List of Abbreviations
1. Introduction
1.1. Problem Definition
1.2. Aims and Non-Aims
1.3. Methodology and Structure
1.4. Definitions of intangible property and relevant TP methods
1.4.1. Trade intangibles
1.4.2. Marketing intangibles
1.4.3. Comparable uncontrolled price method
1.4.4. Resale price method
1.4.5. Cost plus method
2. The importance of intangible property for MNEs
3. Transfer Pricing and its objectives
4. Challenges of applying the ALP to intangible property
5. Application and Limitations of OECD TP methods for intangible property
5.1. Comparable uncontrolled price method
5.2. Resale price method
5.3. Cost plus method
5.4. Transactional profit methods
6. Conclusion
7. References
Abbildung in dieser Leseprobe nicht enthalten
Due to increased globalisation over the last years and enhanced activities of multinational enterprises (MNEs), intra-firm trade has become more and more important. Intra-firm trade is estimated to constitute about one third of the global trade; and about 50% of all exports within the member states of the Organisation for Economic Co-operation and Development (OECD) are intra-firm exports (Lanz & Miroudot, 2011, p. 12). In order to determine the expenses and revenues for the associated companies, transfer prices (TP) have to be set for the respective goods of intra-group transfers (Organisation for Economic Co-operation and Development [OECD], 2010, p. 19). Intra-group transfers can be defined as the transaction of tangible or intangible property from one entity of a MNE to another entity, considered as sale (Fraedrich & Bateman, 1996, p. 17) and “may apply to departments, divisions, subsidiaries, or affiliate business units” (Cravens, 1997, p. 128). A TP therefore is the internal monetary value imposed on goods, services or unmanufactured material that is transferred within a MNE group (Cravens, 1997, p. 128). According to the OECD (2010) intra-firm transfers are likewise defined as controlled transactions (i.e., transactions between two associated enterprises) (p. 25).
This transfer of tangible or intangible goods may also comprise cross-border transactions, which are transfers within one MNE but across several countries. MNEs, thus, are confronted with the challenge of balancing differences in foreign tax jurisdictions, and, dependent on the various tax bases, have to choose the appropriate transfer pricing strategies (Fraedrich & Bateman, 1996, pp. 17-18). This challenge is supposed to be intensified with each additional foreign market that a MNE group enters, as an increased number of national markets and tax regulations as well as competitive circumstances have to be assessed and afterwards aligned to derive a coherent transfer pricing strategy (Cravens, 1997, pp. 129-131).
MNE groups have to ensure that their transfer pricing strategies comply with the arm’s length principle (ALP) which is set forth in Article 9 of the OECD Model Tax Convention, stating that members of a MNE group have to be regarded as separate organizations rather than inextricable members of a union (OECD, 2010, p. 33). The ALP thus is a prerequisite for equal tax treatment of the different parties of MNE groups and separate companies to avoid tax advantages that could otherwise falsify the competitive positions of the entities involved (OECD, 2010, pp. 33-34).
The determination of a suitable TP is strongly influenced by accomplishing certain corporate objectives in order to ensure continuous success of the company. On the one hand, transfer pricing is a suitable means to reduce the overall income tax burden of the MNE in various national tax jurisdictions as well as managing import and export tariffs (Cravens, 1997, p. 133). However, the choice of appropriate transfer pricing methods is not solely used to minimize tax and tariff payments, but is also influenced by various other strategic considerations and objectives. According to a variety of researchers (Al-Eryani, Alam, & Akhter, 1990, pp. 422-423; Caves, 2007, p. 248; Cravens, 1997, pp. 133-134) MNEs additionally aspire to achieve profit maximization, increase the motivation of managers of foreign subsidiaries, or the creation and maintenance of a sustained competitive position in the market as well as compliance with tax regulations.
