Transfer Pricing Rules have been introduced in Malta with effect from 1 January 2024. In this regard, the Maltese Transfer Pricing Guidelines make reference to the OECD Transfer Pricing Guidelines.
In this article we will explore Transfer Pricing considerations for intangibles.
Intangibles are seen as the main drivers of value creation for a majority of businesses. Technological changes and the digital revolution have facilitated this process and enabled intangibles as key profit drivers.
What are intangible assets?
Intangibles by nature are hard to define. Whereas a physical product can be seen, touched, or pointed to, an intangible might be an idea or know-how, with no physical characteristics. The OECD defines intangibles as “something which is not a physical asset or a financial asset, and which is capable of being owned or controlled for use in commercial activities”.
Who owns the intangible assets?
One of the key considerations in the analysis of intangible assets is identifying the owner of such assets. This may not always be clear, particularly when multiple related parties rely on and utilise the same intangible assets.
Generally, the legal owner of the intangible asset is the economic owner. However, it is becoming increasingly more important to consider the facts and circumstances of the underlying transactions, placing more reliance on the actual substance of the transaction and the actions of the parties involved.
This indeed has led the OECD to issue new guidelines on the concept of ownership in order to ensure that the allocation of profits from the exploitation of intangibles will be based on the relative contribution of each party. This is what the OECD refers to as the DEMPE Functions.
The DEMPE Functions
In its guidance material, the OECD seeks to establish a TP framework for intangibles that ensures that profits associated with the transfer or use of intangibles are appropriately allocated in accordance with value creation.
Group entities performing the relevant functions and assuming the relevant risks regarding the Development, Enhancement, Maintenance, Protection and Exploitation of the intangibles should be remunerated for the contributions they made.
Hence, if the legal owner of the intangible is economically responsible for all functions, assets and risks with respect to the DEMPE functions, the OECD Guidelines indicate the legal owner of the intangible is likely to have the right to expect full rights to any profits derived from the use of that intangible.
On the other hand, if the legal owner does not perform any key functions related to the intangibles, such legal owner should not be entitled to any portion of the return derived from the exploitation of the intangibles other than the arm’s length compensation, if any, for holding the title and providing the funding.
Valuing the intangible assets for TP purposes
When it comes to valuing intangibles, the OECD TP Guidelines provide guidance on the appropriate price that should be charged in the transfer of intangible asset.
There are many valuation methodologies that are used to value various intangible assets outside the context of TP, and TP rules are gradually starting to converge with these valuation methodologies. Essentially, every asset has one intrinsic value, and it is that value that is to be measured, regardless of which set of rules are being followed.
In terms of the OECD, the TP methods most likely to prove useful in matters involving transfers of one or more intangibles are the Comparable Uncontrolled Price (CUP) method, the transactional profit split method and also valuation techniques.
Other considerations
One should also keep in mind other tax considerations when valuing intangibles, such as:
Any chargeable gains arising on the transfer of the intangible;
The amortisation of intellectual property or intellectual property rights for Maltese income tax purposes; and
The Patent Box Regime
Intangibles are of critical significance for multinational groups from a business, operational and tax perspective. Organisations should regularly monitor their intangible assets from a TP and tax perspective to ensure compliance with current practice/regulations.
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