Transfer pricing of intangible assets



FW moderates an online discussion focusing on transfer pricing of intangible assets between Richard G. Fletcher at  Baker & McKenzie, Nathaniel Carden at Skadden, Arps, Slate, Meagher & Flom LLP, and  Les Secular at True Partners Consulting.

FW: In this difficult economic climate, are you seeing more companies ‘move’ intangible assets – such as trademarks, copyrights and patents – around their group structure to reduce tax liabilities where possible?

Secular: A greater number of companies indeed seek to migrate their intangible assets to reduce group tax liabilities despite the efforts of tax authorities to limit their ability to do so. It is for this reason that the UK tax authorities have produced draft legislation on the Patent Box, designed to encourage UK companies to leave their IP in the UK. Under the Patent Box legislation, the corporate tax rate on patented inventions will be only 10 percent. This brings the UK into line with other EU countries which have similar incentives, but to qualify the technology must be capable of being patented; this may rule out certain categories of IP. Would multi-national companies necessarily want to centralise their patented IP in the UK? It is expected that companies will continue to consider migrating their IP, or part of it – for example R&D functions – to a more tax favourable jurisdiction.

Carden: The number of companies moving intangibles for the sole or primary purpose of reducing tax liability is declining. Instead, the restructuring of intangible ownership occurs more commonly in connection with other corporate initiatives, such as acquisitions, dispositions, strategic expansions, or efficiency and cost-cutting efforts. There are a number of reasons for this trend, including increasing scrutiny by tax authorities and more rapid business changes. Moreover, I think that the economic climate is causing more companies to proceed cautiously and make sure that their tax and transfer pricing planning is aligned with real business expectations, since moving IP involves real risk and can actually increase a company's overall tax burden when the business is not successful. 

Fletcher: Businesses will develop and acquire relevant intangibles to further enhance their market position. Particularly with acquired intangibles, it often makes sense to integrate and manage further development and exploitation of such intangibles along with an existing portfolio. Hence, the vast majority of intangibles transfers within a group of companies occur for these very good commercial reasons, and are relatively less tax driven. Also, for anti-avoidance purposes, many taxing authorities target the need for there to be sufficient substance of operations in the location acquiring the intangibles intragroup in order for an effective rights transfer to take place. This means having sufficiently senior decision making personnel as well as capital to respectively manage and absorb business risks relating to the intangibles. One potential tax benefit of transfers occurring now is that the value of intangibles may be depressed because of uncertain economic forecasts, so that taxes due on transferring intangibles are potentially reduced. As a result, there is likely to be an acceleration of decision making to transfer intangibles in the current climate.

FW: To what extent can the valuation of intangible assets give rise to transfer pricing disputes between companies and tax authorities?

Carden: Intangible asset valuations are the source of the largest transfer pricing disputes with most major OECD tax authorities. In my view, there are three factors driving this. The first is very practical – current economic conditions are putting substantial revenue pressure on every government, making tax authorities much more sensitive to reductions in the tax base. Second, intangible assets are, of course, intangible, which often makes it possible to transfer them with fewer consequences to day-to-day business operations. Finally, it is very difficult to assign a precise value or useful life to a given intangible, especially ones such as patents, copyrights and trademarks that are inherently unique and company-specific. As a result, there is a lot of room for companies and tax authorities to get into disputes.

Fletcher: Valuations of intangibles for tax purposes are required both for transfers of rights, but also effectively for evaluating the amounts payable by one group company to another for using those rights, for example under licensing arrangements. These profit flows relating to intangibles can be material, and can therefore have a material tax impact. On an even broader basis, particularly with multinational businesses that are highly integrated across borders, and where many group entities own intangible value drivers of the business, valuation of all these intangibles effectively determines the way that profit is split across all those tax jurisdictions in which the multinational operates. Hence, the valuation area is a fertile one for tax disputes, not just between taxpayers and tax authorities, but also between the tax authorities themselves. This is why the OECD is currently carrying out a detailed project to see if the views of OECD countries can be somewhat better aligned, although in fact many of the major differences of valuation opinion are increasingly with non-OECD countries.