One major challenge for deriving convenient transfer pricing strategies and simultaneously complying with the ALP is the determination of appropriate TP for intangible properties. Thus, it is difficult to detect comparable properties and their values for the determination of the ALP (OECD, 2010, pp. 195-196). According to the OECD (2010), intangible property is classified on the one hand as commercial intangibles, including marketing intangibles, comprising “patents know-how, designs, and models ..: used for the production of a good or the provision of a service” (pp. 191-192). It also includes intangible rights that are business assets and that can either be sold to customers or used for further business activities (OECD, 2010, p. 192).
The value of intangible assets (e.g., stock of innovative products, knowledge of production processes, or employee talent) is a strong determinant of an enterprise’s creation of economic value, which is not only defined by its tangible assets (Carmeli, 2004, p. 112; Johnson & Kaplan, 1987, p. 202) Furthermore, according to several studies (Caves, 2007, pp. 3-5; Delios & Beamish, 2001, p. 1028; Morck & Yeung, 1991, pp. 165-166) intangible assets have significant influence on the expansion and foreign investment of a firm and are thus crucial for the establishment of a globally acting MNE group as the value of these intangible assets is “proportional to the firms’ degree of multinationality” (Morck & Yeung, 1991, pp. 165-166). Furthermore, Delgado-Gómez, Ramírez-Alesón, and Espitia-Escuer (2004) examined that MNEs indeed possess a higher number of intangible assets which are derived from an accumulation of international experiences, knowledge, and information and which in turn leads to an even higher degree of internationalization (pp. 490-492). According to Tallman and Li (1996, pp. 192-194) a corporation’s performance is positively related to its level of multinationality which means that the more foreign markets a company enters, the higher is the degree of profitability of a corporation.
In order to preserve the value of intangible assets or knowledge and thus the competitive advantage, these intangibles have to be transferred within the organization to be of further value for the MNE group (Teece, 2000, p. 38). Even though the proprietary barriers for intra-group transfer of knowledge and other intangible assets may be absent, such transfers nevertheless are not free of costs (Teece, 2000, p. 39). The transfer of intangible property within a MNE still has to be aligned with the ALP, which means that the intra-group TP of these intangibles has to be similar to a TP that is applied to transfer of intangibles between independent entities (Borkowski, 2001, p. 352). However, it is especially difficult to value unique intangible assets due to a lack of suitable comparable transfers, a prerequisite for applying the ALP (Borkowski, 2001, p. 352; OECD, 2010, pp. 195-196). Therefore, the appropriate TP methods have to be selected and applied. This paper thus focuses on answering the following question: Which of the transfer pricing methods of the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations are adequate for determining appropriate intra-group transfer prices of intangible property?
As the “transfer pricing of intangible assets is a critical concern of transnational corporations” (Borkowski, 2001, p. 350) but still seems to be underexplored, this paper aims at examining the TP methods that are most suitable for determining the value of intangible assets within intra-firm transfers. The paper solely focuses on the TP methods that are presented in the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations and thus aims at identifying those methods that are appropriate for transferring intangible property within a MNE. According to the definition of the OECD, intangible property thus involves trade intangibles and marketing intangibles.
Furthermore, this thesis exclusively investigates the applicability of these methods for cross-border transfers within MNE groups, thus it will not consider transfers of property within one nation. Due to the fact that the OECD Guidelines are applicable for a high amount of member countries and industries, this paper does not include any regional limitations or structural differences of various industry sectors. Likewise, there will be no in-depth elaboration on tangible assets that are transferred between affiliates of a MNE group but might be considered as a point of reference for explaining the applicable TP methods for intangibles assets.
In order to answer the research question and to achieve the defined aims, a comprehensive and profound literature review with a clear focus on intangible property will be conducted. An effective literature review can be seen as a foundation for promoting knowledge and simultaneously is a method for disclosing fields where new research is needed (Webster & Watson, 2002, p. xiii). Effective literature reviews should therefore not be “mind-numbing lists of citations and findings that resemble a phone book” (Bem, 1995, p. 172) and without a clear plot (Bem, 1995, p. 172).
