Intangibles are a key driver in most multinationals’ value chains. Transfer pricing planning helps recognize them and ensure sustainable long-term performance. The acceleration of digitalization under COVID makes it a good time to check that profit outcomes recognize intangibles, old and new.
Recognizing the value of intangibles1 – a key profit driver – is essential for all multinationals. IP-planning:
- Sheds lights on value-creating activities to (re-)enforce their commercial importance within groups and towards the market.
- Offers opportunities for proactive and efficient management of intangibles within the group.
- Allows multinational groups to correctly allocate (future) IP returns where they have been generated.
An ongoing review of intangibles-related recognition is important under business model evolutions, small and large, such as the ones caused by digital innovation. Rethinking the exact intangibles and any potential new contributions to their generation and ongoing management is especially important for transfer pricing. Transfer pricing can propose models that best support business objectives and assess if profit has to be re-aligned with business changes. Now is a good time to consider these transfer pricing planning elements as the COVID-crisis has accelerated the digital agenda for many companies.
Spotting the intangibles in digital business models
As mentioned in our previous article: “Recognizing intangibles under latest market changes”, digitalization fosters enhanced and new business models with potentially different sources of intangibles. An example of the former is a company building mechanical equipment that adds sensors to monitor the efficiency of its production line. From the sensor to the data extraction to the knowledge-based management of the production line, the datafication of the value chain may lead to new intangibles and contributors.
Uniquely digital business models (e.g. linked to the cloud economy) create their own set of complexities. Digital innovation may lay within the data and the code lines used to read them – and thus the developers’ know-how. The overall business model that is driving new sources of revenue recognition and fostering this datafication is key. The valuable intangibles supporting the development of new products and services tend not to be protected under traditional formal IP frameworks (i.e. patents, trademarks, and design). Their development, ownership and protection remain nonetheless important, even if sometimes underestimated at first as less visible.
Where to start?
Finance / Tax departments are used to staying close to business leaders to stay abreast of latest developments. Frequent exchanges will allow them to understand potential new or changing sources of intangibles. This is particularly important as the digital workforce is very mobile and digital innovation can suddenly accelerate, as seen under the Covid-19 pandemic. A broad range of stakeholders may need to be consulted, e.g. those responsible for innovation, cybersecurity, talent management etc. Specific task forces in charge of defining and fostering new value propositions and key intangibles like corporate reputation (incl. ESG criteria) should also likely be turned to.
The value chain framework remains an important tool to map key value drivers and assess the various contributions to the group’s global value creation and proposition. As part of the value chain analysis, the “DEMPE” framework of the OECD can be applied. Due to their complexity, novelty and rapid evolutions, digital business models may require additional effort to fully define intangibles and their contributors. Creative solutions might be required drawing on industry, technology, as well as tax and legal know-how. Turning to recent market valuations of digitally-driven businesses may provide useful insights.
These approaches will enable groups to identify where valuable intangibles are created and develop appropriate transfer pricing policies, driving value for the business.
1 We use intangibles in this article in line with the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations. We refer to it as IP for ease of reference but the definition is broader than property.