guidelines.

Footnotes

1

OECD Transfer Pricing Guidelines. Chapter VI, paragraph 6.6.

2

A business is defined as an integrated set of activities and assets capable of being conducted and managed for the purpose of providing goods or services to customers, generating investment income (such as dividends or interest) or generating other income from ordinary activities.

3

OECD Transfer Pricing Guidelines (2017), paragraph 6.189.

4

With certain exceptions such as the protection of non-registered but well-known trademarks, or the protection of non-registered designs under the EU Regulation 6/2002.

5

Examples: https://​worldwide.​espacenet.​com for patents or https://​euipo.​europa.​eu/​eSearch/​ for EU trademarks and designs.

6

OECD Transfer Pricing Guidelines. Chapter VI, paragraph 6.20.

7

Agreement on Trade-Related Aspects of Intellectual Property Rights. ART. 39.

8

EU  Directive 2016/943 of the European Parliament and of the Council of 8 June 2016 on the protection of undisclosed know-how and business information (trade secrets) against their unlawful acquisition, use and disclosure. Article 2.

9

OECD Transfer Pricing Guidelines. Chapter VI, paragraph 6.6.

10

Except for unregistered but well-known trademarks.

11

For example, trade secrets, unregistered designs under certain circumstances, etc.

12

EU Regulation 2017/1001 of June 14, 2017. On the European Union Trademark Article 15.1 establishes the following: "An EU trade mark shall not entitle the proprietor to prohibit its use in relation to goods which have been put on the market in the European Economic Area under that trade mark by the proprietor or with his consent."

13

See US Supreme Court, Kimble vs Marvel Entertainment LLC, 2015.

© Springer Nature Switzerland AG 2021

B. Heidecke et al. (eds.)Intangibles in the World of Transfer Pricinghttps://doi.org/10.1007/978-3-319-73332-6_2

Allocation of IP for TP Purposes

Susann Karnath¹  

(1)

Flick Gocke Schaumburg, Munich, Germany

Susann Karnath

Email: [e-mail]

Keywords

Economic ownershipFunctional ownershipDEMPEControl-over-risk

What Will the Reader Learn?

Definition of economic and functional ownership

Identification of economic and functional owner

Consequences of reassessment of the economic and functional ownership by the tax authorities

Implications for a consistent and arm’s length transfer pricing system

1 Introduction

The notion of ownership of an intangible asset is of particular importance in a transfer pricing analysis. The ownership of an intangible asset has a significant influence on the characterization of the group company for transfer pricing purposes and the selection of an appropriate transfer pricing method for the intercompany transactions, such as whether the company is characterized as a routine or an entrepreneurial entity. It also directly assigns the residual profits that result from the use of the asset. Ownership of an intangible asset thus defines the level of remuneration that should be allocated to the respective owner of the asset.¹

According to both the OECD Transfer Pricing Guidelines 2017 and German tax law, legal ownership of an intangible asset does not in fact have any relevance to the taxation of profits in a multinational group. An intangible asset is instead allocated to the economic owner for tax accounting purposes according to German tax law, whereas the profits resulting from that intangible asset are allocated to the functional owner according to the OECD Transfer Pricing Guidelines 2017. The following will first include a definition of economic and functional ownership and then discuss the determination of the economic and functional owner in outsourcing transactions, as well as the reallocation of the economic or functional ownership in tax audits. Thereafter, implications of the OECD’s DEMPE approach for setting up a transfer pricing system will be shown.

2 Definition of Economic and Functional Ownership

2.1 Economic Ownership as Defined by German Tax Law

Section 39 paragraph 1 of the German Fiscal Code stipulates that economic goods shall be attributed to the (legal) owner. The benefit to the legal owner, however, can be eroded due to legal or factual circumstances in such a way that it is actually of no value to the owner.² According to Section 39 paragraph 2 number 1 sentence 1 of the German Fiscal Code this is the case when a person other than the owner exercises effective control over an economic good in such a way that he can, as a rule, economically exclude the owner from affecting the economic good during the normal period of its useful life. In this case, the economic good shall be attributed to this person, i.e., the economic owner. Analysis of the effective control over an economic good generally depends on who has possession of the good and who assumes the risk, benefit, and expenses in connection with that good, based on the overall facts and circumstances.³ This assumes that any third party would claim to receive a share of the ownership of a good for his contribution to the development of the good.⁴

