Transfer Pricing and Intangibles

US and OECD Arm’s Length Distribution of Operating Profits from IP Value Chains

Transfer pricing and intangibles
This book explores how taxing rights to multinationals’ business profits from valuable IP shall be allocated among jurisdictions under US and OECD transfer pricing law.

Why this book?

The transfer pricing of intangibles (patents, trademarks, etc.) is an important issue in international tax law, because it determines how superprofits generated by multinationals through the exploitation of valuable intellectual property (IP) in their worldwide value chains are allocated among the jurisdictions in which they do business. For decades, multinationals have used IP transfer pricing to shift taxable profits out of high-tax jurisdictions, causing serious base erosion. Both the United States and the OECD seek to combat these practices through mandatory transfer pricing rules aimed at ensuring that IP superprofits are taxed where the intangible value was created. The profit allocation process prescribed by these rules is analysed in this text.

The first part of the process determines the amount of superprofits allocable to a unique and valuable IP (royalty amount). The US and OECD transfer pricing methods that govern this determination are analysed, applying a distinction between unique and non-unique value chain contributions, and it is observed that the methodology has evolved significantly over the years, from primarily relying on imprecise third-party benchmarking to more substance-based approaches that seek to ensure results that adhere to the realistic alternatives of the controlled parties.

The second part of the profit allocation process determines to which group entity, and thus indirectly also to which jurisdiction, the amount of IP superprofits will be allocated. The US and OECD intangible ownership provisions that govern this determination are analysed, applying an original analytical distinction between manufacturing and marketing IP. The analysis shows that, while both the US and OECD rules go a long way towards aligning the allocation of superprofits from R&D-based manufacturing IP with value creation, the allocation of superprofits from marketing IP still largely hinges on formal legal ownership and thus opens the opportunity for tax planning from multinationals and should be ripe for future reform.

This book is suited for those that have an interest in transfer pricing analysis, e.g. students, lawyers, accountants and economists. The historical background of the current transfer pricing rules is explained, allowing for an “all-in-one” solution for catching up with the US and OECD transfer pricing development over the last decades.

Downloads

Free book sample with table of contents and sample chapter

This book is part of the IBFD Doctoral Series

View other titles in the series 

Author(s)

Oddleif Torvik is a tax lawyer with Advokatfirmaet Schjødt AS, one of Norway’s largest corporate law firms, where he advises primarily on transfer pricing and international tax issues. He also holds a position as Associate Professor at the Department of Accounting, Auditing and Law at the Norwegian School of Economics (NHH) in Bergen and is an affiliated member of the Norwegian Centre for Taxation (NoCeT) at NHH. He obtained his PhD from the Faculty of Law at the University of Bergen. His primary research interest lies in the field of transfer pricing.

Transfer Pricing and Intangibles – US and OECD arm’s length distribution of operating profits from IP value chains
Chapter 1: Research Questions, Methodology and Sources of Law
Chapter 2: Business and Tax Motivations for Intangible Value Chain Structures
Chapter 3: Controlled Intangibles Transfers
Chapter 4: Introduction to Part 2
Chapter 5: The Historical Development of Profit-Based Transfer Pricing Methodology
Chapter 6: Metaconcepts Underlying the US and OECD Profit Allocation Rules
Chapter 7: Direct Transaction-Based Allocation of Residual Profits to Unique and Valuable IP: The CUT Method
Chapter 8: Indirect Profit-Based Allocation of Residual Profits for Unique and Valuable IP: The CPM (US) and TNMM (OECD)
Chapter 9: Direct Profit-Based Allocation of Residual Profits to Unique and Valuable IP: The Profit Split Method
Chapter 10: Location Savings, Local Market Characteristics and Synergies
Chapter 11: Transfer Pricing of Intangibles in the Post-BEPS Era under the OECD TPG
Chapter 12: Allocation of Residual Profits for Unique and Valuable IP Based on Unspecified Pricing Methods
Chapter 13: Allocation of Residual Profits to Unique and Valuable IP through Valuation
Chapter 14: Allocation of Residual Profits to Unique and Valuable IP through Cost-Sharing Structures
Chapter 15: Taxpayer-Initiated Compensating Adjustments to Indirect IP Pricing
Chapter 16: Periodic Adjustments of Controlled IP Transfer Pricing
Chapter 17: The Allocation of Residual Profits to a Permanent Establishment
Chapter 18: Introduction to Part 3
Chapter 19: The Evolution of the US and OECD Approaches to Intangible Ownership
Chapter 20: A Lead-In to the Determination of IP Ownership under the US Regulations and OECD TPG: A Story about Legal Ownership, Control and Economic Substance
Chapter 21: The Distribution among Group Entities of Residual Profits Generated through Exploitation of Internally Developed Manufacturing IP under the US Regulations
Chapter 22: The Distribution among Group Entities of Residual Profits Generated through Exploitation of Internally Developed Manufacturing IP under the OECD TPG
Chapter 23: The Distribution among Group Entities of Residual Profits Generated through Exploitation of Internally Developed Marketing IP under the US Regulations
Chapter 24: Distribution among Group Entities of Residual Profits Generated through Exploitation of Internally Developed Marketing IP under the OECD TPG
Chapter 25: The Allocation of Residual Profits from Unique and Valuable IP to Permanent Establishments
Chapter 26: Concluding Remarks

Recommended Books

Transfer pricing and customs valuation
May 2025

Transfer Pricing and Customs Valuation