Secular: There will always be potential transfer pricing disputes regarding the valuation of intangible assets, as tax authorities are reluctant to see potential income leaving their jurisdiction. Disputes arise on the value of IP transferred, by way of sale, cross licence/franchising arrangements or cost sharing, and on the amount of royalty – if any – paid by the local based company for use of the IP.This latter issue may arise irrespective of whether the IP has been transferred offshore and then licensed back, or there is a royalty for IP developed overseas. That disputes arise is evidenced by the fact that the OECD’s Working Party 6 has had consultations with private sector representatives to discuss various areas including, but not limited to the definition of IP; the definition and treatment of goodwill; and the definition and importance of ‘brand’.

FW: Could you explain some of the commonly-used valuation methods applied to intangible assets, and the benefits and drawbacks of each?

Fletcher: There are three traditional approaches to valuing intangible assets: the income, cost and market approaches. Income methods assess what marginal income the intangible asset commands and usually represent a discounted cash flow calculation. Examples are excess earnings method, relief from royalty, and price premium method. These methods are based on strong theoretical foundations. However, valuations are sensitive to inputs and assumptions, and can be subjective. Cost methods assess the cost of creating or replacing the intangible asset. The historical costs method or replacement value methods are examples. Cost methods are relatively straightforward and use reliable and measurable inputs, however the main weakness is that the resulting value may be somewhat backward looking and therefore of low validity. Market methods assume that the value of the intangible is as much as the market perceives it to be. Examples are the Comparable Uncontrolled Transaction method and Residual market value method.

Secular: Although there are a number of valuation methods such as discounted value; expected useful life; and the income method, each has certain drawbacks. For discounted value there would be issues over how discount rates are determined; useful life should consider legal, regulatory, commercial and economic aspects; and the income method requires reliable forecasts. Cost is not usually recommended as marginal cost is often very low, but if intangibles are transferred before they have been exploited the cost of creating them may be a factor in determining the market price. It can be difficult to find market comparatives as IP may have distinct unique characteristics particularly in the pharmaceutical industry. Factors such as whether all legal rights are transferred, or just some, will impact on the valuation method used as will limitations on applicable geography, exclusivity and the ability to restrict the use of certain rights or to reclaim them.  

Carden: Intangibles are typically valued using one of three basic approaches. The first is to try to identify arm’s length transactions involving similar intangibles. While this can be a very effective technique if a company can find comparable transactions, it is often difficult especially with high value, core intangibles. Other methods start with the value of an entire company or business, then subtract away the value of so-called ‘routine’ assets – including most tangible assets – and functions. What is left is the total value of the intangibles, which must then be allocated across the specific intangibles. Both of these steps require a number of assumptions, so they can also lead to significant disputes with tax authorities. Finally, some companies attempt to value intangibles by starting with ‘rules of thumb,’ such as a 75-25 percent split of profit between licensor and licensee. While there is a superficial appeal as well as some empirical evidence supporting the use of rules of thumb, a recent US patent case rejected these as unreliable in the patent damages context.

FW: What complications may arise from joint ownership of IP rights? Would you envisage any issues regarding withholding taxes on payments of royalties?

Secular: Concerns regarding withholding tax (WHT) on royalties arise where IP is jointly owned in different locations. Although some jurisdictions have no WHT on royalties, several still do. However, double tax treaties often eliminate or reduce WHT provided there is no evidence of treaty shopping or excessive non arm’s length behaviour. Some countries, for example the UK, adopt a self assessment approach whereby the payer satisfies itself that the recipient is entitled to relief, whilst others require the payer to seek advance permission to apply treaty rates. Each treaty has to be inspected closely as the same rate of WHT is unlikely to apply – for example in Italy the rate can vary from 0 percent to 22.5 percent. It is thus essential to consider particular wording of treaties or mitigate WHT through appropriate and advanced planning. Within the EU, the savings directive can mitigate WHT in certain circumstances and this can supersede double tax treaties.