In order to economically exclude the (legal) owner from affecting the good, it is necessary that the (legal) owner does not have the right to recover possession over the good or that this right is economically of no significance.⁵ The economic owner of an intangible asset, in turn, regularly bears the costs associated with the development of the asset and receives profits resulting from its exploitation.⁶ The notion of economic ownership, according to Section 39 paragraph 2 number 1 sentence 1 of the German Fiscal Code, therefore strongly depends on economic, i.e., monetary, criteria. This view was also confirmed in a recent court case relating to the economic ownership of securities lending where the German Federal Fiscal Court stressed the economic aspects of the arrangement in order to determine the economic owner of the securities, i.e., which entity receives income from the securities and which entity has the chances and risks associated with these securities.⁷

This rather vague definition and description of economic ownership has yet to be put in more concrete terms by German fiscal authorities or German case law with respect to intangible assets for transfer pricing purposes. In order to determine the economic ownership of an intangible asset in a licensing transaction, in practice the general judgments of the German Federal Fiscal Court and the associated letters of the German Ministry of Finance relating to economic ownership in cases of leasing and hire purchase transactions⁸ are therefore often applied. The principles established therein are also applicable to film rights⁹ and could therefore also be used for other types of intangible assets.¹⁰ Using several criteria it is possible to analyze whether the licensor, as the legal owner of the licensed intangible asset, is in fact also the economic owner of that asset or whether the economic ownership has shifted to the licensee due to the specific terms of the license agreement.¹¹ These criteria are:

Term of the license agreement

Type of the license agreement (exclusive, single, or simple license)

Sum of royalty payments for the intangible asset over the term of the agreement in relation to the value of the intangible asset

Right to grant sublicenses

Assumption of chances and risks relating to changes in the value of the licensed intangible asset

Assumption of activities and costs in connection with the maintenance of the legal protection of the intangible asset

Ordinary and extraordinary termination rights of the licensor

Purchase option of the licensee and tender right of the licensor

Allocation of economic ownership to the licensor or the licensee, therefore, depends on the overall facts and circumstances of the case. The more of the following criteria are fulfilled, the more likely it is that the licensed intangible asset would be allocated to the licensee as economic owner and not to the licensor as the legal owner of the asset:

The term of the license agreement is relatively long compared to the useful life of the licensed intangible asset (more than 90% of the normal period of its useful life).

It is an exclusive license.

The sum of royalty payments is relatively high compared to the value of the intangible asset.

The licensee can grant sublicenses and has a purchase option for the intangible asset.

The licensee enjoys the chances and bears the risks related to any changes in the value of the licensed intangible asset.

The licensee is responsible for activities and costs in connection with the legal protection of the intangible asset.

The licensor does not have any extraordinary termination rights.

Based on the criteria described above, if the licensee of an intangible asset qualifies as an economic owner of the licensed asset, the corresponding intercompany transactions would need to be reassessed. The licensing transaction and the associated license payments to the legal owner of the intangible asset, for example, would not be valid anymore and might qualify as installment payments on the purchase price of the intangible asset (see also Sect. 4 below).

To conclude, the notion of economic ownership as defined in German tax law strongly refers to the economic aspects of an arrangement, i.e., the allocation of benefits, costs, chances, and risks relating to the intangible asset, taking into account the legal and/or contractual rights of the parties involved. Based on existing case law and administrative practice, a company that receives contract R&D services from a related party and pays an arm’s length service fee that is based on the actual costs incurred by the related party in connection with R&D activities would thus become the owner of the intangible assets resulting from these activities.¹² Contractual arrangements, therefore, play an integral role in the determination of economic ownership according to German tax law. Whether, from a transfer pricing perspective, the economic owner of an intangible asset is also entitled to the residual profits resulting from this asset, has to be determined on the basis of the functional ownership and the OECD’s DEMPE approach.

