• Olivia Gedge, Director |

Intangibles are often a key value driver. Identifying them and their contributors within multinationals can be difficult, however. Market developments provide an opportunity for companies to review their sources of intangibles and ensure their appropriate recognition, for business and tax purposes.

BEPS but not only

Many countries worldwide have focused their attention on intangibles and the activities that gravitate around the development, enhancement, maintenance, protection and exploitation thereof (i.e. the so-called “DEMPE functions”), as outlined by the OECD in its work on the BEPS (1.0.) project. Tax authorities track which entities perform these DEMPE functions in order to assess to which entities the profits deriving from the intangibles should be attributed and, therefore, in which jurisdictions they should be taxed.

Having a clear overview of who is contributing to intangibles is therefore no longer really optional. Some companies are already well aware of this as they face the difficulty of dispersed intangibles and related ownership more than others. These include multinationals active in engineering and/or that have grown by acquisition for example. Recent market developments however, provide an additional opportunity for all companies to review sources of intangibles – past, present and future – and ensure their appropriate remuneration. We outline a couple such developments below.

Market developments are reshaping value chains and business models

The digitalization of the economy

In most industries, digitalization is leading to changes – large and small – in the value chain of multinational groups. The digitalization trend means companies are reviewing their business and operating models. Increasing demand of consumers for online purchasing is just one example of market developments driving important choices for companies with traditional and digital business models alike: what business model? what value drivers? will new technologies be introduced and for what purpose – to automate the supply chain or more fundamentally as a backbone to addressing customer demand – and where will these new technologies come from?

Outsourcing and / or acquisition may be required, in relation to technology for example. Third party development may be an appealing start and prime facie raises fewer transfer pricing issues. However, important questions need to be addressed early on, e.g. which legal entity(ies) in the group will be responsible for overseeing that third party relationship, how will these new developments fit with the broader business and tax model of the group. Over time, changes or additions made to that initial outsourcing / acquisition will also need to be tracked and remunerated. In other words, should the value of that intangible be attributed to the old, previously performed activities of the outsourced / acquired group or rather to the newly performed development functions? Or both?

In short, what will the DEMPE functions (and financial contributions) linked to these changes in the value chain look like over time?

The (post) COVID-19 crisis

The COVID-19 pandemic has brought substantial changes in the economy, and intangibles were likely not excluded. New ways of doing business and/or with different teams / legal entities may have emerged in times of limited travel.
Some may argue that it just accelerated the digitalization trend mentioned above, for example for multinationals with important retail operations who were already facing the digitalization challenge prior to the crisis.

Beyond some of the potential tax risks that may be created due to temporarily dislodged (including DEMPE-linked) employees, international remote working is becoming a new reality under review by many multinationals. Companies are having to address fundamental questions around business and tax models. Key roles connected to the value creation of intangibles will need to be analyzed carefully in this context.

Increased business restructuring and/or merger and acquisition activity may also be expected following the pandemic. When a group merges or acquires another group, it might acquire intangibles. Contributions to the value of the acquired intangibles – past and future – should be identified as early as possible and adequately remunerated. Other groups may undergo business restructurings as they seek to diversify or streamline their product / service portfolio. Important questions around the contributions to those intangibles (e.g. central? local? split?) will need to be addressed. Because these contributions tend to happen over time, a certain planning horizon needs to be anticipated for transfer pricing purposes.

Tracking down intangibles – where to start and next steps

In light of latest market developments, it is becoming increasingly difficult for taxpayers to keep track of their intangibles and of the entities that contribute to them. At the same time, it is extremely important for a multinational to have an overview of the entities that contribute significantly to the group’s intangibles to maximize value for the business and recognize them appropriately in the group’s tax model.

It is therefore important for a company not only to review the existing and past set-up, in order to have an overview of what intangibles have been and are being created, but also to plan in advance and be aware of the consequences that any small shifts in the value chain or bigger restructurings might have on its intangibles.

Taking a step back and stock of the current and proposed future business model is likely a useful starting point. Several approaches are available. A value chain analysis is one of them and may help to provide a useful overview of where a group stands when it comes to its value creation including intangibles. It can also support companies with:

  • Identifying valuable intangibles which the group was (or not) aware of including for more subtle changes that may have occurred over time in the business;

  • Performing a DEMPE analysis and assessing which entities contribute in what measure to the group’s intangibles;

  • Checking the allocation of profits deriving from the intangibles used according to the results of the previous analyses;

  • Evaluating the potential opportunity to use specific intangible-related incentives introduced by countries, e.g. the patent box regime introduced in the Swiss tax reform, for which a clear view on the ownership of intangibles is required

  • Assessing the potential impact of latest tax developments, e.g. the OECD’s BEPS 2.0. project on the taxation of the digital economy.

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