Increased focus of tax authorities on transfer pricing valuation

​Clive Jie-A-Joen, Liu Lu and Fan Bai examine recent TP developments that are relevant for the arm's-length pricing of transactions of intangibles and other items of value between group entities resulting from business restructuring. Each of these developments is specific and can be useful considering the specific facts and circumstances of the case at hand.

This article previously appeared in Bloomberg Tax, who have agreed to Simmons & Simmons making it available on elexica.


Multinational enterprises (MNEs) are continuously restructuring their business operations for business reasons (eg anticipated synergies, economies of scale, competitive pressure, lowering costs and regulatory developments). Such business restructurings may involve the transfer of functions, risks or assets (eg intangibles) within a MNE group. In case something of value (eg intangibles and ongoing concern) is transferred, a TP consequence is that the restructured group entity may be entitled to an arm’s-length compensation payment. Transfer pricing valuation principles are used to estimate the transfer price for the transfer of something of value between MNE group entities taking into account the arm’s-length principle as the valuation standard.

The Organization for Economic Co-operation and Development (OECD) recognized the importance of TP valuation in its base erosion and profit shifting (BEPS) project. The 2015 final OECD report on BEPS Actions 8-10 (Aligning Transfer Pricing Outcomes with Value Creation) provided revised TP guidance on intangibles specifically regarding the use of economic valuation techniques (in particular income-based methods) as one of the OECD recognized TP methods or as a useful tool in estimating the arm’s-length price for the transfer of (rights to) intangibles. This revised guidance on intangibles has been incorporated in Chapter VI of the July 2017 version of the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (OECD Guidelines).

The authors’ article in the 31 March 2016 issue of this journal discusses the above guidance regarding the application
of valuation techniques. The goal of this article is to discuss certain guidance and developments on transfer pricing valuation following the 2015 final OECD report on BEPS Actions 8-10:

On 21 June 2018, the OECD released new guidance for tax administrations on applying the approach to hard-to-value intangibles (HTVI). Under the HTVI approach, tax administrations can consider ex-post outcomes as presumptive evidence regarding the appropriateness of the ex-ante pricing arrangements relating to the transfer of an HTVI. The goal of the new OECD guidance is to arrive at a common understanding between tax administrations regarding how to apply adjustments arising from the application of the HTVI approach. The guidance, which has been incorporated as an annex to Chapter VI of the OECD Guidelines, intends to improve consistency in applying the HTVI approach. It is clear that the HTVI approach will increase the burden of taxpayers to substantiate the pricing of HTVI transactions.

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