2.2 Functional Ownership of the OECD

According to earlier guidance of the OECD, for transfer pricing purposes the allocation of an intangible asset was primarily based on legal ownership and the contractual arrangements between the companies of a multinational group. For example, if a group company performed contract R&D services for a related party and that related party assumed the associated R&D risk and became the legal owner of the developed intangible asset, this would generally have also been accepted for transfer pricing purposes. The allocation of residual profits resulting from an intangible asset thus followed the legal ownership of that asset. This regulation, however, led to a situation where a group company could become the legal owner of intangible assets of the group and could earn the respective residual profits, although it was not involved in any R&D activities and merely provided funding for these activities. As this could lead to a shifting of profits to group companies in low-tax jurisdictions based on contractual arrangements without any further substance, the OECD revised its transfer pricing guidelines and its regulations regarding the ownership of intangible assets as part of its Base Erosion and Profit Shifting project.

According to the new regulations in the OECD Transfer Pricing Guidelines 2017, legal ownership of an intangible asset no longer confers any right to retain returns derived by the multinational group from exploiting this asset.¹³ Contractual arrangements within a group of companies are thus effectively of no significance anymore for the arm’s length allocation of residual profits. Instead, the performance of functions, the use of assets, and the assumption of risks in connection with the development, enhancement, maintenance, protection, and exploitation ("DEMPE approach) of an intangible asset are now the key criteria for determining the functional owner of an asset. Functional ownership corresponds to entitlement" for transfer pricing purposes, i.e., it defines which company of the multinational group is entitled to the residual profits from the use of the intangible asset.¹⁴

2.2.1 Performance and Control of Functions

The performance of functions relating to the development, enhancement, maintenance, protection, and exploitation ("DEMPE functions") of an intangible asset is a key criterion for determining the functional owner. For this purpose, all activities in a multinational group relating to these functions have to be analyzed in detail. In particular, the role of each of these functions within the whole value chain of the group has to be assessed, as well as the functional contributions of all group companies. If various members of a multinational group contribute to the performance of these functions, certain functions are considered to be of special significance by the OECD.¹⁵ For self-developed intangible assets, or for self-developed or acquired intangible assets that serve as a platform for further development activities, among others, the more important functions may include:

Design and control of research and marketing programs

Direction of and establishing priorities for creative undertakings, including determining the course of blue sky research

Control over strategic decisions regarding intangible development programs

Management and control of budgets

For any intangible, other important functions may also include:

Important decisions regarding the defense and protection of intangible assets

Ongoing quality control over functions performed by independent or associated enterprises that may have a material effect on the value of the intangible asset

The performance of these important functions by a group company is a strong indicator that this entity should be considered as the functional owner of the relevant intangible asset. The outsourcing of one of these functions to a related party without any impact on functional ownership is therefore only possible to a limited extent, as described below.

2.2.2 Use of Assets

The use of assets in the development, enhancement, maintenance, protection, and exploitation of an intangible asset is the second criterion for the determination of functional ownership of an intangible asset. Such assets may include, without limitation, intangibles used in research, development, or marketing (e.g., expertise, customer relationships), physical assets, or funding.¹⁶ The provision of funding is thereby the most relevant factor. Contrary to the notion of legal ownership relevant for transfer pricing purposes under previous versions of the OECD Transfer Pricing Guidelines, a company that only provides funding, does not perform any of the DEMPE functions and does not control significant risks in connection with these functions is no longer entitled to the residual return from the intangible asset. According to the OECD, the appropriate return for purely funding activities should be based, for example, on the cost of capital or return on a realistic alternative investment.¹⁷

2.2.3 Assumption of Risk

Assumption of risk is still the most critical factor in a transfer pricing analysis. The principles for the allocation of risks within a multinational group, however, have developed over time. Initially, a risk was allocated to the group company that contractually assumed the risk, based on a contractual arrangement, for example. In the OECD Transfer Pricing Guidelines 2010, the OECD changed its guidance on the allocation of risks in a multinational group. A company was henceforth only deemed to assume a certain risk if it had control over the risk and the financial capacity to bear the risk. This regulation, however, only applied to business restructurings (Chapter IX of the OECD Transfer Pricing Guidelines 2010). The allocation of R&D risks to a group company on the basis of a contractual arrangement, for example, was thus no longer possible in the context of a business restructuring if the company did not also fulfill these two conditions. Within the framework of the Base Erosion and Profit Shifting project, the OECD has adopted this regulation for all types of intercompany transactions and incorporated it into the first chapter of the OECD Transfer Pricing Guidelines 2017.

