In outsourcing transactions between independent enterprises, it is usually the case that an entity performing functions on behalf of the legal owner of the intangible that relate to the development, enhancement, maintenance, protection, and exploitation of the intangible will operate under the control of such legal owner (as discussed in paragraph 1.65). Because of the nature of the relationships between associated enterprises that are members of an MNE group, however, it may be the case that outsourced functions performed by associated enterprises will be controlled by an entity other than the legal owner of the intangibles. In such cases, the legal owner of the intangible should also compensate the entity performing control functions related to the development, enhancement, maintenance, protection, and exploitation of intangibles on an arm’s length basis. In assessing what member of the MNE group in fact controls the performance of the relevant functions, principles apply analogous to those for determining control over risk in Section D. 1.2.1 of Chapter I. Assessing the capacity of a particular entity to exert control and the actual performance of such control functions will be an important part of the analysis.
TPG2017 Chapter VI paragraph 6.53
Category: B. Ownership of intangibles and DEMPE, OECD Transfer Pricing Guidelines (2017), TPG2017 Chapter VI: Special Considerations for Intangibles | Tag: Control functions, Control of the legal owner, Controlling performance of functions, DEMPE, DEMPE functions, Intangibles, Legal owner, Outsourcing, Ownership
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- TPG2022 Chapter VI paragraph 6.54If the legal owner neither controls nor performs the functions related to the development, enhancement, maintenance, protection or exploitation of the intangible, the legal owner would not be entitled to any ongoing benefit attributable to the outsourced functions. Depending on the facts, the...
- TPG2022 Chapter VI paragraph 6.55The relative value of contributions to development, enhancement, maintenance, protection, and exploitation of intangibles varies depending on the particular facts of the case. The MNE group member(s) making the more significant contributions in a particular case should receive relatively greater remuneration. For example,...
- TPG2022 Chapter VI paragraph 6.52Where associated enterprises other than the legal owner perform relevant functions that are anticipated to contribute to the value of the intangibles, they should be compensated on an arm’s length basis for the functions they perform under the principles set out in Chapters...
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- TPG2022 Chapter VI paragraph 6.51The need to ensure that all members of the MNE group are appropriately compensated for the functions they perform, the assets they contribute and the risks they assume implies that if the legal owner of intangibles is to be entitled ultimately to retain...
- TPG2022 Chapter VI paragraph 6.33Applying the provisions of Chapters I – III to address these questions can be highly challenging for a number of reasons. Depending on the facts of any given case involving intangibles the following factors, among others, can create challenges: i) A lack of...
- TPG2022 Chapter VI paragraph 6.76A common situation where these principles must be applied arises when an enterprise associated with the legal owner of trademarks performs marketing or sales functions that benefit the legal owner of the trademark, for example through a marketing arrangement or through a distribution/marketing...
- TPG2022 Chapter VI paragraph 6.57Because it may be difficult to find comparable transactions involving the outsourcing of such important functions, it may be necessary to utilise transfer pricing methods not directly based on comparables, including transactional profit split methods and ex ante valuation techniques, to appropriately reward...
- 2022: ATO Taxpayer Alert on Treaty shopping arrangements to obtain reduced withholding tax rates (TA 2022/2)The ATOÂ is currently reviewing treaty shopping arrangements designed to obtain the benefit of a reduced withholding tax (WHT) rate under a double-tax agreement (DTA) in relation to royalty or dividend payments from Australia. Typically, this benefit is sought via the interposition of one...
- Guidance on the application of the HTVI approachThis June 2018 report contains guidance for tax administrations on the application of the approach to hard-to-value intangibles (HTVI). The HTVI approach was adopted as part of the Actions 8-10 Report in 2015 and it was subsequently incorporated in Chapter VI of the OECD Transfer...
Related Case Law
- India vs. Maruti Suzuki India Ltd.Maruti Suzuki India manufactures and sells cars and spare parts. A license agreement had been entered with the group parent for use of licensed information and trademark for the manufacture and sale of the products. Hence, Maruti Suzuki paid royalties to the parent for trademark...
- US vs GlaxoSmithKline Holdings, September 2006, IR-2006-142In September 2006 the Internal Revenue Service announced that it has successfully resolved a transfer pricing dispute with Glaxo SmithKline. Under the settlement agreement, GSK will pay the Internal Revenue Service approximately $3.4 billion, and will abandon its claim seeking a refund of...
- Netherlands vs “X B.V.”, August 1998, Supreme Court, Case No 32997, ECLI:NL:HR:1998:AA2288In a situation where a new intangible asset has been developed and is transferred to an affiliate at a time when its success is not yet sufficiently apparent, for example, because the intangible asset has not yet generated revenues and there are significant...
- Portugal vs R… Cash & C…, S.A., June 2023, Tribunal Central Administrativo Sul, Case 2579/16.6 BELRSThe tax authorities had issued a notice of assessment which disallowed tax deductions for royalties paid by R…Cash & C…, S.A. to its Polish parent company, O…Mark Sp. Z.o.o. R… Cash & C…, S.A. appealed to the Administrative Court, which later annulled the...