Accurately identifying intangibles for TP compliance

Don't assume that any one person has all the relevant information

We all know that the concept of an ‘intangible asset’ in the OECD Transfer Pricing Guidelines is very broad. “Something which is not a physical asset or a financial asset, which is capable of being owned or controlled for use in commercial activities, and whose use or transfer would be compensated had it occurred in a transaction between independent parties in comparable circumstances.”

That could be almost anything.

Even so, it is still essential to “identify the relevant intangibles with specificity.” And, if we want the MNE concerned to have TP policies which it can actually operate in practice (which of course we do), a TP policy regarding transactions in intangibles needs to be created with reference to the actual legal rights involved.

From a legal perspective, relevant intangible assets may include:

• Patents
• Design rights
• Copyright and moral rights (including software)
• Database rights
• Trade marks and rights in passing off
• Domain names
• The benefit of exclusive and non-exclusive licenses
• Customer contracts, customer data and user data
• Confidential information / trade secrets (including know how and proprietary processes)
• The benefit of restrictive covenants (e.g. in employment contracts and contracts with commercial counterparties)
• Government licenses and concessions.

When doing the necessary due diligence, several practical challenges can arise.

One is that many businesses do not regard themselves as ‘owning’ significant intellectual property. Another is that knowledge of the relevant facts needed to identify intangible assets may be fragmented within the group: it may be unsafe to assume that any one person within the group has a sufficiently granular understanding of the group’s operations.

There are many possible sources of relevant information, including:

• IP registers maintained by the group
• Searchable public registers
• Patent attorneys, trade mark agents, legal advisers and other service providers currently or previously engaged by the group
• Business plans
• Marketing materials
• Public announcements, stock exchange filings and investor presentations
• Customer contracts and standard terms of business
• Agreements relating to joint ventures, corporate partnerships and strategic alliances
• NDAs issued by the group
• HR policies and documents, including standard terms of employment and standard terms for appointment of consultants and contractors
• Patent box applications
• R&D tax credit applications
• Applications for tax clearances
• Claims for government grants
• Records of ongoing and historic litigation, claims and settlements
• Records of historic corporate finance transactions, including DD reports, sale and purchase agreements, disclosure bundles and other transaction documents
• Records of historic group reorganisations, including bibles of transaction documents and corporate approvals.

Although this is a long list, it is absolutely not an exhaustive one. And completing this due diligence properly is essential: without it the group's transfer pricing policies may not accurately identify the 'actual transactions' relating to intangibles, and the legal implementation of those policies may be deficient.

Article by Paul Sutton

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