The allocation of risk in a multinational group for transfer pricing purposes now depends on these two factors: control over the risk and the financial capacity to assume the risk.¹⁸ Control over risk is defined by the OECD as the capability to make decisions to take on, lay off, or decline a risk-bearing opportunity, together with the actual performance of that decision-making function and the capability to make decisions on whether and how to respond to the risks associated with the opportunity, together with the actual performance of that decision-making function.¹⁹ In order to exercise control over risk, it is not necessary that day-to-day risk mitigation activities are performed by the same company. These activities can be outsourced to a related or unrelated party. In this case, however, the outsourcing company should have the capability to determine the objectives of the outsourced activities, to decide to hire the provider of risk mitigation functions, to assess whether the objectives are being adequately met, and, where necessary, to decide to adopt or terminate the contract with that provider. In addition, the outsourcing company should actually perform these assessment and decision-making activities. The decision-makers should thus possess competence and experience in the area of the particular risk. Neither a mere formalizing of the outcome of decision-making in the form of meetings organized for formal approval of decisions that were made in other locations, nor the setting of the policy environment relevant for the risk is deemed to be sufficient to fulfill the criterion of control-over-risk.²⁰ This control-over-risk-approach of the OECD, however, has been widely criticized in the literature, as it would not reflect arm’s length behavior.²¹

The financial capacity to assume risk is defined as access to funding to take on or lay off the risk, to pay for risk mitigation functions and to bear the financial consequences of a risk if one materializes.²² It is therefore not necessary that a company has the financial capacity to bear the full consequences of a risk materializing, as it can be sufficient if it has the financial capacity to protect itself from the consequences of a risk materializing, e.g., through external insurance.²³

In order to determine the functional owner of an intangible asset, the OECD lists several types of risk that might be of particular importance and should be considered in detail:²⁴

Risks related to the development of an intangible asset, including the risk that costly R&D and marketing activities will prove to be unsuccessful.

The risk of product obsolescence, including the possibility that technological advances of competitors will adversely affect the value of the intangible assets.

Infringement risk, including the risk that defense of intangible rights or defense against other persons’ claims of infringement may prove to be time-consuming, costly, and/or unavailing.

Product liability and similar risks related to products and services based on the intangible assets.

Exploitation risks, uncertainties in relation to returns to be generated by the intangible assets.

In particular, with respect to these risks, multinational companies should analyze whether the company that should receive the residual profits from an intangible asset also has control over the respective risks and the financial capacity to bear the risks.

2.2.4 Summary

The relevant criteria for the identification of the functional owner of an intangible asset as described above are summarized in Fig. 1.

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Fig. 1

Determining functional ownership. (Based on OECD Transfer Pricing Guidelines (2017), notes 6.56, 6.59 and 6.65)

3 Economic and Functional Ownership in Outsourcing Transactions

3.1 Economic Ownership

A typical outsourcing transaction that involves intangible assets in a multinational group is an intercompany contract R&D agreement. Under such an arrangement, one group company performs R&D activities as a service for a related party. The latter bears all costs, risks, and benefits in connection with the R&D activities and becomes the legal owner of the results of these R&D activities. The contracted R&D company, on the other hand, is not entitled to use the results of its R&D activities for its own commercial benefit and cannot economically exclude the legal owner from affecting the intangible asset. The principal, as the legal owner of the intangible asset, is therefore also the economic owner of the asset in accordance with Section 39 paragraph 2 of the German Fiscal Code. As a consequence, the intangible asset that results from the contract R&D arrangement is allocated to the principal, i.e., the legal and economic owner. From a transfer pricing perspective, however, the principal is only entitled to residual profits in connection with the intangible asset if the principal is also the functional owner of the asset.

3.2 Functional Ownership

In order to be qualified as the functional owner of an intangible asset, a company has to perform the DEMPE functions related to the asset, as described above. It is, however, not necessary that the functional owner physically performs all of these functions with its own personnel.²⁵ Outsourcing certain functions relating to the development, enhancement, maintenance, protection, and exploitation of an intangible asset to a related party, e.g., under a contract R&D arrangement, is therefore still possible. In this case, however, the functional owner still has to control the risks associated with the outsourced function (control-over-risk). The group company that physically performs the outsourced function has to operate under the control of the functional owner of the intangible asset. In addition, the functional owner needs to have the financial capacity to bear the consequences if risks related to the outsourced function materialize.

