Posted by: Ernst-Jan de Roest Posted on: Friday 08 July 2011, 17:24

In July of the previous year, after years of intensive work and multilateral consultations, in particular with business milieus, the OECD published an update of the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations.

Major changes were introduced in the first three chapters of the OECD Guidelines pertaining to the market price principle, transaction comparability analysis and application of the transaction profit method. Additionally, a new Chapter IX was introduced, which regulates some aspects of enterprise restructuring from the point of view of transfer pricing and contains among others recommendations as to transfer of functions, risks, assets and profit potential within a group of related entities.

Now works of the OECD concentrate on regulating issues concerning intangibles, which due to insufficient guidelines as to their definition and measurement for the purposes of transfer pricing constitute in practice a problematic area.

Problems with Measurement

As regards measurement, the general principle arising from agreements on avoidance of double taxation and national tax regulations is of course the market price principle. When it is know-how that is made available, the price subject to the market price analysis has the form of licence fees.Therefore, some generally used methods, which are also recommended in the OECD Guidelines,are applicable only to a limited extent. This pertains in particular to the comparable uncontrolled market price method, the resale price method and the reasonable margin method. As regards the first method listed above, limitations result first of all from the uniqueness of the know-how that is made available, which consequently makes it difficult to find a comparable equivalent. Moreover, access to data on the amount of licence fees that could be used for this purpose is restricted as well.

For this reason, the two most frequently applied licence fee valuation methods selected upon a functional analysis are the profit split method and the transactional net margin method. In practice also methods not named in the OECD Guidelines are used (e.g. income method).

Know-How or Services

In the case of transactions concluded between related entities consisting in support in the operating activity by way of provision of specialist knowledge and developed tools, it may be problematic to distinguish whether we deal only with provision of services or rather provision of know-how in the field of the pursued industrial, commercial or scientific activity, licence fees onaccount of which are subject to withholding tax. Identification of the actual nature of a given transaction is the key from the point of view of the proper application of the relevant tax regulations. What decides here is the contents of the agreement, which should clearly specify the detailed scope and type of works constituting the object of the transaction.

If the performance of the analysed agreement consists predominantly in engaging appropriately qualified persons who share their knowledge and experience within the framework of on-going cooperation, than the transaction consists in provision of consultancy services. On the other hand, transactions involving provision of know-how are characterised among others by the fact that the agreement contains confidentiality clauses with regard to the disclosed information and premises implying that the provided knowledge has a specific form, e.g.is selected and documented with the use of appropriate carriers.

These elements are crucial, which finds is confirmation in the definition of know-how applied in the legislation of the European Commission: it refers to „a set of technical information that is secret, substantial and identified in an appropriate form”. The Supreme Court of Administration cites this definition in its decisions (cf. file no. III SA 1661/02). Its explication finds its reflection also in interpretations of tax authorities (cf. interpretation of the Tax Chamber in Warsaw of 23 April 2009, file no. IPP-B5/423-47/09-2/PS).

Therefore, I would like to draw your attention to the fact that it is necessary to analyse agreements with related entities which you conclude or perform from the point of view of identification of components specific for know-how and provision of services, which allows their proper taxation.