Furthermore, in order to obtain profound insights into the TP methods and their applicability for intra-group transfers of intangible property this paper relies on a broad variety of sources in order to guarantee the display of different perspectives and approaches to the topic and in order to prevent biases (Jesson & Lacey, 2006, p. 144). These sources include articles of renowned journals as well as books and other references. Nevertheless, it is ensured that the right decisions are made concerning which works of research should be included in the literature review and which ones are rather not significant for adding additional value to the thesis (Webster & Watson, 2002, p. xviii).
The following thesis first highlights the importance of intangible property especially for MNEs to provide a profound reasoning why the application of appropriate transfer pricing method is essential for intra-group transfers. Subsequently, the objectives of TP as well as the challenges of establishing the ALP for intangible property are outlined and major constraints are emphasised. The following section then provides an in-depth analysis of the respective OECD transfer pricing methods including the application and limitations of these methods when it comes to establishing proper TP for intangible assets. The last section provides a summary of the primary findings, highlights the existing knowledge-gaps, and discusses possible future fields for research.
The OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations primarily focus on “intangible property associated with commercial activities, including marketing activities” (OECD, 2010, p. 191) when evaluating whether the transfer prices for intangible property reflect the arm’s length principle. Commercial intangibles in general are either utilized for the production of a product and for providing a service or encompass rights that are directly forwarded to customers or used for economic activities, so called business assets (OECD, 2010, p. 192). These assets might not be recorded in the firm’s balance sheet but nevertheless have substantial value for the company and its operations (OECD, 2010, p. 192) Accordingly, it is important to define appropriate TP for these assets. The following section defines trade intangibles as well as marketing intangibles as part of commercial property according to the OECD standards and the most relevant TP methods that are suitable for application.
According to the OECD (2010), trade intangibles are generally defined as commercial intangibles, excluding marketing intangibles (pp. 192-194). Trade intangibles therefore are a result of extensive research and development (R&D) and are directly related to the production of goods which are then sold by providing the respective services (OECD, 2010, pp. 192-194). They may encompass trade secrets and know-how as well as models and patents which provide their owners with the right to use an invention for a certain amount of time (OECD, 2010, p. 194).
Marketing intangibles mainly have a promotional value for a certain product or service depending on a variety of factors like brand image or reputation of a company, the quality level of the products or distribution of goods (OECD, 2010, p. 192). These form of intangibles includes trademarks and trade names that may be protected by law or specific symbols and pictures related to a company (OECD, 2010). In comparison to trade intangibles, marketing intangibles may be carried on for an indefinite amount of time (OECD, 2010, p.194).
According to the OECD (2010), the comparable uncontrolled price method establishes the arm’s length price based on a comparison of prices of products or services transferred in controlled transactions and uncontrolled transactions (i.e., between unrelated parties) (p. 24). Thus, the CUP method establishes the arm’s length price based on available market prices. If the compared prices display any differences, the conditions of the transfer therefore might not be at arm’s length (OECD; 2010, p. 63).
The resale price method basically considers the price for products that were purchased from an affiliate and that are afterwards resold to unrelated third parties (OECD, 2010, pp. 28-29). An appropriate resale price margin is then subtracted from the resale price which is the price for covering selling and operating expenses of the reseller (OECD, 2010, p. 65). The remaining portion is then considered as the arm’s length price for the intra-company transfer between the affiliates (OECD, 2010, p. 65).
The cost plus method considers the costs of the supplier of products within a controlled transaction and adds up an adequate mark up in order to ensure a feasible profit (OECD, 2010, p. 26). This profit has to be aligned with the actual services performed as well as with the current market conditions and eventually can be regarded as suitable arm’s length price of the controlled transaction and is especially useful for service-provision or intra-company transfer of semi-finished products (OECD, 2010, pp. 70-71).
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