Carden: Joint ownership is almost always complicated and fact-specific, especially when structured as cross-licenses. These transactions can perform two different functions – sometimes they facilitate joint business efforts, but in other cases they are ‘defensive’, in the sense that the primary goal is to prevent protracted infringement disputes between companies using the same or similar IP in their own separate initiatives. In the US, these ‘defensive’ transactions have led to ongoing disputes with the tax authorities regarding withholding. One major area of controversy is whether companies with cross-licenses that allow each party to use the other’s IP but only call for a royalty from one of the two must withhold only on the net payment – that is, the cash that actually moves, after royalties due under the cross-license are netted out – or instead on the gross amounts – the amount that would be paid under each of the cross-license arrangements if they were separate agreements. In certain circumstances, safe harbours exist that allow taxpayers to withhold solely on the net amount, but in most cases this presents significant challenges.

Fletcher: When IP rights are jointly owned, complications may arise as a result. These typically revolve around how to determine the share of each owner in the IP rights and whether/how these shares change over time. This can be particularly important, for example, if a group decides to dispose of a jointly owned asset or if such an intangible is licensed out, in terms of allocating the consideration received for tax purposes to the owners. In respect of licence payments such as royalties, there may also be uncertainty in determining what rates of withholding tax should be due, given that this depends upon the beneficial ownership shares of the IP. To carry out such a determination, generally allocation keys need to be introduced which fairly reflect both the relative investment of IP owners into the IP, and the benefits that are likely to be achieved by each owner. These are clearly subject to a great deal of uncertainty.

FW: What advice would you give to companies on managing the transfer pricing issues surrounding intangible assets, such as understanding jurisdictional differences and maintaining adequate documentation? Are cost contribution/cost sharing arrangements appropriate?

Carden: One of the most significant transfer pricing developments in recent years has been the sharing of information and coordination of audits by tax authorities. Hence, I advise companies to do as much as possible to ensure consistency in the theory underlying intangibles transfer pricing across jurisdictions. Additionally, as more countries require transfer pricing documentation, having a consistent and coherent approach becomes that much more important, since inconsistencies will be readily apparent in competing documents. With respect to cost contribution/cost sharing agreements, I think that these are often very attractive options for companies with multiple IP-generating locations around the world. They can also be a good approach for US companies that use domestic production for the US market but not for overseas markets. That said, in my view the technical requirements under the US cost sharing rules have become both theoretical and very onerous for companies without sophisticated accounting systems or well-staffed tax departments able to apply the rules and monitor the agreement. As it is often possible to produce similar results using licenses, for many companies the reduced administrative burden makes intercompany licensing a more attractive option, notwithstanding the safe harbor benefits of the cost sharing rules. 

Fletcher: Groups need to have a clear and detailed understanding of the intangibles that are involved in their business, how the value of these contributes to the business and how this ties in with the recognition of profits in different jurisdictions. This needs to be documented and supported at a central level, and reviewed and updated on an ongoing basis. Such information from this may need to be specifically included in local transfer pricing documentation for affected group companies. However, as exchange of information agreements are increasingly introduced between tax jurisdictions, groups should recognise that such materials may often practically become available to all tax authorities where they operate. Jurisdictional approaches to intangibles can differ markedly, and some of the most significant tax litigation in recent years at a global level has centred on the relative value of intangibles owned by group companies. This is one of the reasons that the OECD is carrying out its project to review aspects of dealing with intangibles from a transfer pricing perspective. Cost contribution arrangements in particular cause concerns for many tax authorities that dislike the idea of joint ownership of intangibles and the tax issues that this can raise.

Secular: It is essential that companies have adequate documentation of their IP exploitation plans and actions as the number of tax authorities seeking evidence of arm’s length behaviour and their application of penalties on transfer pricing adjustments is increasing. In Italy penalties of between 100 and 200 percent can be applied on additional tax arising from a transfer pricing adjustment, whilst Russia has introduced new transfer pricing rules including from 2014 penalties of 20 percent rising to 40 percent in 2017. Where companies retain existing IP in their home territory but allow an offshore connected party to develop new IP or ‘buy in’ to the existing IP, specific cost sharing arrangements should be properly documented. They should identify the valuation methods used to mitigate the risk that tax authorities may attempt to apply a different valuation method and then seek penalties for incorrect application of the values, or limit tax deductions for royalty payments/compensating payments. 

