Difficulties can arise in the context of business restructuring where the valuation of an intangible or rights in an intangible at the time of the transaction is highly uncertain. In these cases, the question arises as to how arm’s length pricing should be determined. The question should be resolved, both by taxpayers and tax administrations, by reference to what independent enterprises would have done in comparable circumstances to take account of the valuation uncertainty in the pricing of the transaction. To this aim, the guidance in Section D.3 of Chapter VI is relevant.
TPG2022 Chapter IX paragraph 9.62
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By OECD
Category: OECD Transfer Pricing Guidelines (2022), TPG2022 Chapter IX: Transfer Pricing Aspects of Business Restructurings | Tag: Business restructuring, Hard-To-Value Intangibles (HTVI), Transfer of value, Valuation
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- TPG2022 Chapter IX paragraph 9.63In addition, where the intangible being transferred as a result of the restructuring meets the criteria for being considered a hard-to value-intangible in paragraph 6.189, then the guidance in Section D.4 of Chapter VI is applicable....
- TPG2022 Chapter IX paragraph 9.56The determination of the arm’s length price for a transfer of intangibles or rights in intangibles should be conducted in accordance with the guidance in Section D. 1 of Chapter VI. It will be affected by a number of factors among which are the amount, duration and riskiness of the...
- TPG2022 Chapter IX paragraph 9.69The determination of the arm’s length compensation for a transfer of an ongoing concern does not necessarily amount to the sum of the separate valuations of each separate element that comprises the aggregate transfer. In particular, if the transfer of an ongoing concern comprises multiple contemporaneous transfers of interrelated assets,...
- TPG2022 Chapter IX paragraph 9.55Transfers of intangibles or rights in intangibles raise difficult questions both as to the identification of the intangibles transferred and as to their valuation. Identification can be difficult because not all valuable intangibles are legally protected and registered and not all valuable intangibles are recognised or recorded for accounting purposes....
- TPG2022 Chapter VI paragraph 6.172It should be recognised in determining and evaluating discount rates that in some instances, particularly those associated with the valuation of intangibles still in development, intangibles may be among the most risky components of a taxpayer’s business. It should also be recognised that some businesses are inherently more risky than...
- TPG2022 Chapter IX paragraph 9.74In outsourcing cases, it may happen that a party voluntarily decides to undergo a restructuring and to bear the associated restructuring costs in exchange for anticipated savings. For instance, assume a taxpayer that is manufacturing and selling products in a high-cost jurisdiction decides to outsource the manufacturing activity to an...
- TPG2022 Chapter IX paragraph 9.73The situation might however be different where the loss-making activity provided other benefits such as synergies with other activities performed by the same taxpayer. There can also be circumstances where a loss-making activity is maintained because it produces some benefits to the group as a whole. In such a case,...
- TPG2022 Chapter IX paragraph 9.72The question may arise of whether the transferee should in fact be compensated by the transferor for taking over a loss-making activity. The response depends on whether an independent party in comparable circumstances would have been willing to pay for getting rid of the loss-making activity, or whether it would...
- TPG2022 Chapter IX paragraph 9.71Not every case where a restructured entity experiences a reduction of its functions, assets and risks involves an actual loss of expected future profits. In some restructuring situations, the circumstances may be such that, rather than losing a “profit-making opportunity”, the restructured entity is actually being saved from the likelihood...
- TPG2022 Chapter IX paragraph 9.70An example is the case where a manufacturing activity that used to be performed by M1, one entity of the MNE group, is re-located to another entity, M2 (e.g. to benefit from location savings). Assume M1 transfers to M2 its machinery and equipment, inventories, patents, manufacturing processes and know-how, and...
Supplemental Guidance
- German Guidance on Business Restructuring and Valuation issued in October 2010In 2008 German legislation on business restructurings was updated to align with the new chapter XI in the OECD Transfer Pricing Guidelines. § 1 para. 3 AStG and the “Regulation on the application of the arm’s length principle according to §1 para. 1 AStG in cases of cross-border relocation of...