Transfer Pricing, Integration
and Synergy Intangibles: A
Consensus Approach to the
Arm’s Length Standard
Mitchell A. Kane, NYU School of Law
Overview of Research Question and Summary of Conclusions
• Basic Research Question: Should the definition of “intangibles” be extended to
include “corporate synergies” under treaty-based AL transfer pricing?
• Conclusion: No, because of likely risk that treaty partners will assert overlapping
claims to tax the associated value.
• Alternative:
•
Some of the gains from corporate synergies can be dealt with using existing tools under the AL
standard.
•
Some of the gains from corporate synergies should be allocated by taxpayer election.
2
Context for this Project
• The “definitional” question is foundational.
• How does AL transfer pricing deal with the comparables vacuum for intangibles?
• Two Broad Scenarios.
•
A “transfer” of “intangible” property  residual profit split. E.g., U.S. Treas. reg. 1.482-6(c)(3)(iii).
•
Cost sharing agreement. No transfer but rather ownership of “intangible” property ab initio.
•
Both lead to proportional approaches. Doctrinal door is recognition of an “intangible.”
• Corporate synergies seem to involve a lot of value, though not easy to value.
• OECD BEPS: Should we carve off this category (and take a formulary approach
within AL)?
3
Outline for Comments
• Taxonomy of Synergistic Value – Three Types
• Consensus Approach to AL
•
“Fractional” interpretation of Article 9
•
Risk of duplicative claims to tax base
• Prescriptions
•
Best analytical approach for different types of synergistic value
•
OECD Intangibles Work
4
Taxonomy of Synergistic Value (1)
• Unilateral Integration Value
•
Value from integration of assets within a single corporate entity.
•
Example: Single corporation owns a proprietary database and a customized algorithm.
• Bilateral Integration Value
•
Value from integration of assets by contract executed by two corporate entities.
•
Example: Two corporations each own a proprietary database. One corporation obtains contractual
rights to use other database.
• Common Control Value
•
Value from integration of assets by common control or ownership of multiple corporate entities.
•
Example: Two corporations each own a proprietary database. Two corporations come under common
control.
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Taxonomy of Synergistic Value (2)
• Common control value and the “inherent flaw” of AL transfer pricing.
•
Implication  No comparables, ever!
• Bilateral integration value.
•
Implication  Comparables are not literally impossible but one would expect to observe ranges, even at AL.
• Unilateral integration value.
•
Implication  Comparables are not literally impossible but likely difficult to find like internal integration.
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Consensus Approach (1): The Fractional Interpretation of Article 9
• Typical reading? Substantive limit on residence country, so bc untaxed.
• Required treaty language to implement?
• “A contracting state may tax an enterprise of that state only up to the amount it
would have earned at arm’s length.”
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Consensus Approach (2): The Fractional Interpretation of Article 9
• “Fractional” Interpretation
•
•
•
Residence country may make adjustments
Residence country is constrained in such adjustments by AL standard
Implication  With consistent reporting bc is taxed somewhere but Article 9 and AL standard are
silent regarding allocation.
Article 9, OECD Model Tax Convention
“Where [enterprises of the two contracting states are under common control and] conditions are made or imposed between the
two enterprises in their commercial or financial relations [which are not arm’s length], then any profits which would [at arm’s
length] have accrued to one of the enterprises, but, by reasons of those conditions, have not so accrued, may be included in
the profits of that enterprise and taxed accordingly.”
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Consensus Approach (3): Overlapping Tax Base
• Existing consensus about unilateral integration value and bilateral integration value?
• Consider hypothetical merger of two previously wholly domestic firms.
• Should we introduce a “synergy intangible” to capture the value bc?
•
No.
•
Overlapping nature of categories of synergistic value suggests competing claims over previously agreed
base.
•
Analogy: the lesson from the “marketing intangibles” debate.
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Prescriptions (1): Categories of Value
• Common control value  Taxpayer discretion.
•
Is this a horrendous result?
•
Consider status quo.
•
Consider treaty-based legal argument.
• Bilateral integration value  Consider existing apparatus regarding AL ranges.
• Unilateral integration value  Consider existing apparatus for aggregated
transactions.
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Prescriptions (2): OECD Intangibles Project and BEPS
• Bottom line OECD conclusion (for now): “synergies” do not count as an intangible.
•
Rationale: Not owned or controlled by a single enterprise.
•
Relevance of this criterion unclear.
• Synergistic value is dealt with as a “comparability factor.”
• Example, OECD Revised Discussion Draft Paragraph 28
•
Group member is central purchasing manager, negotiates widget price from $200 down to $110 based on group volume.
•
AL fee for services would be $6 per widget.
•
What price when on-sells to group members?
•
Treating group synergy as “comparability factor” avoids result of $200/widget.
•
Revised discussion draft suggests benefit to be shared proportionately.
• Concluding Observations
•
This is “bilateral integration gain” in my taxonomy.
•
Analytically, AL would seem to require looking at AL ranges. Perhaps proportionality is an easier route.
•
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But open question: Is this transactionally contained or does it introduce exact same problems as a “synergy intangible”?