FW: If companies do find themselves under investigation or in dispute with tax authorities over intangible assets, what steps should they take to resolve the problem?

Fletcher: Intangibles are a difficult tax dispute area for both companies and tax authorities, particularly because each company's situation is unique and it is often very difficult to find external evidence that provides absolute proof of tax positions taken. One useful approach is to ensure that business individuals in the company's operations are fully involved in providing information regarding the intangibles involved in the business, as often tax authorities are more comfortable that such sources will show less tax bias. Ultimately, however, there are sometimes widely differing views of tax authorities even on positions such as the existence of certain intangibles. For example, some jurisdictions treat the ‘workforce in place’ on its own as a potentially compensable intangible if it is transferred. As a result, it is important to understand the views of individual tax authorities on these topics, both in preparing transfer pricing documentation which may ultimately have to be provided to tax authorities, and certainly before entering into detailed discussions with an individual tax authority.

Secular: Companies under investigation should never panic, accept what tax authorities say or pay assessments without challenge. When an investigation is started, unless there are in-house personnel who have experience of handling revenue authorities, external advice should always be sought early. This is most important where there may be a lack of adequate documentation which could then be remedied quickly. It is also worth noting that transfer pricing is not one-sided. There will always be a counter party and considering the competent authority position at an early stage is a necessity, particularly as the time limits for competent authority can be short – in some cases only three years from the date of first notification by a tax authority. External advisers also have access to particular databases that could be used to generate comparability analysis that can be used even retrospectively to support a position. 

Carden: Audits of intangible valuations or transfer pricing can quickly become ‘fishing expeditions’ that can consume large amounts of time and resources for the companies involved. Often the burden falls not only on the tax department, but also on other parts of the organisation that are asked to provide financial information, business documents, and sometimes even interviews. Consequently, I advise companies to be very proactive. First, companies should assemble the financial information, documents and other organisational resources that will be needed, preferably in connection with any major intercompany transactions. Second, it is important to identify any documents that may be withheld under privilege or work product doctrine. Finally, and most importantly, companies must engage with the tax authorities to define the scope of the audit and set agreed expectations regarding the types of information to be provided. 


Richard G. Fletcher is a principal tax advisor in the London Tax Department of Baker & McKenzie, and leads the UK transfer pricing practice. His practice focuses on transfer pricing and cross-border transactions; tax controversies; and general corporate and international taxation. His work includes dealing with HMRC on behalf of his clients, in particular negotiation of Advance Pricing Agreements and leading transfer pricing related controversy matters, as well as advising clients as to transfer pricing consequences of major transactions and financial and operational structuring. Mr Fletcher can be contacted on +44 (0)20 7919 1771 or by email:

Nathaniel Carden is a partner at Skadden, Arps, Slate, Meagher & Flom LLP. He focuses on matters of transfer pricing and operational tax planning and tax controversy. He represents corporate clients across many industries, with a particular focus on life science and health care companies. Mr Carden’s transfer pricing and operational planning practice focuses on planning and pre-audit issues arising from cross-border intangible property, service and financing transactions. He has also provided advice and related documentation concerning cross-border transactions, applying US and OECD transfer pricing rules. Mr Carden can be contacted on +1 312 407 0905 or by email:

Les Secular is a partner at True Partners Consulting. He has been practising tax for over 30 years, working both for ‘Big 4’ firms and smaller firms. He specialises in transfer pricing and cross border tax issues for both international companies investing into the UK and Europe and UK companies expanding their operations internationally. Mr Secular has lectured on international tax issues and was, for four  years, the UK representative for European Taxation, a monthly tax journal issued by the IBFD. He can be contacted on +44 (0)207 868 2431 or by email:

© Financier Worldwide



Richard G. Fletcher

Baker & McKenzie 


Nathaniel Carden

Skadden, Arps, Slate, Meagher & Flom LLP


Les Secular

True Partners Consulting

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