The notion of control over the outsourced risk corresponds to the concept of control-over-risk as described above.²⁶ The outsourcing company thus needs to have the capacity to make all strategic decisions related to the outsourced function and has to actually perform this decision-making and control function. It, therefore, needs sufficient substance in the form of qualified personnel with sufficient experience and decision-making power related to the outsourced function. The functional owner must be able to assess the outcome of the outsourced services and must be actively involved in the selection of the related party that acts as a service provider. This includes specifying the scope of the related party’s assignment and regularly controlling and assessing the work performed by the related party.²⁷ In this context, it is crucial to analyze the actual decision-making process within a multinational group and to determine the persons and functions that are part of this process. For example, the board and executive committees of the group might in some cases not be in the position to effectively perform the control function, which might, instead, be carried out by the line management in business segments, operational activities, and functional departments.²⁸ In addition, in cases of long-term outsourcing transactions, it is necessary to monitor that the control function is not gradually shifted to the company performing the outsourced function, e.g., by gradually shifting decision-making functions and competencies abroad, as this might have significant consequences for functional ownership of the intangible asset and intercompany transactions involving the intangible.

In general, even functions considered as important functions within the DEMPE approach can be outsourced to a related party. As the OECD considers these functions to make a significant contribution to the value of the intangible asset, the company performing these functions should receive appropriate compensation. If this compensation cannot be derived from comparable data, the profit split method or valuation techniques should be applied to reward the performance of these functions.²⁹ The transfer price for the performance of a specific important DEMPE function would thus be based on the sharing of the profits derived from the use of the intangible asset.

As the assessment of the effective control over outsourced functions is deemed to be an important part of the transfer pricing analysis under the new DEMPE approach,³⁰ taxpayers should be very careful that respective requirements are actually met and also thoroughly documented for future tax audits. If the outsourcing company cannot be qualified as a functional owner under the DEMPE approach, it is not entitled to residual profits that relate to the intangible asset and would only earn a routine return for its funding activities.

In practice, there is a rather high threshold for outsourcing transactions to be accepted as such in the context of the determination of the functional owner of an intangible asset for transfer pricing purposes. In particular, it is essential to clearly differentiate between the outsourcing of activities to a related party under the control of the outsourcing company that will still be considered the functional owner of the intangible asset and mere funding activities, which are not deemed sufficient to create functional ownership. Therefore, taxpayers should perform a detailed functional analysis of the DEMPE activities of the group as well as an analysis of the persons involved and the respective reporting lines, decision-making authority, and competence in order to identify the functional owner of an intangible asset.

4 Reassessment of Intercompany Transactions

As shown above, the allocation of an intangible asset within a multinational group of companies based on the latest guidance of the OECD depends on a rather subjective evaluation of the factual background. This increases the risk that tax authorities will assess the case in a different way than the group itself and reallocate the economic and/or functional ownership of the intangible asset to a different entity in the group.

In cases of reallocation of the economic ownership of an intangible asset to another group entity, the type of intercompany transactions that involve the intangible asset would also have to be reassessed and adjusted accordingly.

Example: An intercompany licensing transaction between two group companies is structured in such a way that the licensee is qualified as the economic owner of the intangible asset by the tax authorities, based on the criteria described above (Sect. 2.1). The licensing transaction would thus not be accepted as such but would be requalified as a sales transaction. The intangible asset would be transferred from the licensor to the licensee and would be shown in the tax balance sheet of the licensee. The royalty payments would be requalified as installment payments to the legal owner. If the intangible asset is also licensed to other group companies, those licensing transactions would also have to be reassessed with respect to whether the other licensees qualify as economic co-owners of the intangible asset or whether the license transactions are accepted as such, but with the economic owner as the new licensor. The reassessment of intercompany licensing transactions might also entail other tax questions, e.g., with respect to withholding taxes on the royalty payments. It is therefore crucial to structure the legal and economic framework of an intercompany transaction that involves intangible assets in such a way that the legal owner also qualifies as an economic owner, in order to avoid major changes to the intercompany transaction structure years later during a tax audit.

