International Profit Allocation, Intangibles and Sales-Based Transactional Profit Split

Information technology has greatly changed the economy and intangible assets have become dominant value drivers of multinationals’ business. Firm-specific intangibles challenge the time-honoured arm’s length principle. The OECD’s Action Plan on Base Erosion and Profit Shifting addresses this issue, aiming at an allocation of profits associated with the transfer and use of intangibles that is in accordance with value creation. The OECD proposals are in line with inter-nation equity, but may have undesired effects on the investment location decisions of multinationals. The authors take the OECD’s proposals as a starting point and explore a sales-based transactional split of profits associated with intangibles to ensure both international investment tax neutrality and inter-nation equity. Sales-based taxation of intangible-related profits calls for an appropriate nexus in the sales jurisdiction. The authors examine possible avenues to expand the current permanent establishment rules to cover intangible-related business activities.