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.
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]). 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 and “may apply to departments, divisions, subsidiaries, or affiliate business units” . A TP therefore is the internal monetary value im-posed on goods, services or unmanufactured material that is transferred within a MNE group. According to the OECD (2010) intra-firm transfers are likewise de-fined as controlled transactions (i.e., transactions between two associated enterprises).
Table of Contents
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
Research Objectives and Core Themes
This thesis examines the suitability of various transfer pricing (TP) methods as defined by the OECD to value intangible property within multinational enterprises. The primary research question addresses which OECD transfer pricing methods are adequate for determining appropriate intra-group transfer prices for intangible assets, given the challenges of valuation and regulatory compliance.
- Analysis of the importance of intangible assets for competitive advantage in MNEs.
- Evaluation of the Arm's Length Principle (ALP) in the context of cross-border transfers.
- Detailed investigation of OECD transfer pricing methods (CUP, Resale Price, Cost Plus, Profit-based).
- Discussion of practical implementation challenges and limitations for high-value unique intangibles.
Excerpt from the Book
5.1. Comparable uncontrolled price method
Most of the MNEs prefer the CUP method and apply it first (Fraedrich & Bateman, 1996, p. 19) as this method can be utilized in various countries and tax jurisdictions for tax purposes (Baldenius et al., 2004, p. 600). The CUP method is used by companies to compare the TP of the sales of their affiliates to selling prices that are charged between independent sellers and buyers for similar goods (Fraedrich & Bateman, 1996, p. 19). The calculation of TP based on external prices of comparable goods allows companies to use an unified approach applicable in various countries (Baldenius et al., 2004, p. 600). The price charged for the comparable uncontrolled transfer (i.e., between independent parties) can directly be substituted to the price of the controlled transaction and thus, the ALP can be established (OECD, 2010, p. 60). An uncontrolled transfer is existent when either (a) MNE group members sell products or services to independent customers, (b) members of a MNE group purchase goods from unrelated third parties, or (c) sales are conducted between two independent parties, which are both not related to the MNE group (Burns, 1980, p. 35).
However, the determination of an appropriate arm’s length price would require the existence of a transfer of similar intangible assets by unrelated parties (Halperin & Srinidhi, 1996, p. 63) or at least the availability of comparable transactions between independent companies in the same industry (OECD, 2010, p. 199). But as already mentioned beforehand, in the case of firm-specific and inimitable intangible assets, there might be a lack of appropriate comparable transfers (Grubert, 2003, pp. 225-226). According to the OECD (2010), slight differences in the assets transferred between affiliates and between independent companies could have an impact on the price even if the activities producing the overall profit may be similar (pp. 63-64). If there are product differences between the controlled and uncontrolled transactions, adjustments to the price can be made, especially if the differences are clearly ascertainable (OECD, 2010, pp. 64-65).
Summary of Chapters
1. Introduction: Outlines the significance of intra-firm trade, defines key concepts like intangible property, and states the thesis objectives regarding TP methods.
2. The importance of intangible property for MNEs: Examines why intangible assets are essential for sustainable competitive advantage and their role in global operations.
3. Transfer Pricing and its objectives: Details the primary goals of transfer pricing, specifically focusing on tax minimization, management control, and strategic positioning.
4. Challenges of applying the ALP to intangible property: Discusses the difficulties of applying the arm's length principle to unique, firm-specific assets that lack market comparables.
5. Application and Limitations of OECD TP methods for intangible property: Provides an in-depth analytical review of how traditional and profit-based methods are applied and where their functional limitations lie.
6. Conclusion: Summarizes findings and emphasizes the necessity of careful case-by-case analysis when selecting TP methods for intangible assets.
Keywords
Transfer Pricing, OECD, Intangible Property, Arm's Length Principle, Multinational Enterprise, Intra-firm Trade, Comparable Uncontrolled Price Method, Resale Price Method, Cost Plus Method, Tax Jurisdiction, Intangible Assets, Profit Maximization, Transactional Profit Methods, Corporate Objectives, Knowledge Assets
Frequently Asked Questions
What is the core focus of this thesis?
The work focuses on identifying which OECD transfer pricing methods are most adequate for determining transfer prices for intangible property within multinational enterprises.
What are the central themes of the research?
The research centers on the intersection of tax compliance, corporate strategy, the valuation of intangible assets, and the application of the Arm's Length Principle.
What is the primary objective of the study?
The goal is to provide a comprehensive analysis of OECD methods to assist MNEs in choosing appropriate transfer pricing strategies for cross-border intangible transfers.
Which scientific methodology is employed?
The paper utilizes a profound literature review to analyze current research, regulatory guidelines, and scholarly perspectives on transfer pricing.
What is covered in the main section of the document?
The main section covers the definition of intangible property, the strategic importance of these assets, the challenges posed by the ALP, and an evaluation of specific OECD pricing methods including CUP, Resale Price, Cost Plus, and Profit-based methods.
Which keywords define the work?
Key terms include Transfer Pricing, OECD, Intangible Property, Arm's Length Principle, and MNEs.
Why is the CUP method often considered the first choice?
The CUP method is preferred by MNEs as it is market-based, perceived as objective and fair, and is less frequently challenged by tax authorities when direct comparables are available.
What is the main limitation of the profit-based methods?
Transactional profit methods are difficult to apply because they require access to data from foreign associated enterprises and involve intricate evaluations of combined revenues and operating expenses.
How does the uniqueness of intangibles impact transfer pricing?
The uniqueness of high-tech or firm-specific intangibles makes finding comparable market transactions extremely difficult, forcing firms to use alternative methods or justify deviations from standard approaches.
- Citation du texte
- Melanie Keller (Auteur), 2015, An Analysis of Adequate OECD Transfer Pricing Methods for Intangible Property, Munich, GRIN Verlag, https://www.grin.com/document/303818