Irrespective of the allocation of the economic ownership, the tax authorities might also reassess the allocation of functional ownership. In this case, they would analyze whether the group company that receives the residual profits from an intangible asset is entitled to those profits from a transfer pricing perspective under the new DEMPE approach. If the group company does not qualify as the functional owner of the intangible asset, the transfer prices for the intercompany transactions that involve the intangible asset would have to be adapted accordingly. The legal setup of intercompany transactions would thus remain unchanged and only the allocation of residual profits within the group would be reassessed.

A reassessment, not only of the transfer prices of a given intercompany transaction but also of the type of intercompany transaction itself—as is the case for the concept of economic ownership—is not included in the OECD’s DEMPE approach. Such a reassessment would not be covered by the arm’s length principle as stipulated in Article 9 Section 1 of the OECD MTC and the corresponding provisions in double tax treaties. Article 9 Section 1 of the OECD MTC stipulates that where "conditions are made or imposed between the two [related] enterprises in their commercial or financial transactions which differ from those which would be made between independent enterprises," the respective profits may be adjusted. This provision thus only covers an adjustment of the conditions (i.e., transfer prices) between two related companies. An adjustment of the commercial or financial relations themselves, i.e., the type of intercompany transactions, on the other hand, is not possible.³¹ This interpretation is also in line with former judgments of the German Federal Fiscal Court that argue that the arm’s length principle as stipulated in Article 9 Section 1 of the OECD MTC only allows for a correction of the actual amount of transfer prices and not a correction of other aspects of the transaction, e.g., whether the transaction itself was at all customary.³²

5 Implications for Setting up a Transfer Pricing System

Intangible assets are the key determinant in every transfer pricing system. Setting up a new transfer pricing structure for a multinational group should therefore always start with the allocation of intangible assets of the group and determination of the related intercompany transactions. This includes the following steps (Fig. 2):

In the first step, a value chain analysis of the multinational group should be performed with a focus on the performance of DEMPE functions related to the intangible assets of the group. From this analysis, the functional owner of each intangible asset can be determined, as well as the legal and economic owner. To have a consistent transfer pricing system, which is reflected in the intercompany agreements and balance sheet of the group companies, it is advisable that legal, economic, and functional ownership of an intangible asset are a single company of the multinational group.³³ This means that countries which do not apply the functional ownership and DEMPE approach, only accepting legal or economic ownership for transfer pricing purposes, would not reassess the transfer pricing system as a whole due to IP ownership issues. Separating legal and economic ownership from functional ownership is therefore only a second-best option. Since determining the functional owner of an intangible asset fully depends on the managerial and operational setup of a multinational group, which often cannot be changed easily, it is generally advisable that legal and economic ownership follow the functional ownership. This may make it necessary to transfer legal and economic ownership of the intangible asset to the functional owner. If more than one company is identified as a functional owner of a specific intangible asset, the respective value contribution of each functional owner has to be determined. All co-owners of the asset should then participate in residual profits associated with the intangible asset, according to their relative value contributions.

In the second step, intercompany transactions relating to the intangible asset should be determined. This includes, for example, contract R&D arrangements and licensing transactions, as well as other functions relating to the development, enhancement, maintenance, protection, and exploitation of the specific intangible asset that are outsourced by the functional owner to a related company. Furthermore, arm’s length transfer prices relating to these transactions have to be determined. The transactions should be documented in intercompany agreements.

Finally, the multinational group should regularly monitor that requirements for functional ownership remain fulfilled by the group company that receives the residual profits related to an intangible asset. This is especially the case with respect to DEMPE functions that are outsourced to another group entity. In this case, it should be regularly monitored whether the functional owner still has control over the outsourced function, i.e., whether the functional owner has the capacity to make all strategic decisions relating to the outsourced function and whether it actually performs this decision-making function. Furthermore, in cases of changes to the operational setup of the group, e.g., due to relocation of certain activities to a related party, it needs to be verified whether the functional owners of the intangible assets in the group are affected by these changes and whether they still fulfill the prerequisites for functional ownership.

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Fig. 2

Setting up a transfer pricing system for intangible assets

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