In the 21st century, the number one international tax issue of interest to multinational enterprises (MNEs) is undoubtedly transfer pricing. The reason for this is that as global trade increases, so too does the uncertainty of the tax treatment of inter-affiliate transactions across national boundaries and the spectre of double taxation. The Australian Deputy Commissioner of Taxation has outlined the concept of transfer pricing as follows: 'Broadly, transfer pricing relates to the setting of prices by multinationals for the goods and services that they supply to related parties. It also covers the structuring of transactions and financial relationships, and how innovation happens and is rewarded.'
The OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (the OECD Guidelines) make it clear that the concept of transfer pricing should not be confused with that of tax fraud, or of tax avoidance, even though transfer pricing transactions may be utilised for such purposes. A number of international tax specialists have also stressed that incorrect references to transfer pricing as 'income-shifting' obfuscate a clear analysis.
A paper prepared by the United Nations Secretariat in 2001 has described transfer pricing as 'probably the most important tax issue in the world'. Referring to the fact that over 60 percent of international trade is carried out within MNEs, the paper also refers to the impact which intangible property has had on this trade. Both US and Australian tax practitioners have acknowledged that some of the most difficult transfer pricing issues have always been in the area of intangible property. The tax treatment of intangible assets therefore warrants particular attention in the transfer pricing context.
In the United States, for purposes of section 482 of the final regulations, the term 'intangible' refers to any item included in one of six broad categories specified in the regulations, provided the item has substantial value independent of the services of any individual. These categories of intangible property include: ? Patents, inventions, formulas, processes, designs, patterns or know-how; ? Copyrights and literary, musical, or artistic compositions; ? Trademarks, trade names, or brand names; ? Franchises, licenses, or contracts; ? Methods, programs, systems, procedures, campaigns, surveys, studies, forecasts, estimates, customer lists, or technical data; and ? Any other similar item that derives its value from its intellectual content rather than its physical attributes. For the purposes of Chapter VI of the OECD Guidelines, 'intangible property' includes rights to use industrial assets, such as patents, trademarks, trade names, designs or models, literary and artistic property rights, and intellectual property such as know-how and trade secrets. Australian Taxation Rulings generally refer to the OECD definitions of intangible assets.
The internationally accepted arm's length principle demands that MNEs charge transfer prices in their controlled transactions that are consistent with the prices that would have been charged for the same uncontrolled transaction taking place between unrelated, independent enterprises under the same circumstances. To this end, transfer pricing methodologies are utilised by MNEs in order to establish an arm's length outcome. The transfer pricing methodology adopted by an MNE consequently constitutes a pivotal component of a determination of the arm's length consideration attributable to a transaction involving the intragroup transfer of intangible property.
As identical transactions between unrelated enterprises are rare, transfer pricing methodologies tend to focus on comparable rather than identical transactions. So-called 'transactional' methodologies have been espoused by revenue authorities as the most direct way of establishing whether arm's length conditions exist between associated enterprises. These methodologies are reliant on finding either identical transactions, or, where these are not available, similar comparable transactions. There has been a growing realisation that where intangible assets are concerned, there are grave problems in determining even a comparative analysis. This paper will explore the consequent shifting focus to newer, non-traditional methodologies, especially profit-split methodologies, in the US and Australia, and to a lesser extent by the OECD. These methodologies tend to rely in whole or in part on internal data rather than on data derived from comparable uncontrolled transactions.
The US final section 482 regulations , the OECD Guidelines and the Australian transfer pricing rulings all permit MNEs to select an appropriate transfer pricing methodology for their inter-affiliate transfers of intangible assets. Different methodologies may be selected under different circumstances. It is necessary to assess a number of variables in determining the correct methodology for a particular transaction. These variables may change over time, necessitating a reconsideration of the methodology to be utilised.
Although there are marked similarities in the US, OECD and Australian approaches to choosing a transfer pricing methodology for intangible property transfers, there are also some important differences. While the official position of the US is that its final transfer pricing regulations are consistent with the OECD Guidelines, some OECD member countries disagree. This has had the unfortunate result that MNEs risk antagonising certain revenue authorities if they undertake what appears to be a US transfer pricing approach. Multinational taxpayers are therefore compelled 'to account for multiple and sometime[s] disparate rules when setting, documenting, and defending cross-border transfer prices.'
