The Effect of the BEPS Project’s Development of Transfer Pricing Guidelines Regarding Intangibles for Danish Enterprises

Christian Præstegaard Ebert & Rasmus Lenvig Havskov Hansen

Student thesis: Master thesis


Due to recent years’ focus on aggressive tax planning, OECD launched the Base Erosion and Profit Shifting (BEPS) project in February 2013. This was meant to put an end to BEPS situations, and make it impossible for multinational entities to avoid taxation. Some of the Action Points in the BEPS project were addressed at updating the Transfer Pricing Guidelines. The purpose of Action Point 8-10 was specifically to align Transfer Pricing outcomes with value creation, and to update the guidelines regarding intangibles, which were unmodified since the introduction in 1995.
This thesis analyzes the theoretical and practical challenges multinational entities are dealing with regarding Transfer Pricing outcome in regards to their intercompany transfer of intangibles. The point of view is from a Danish parent company, which have controlled cross-border transactions with its subsidiaries.
The Transfer Pricing Guidelines have undergone extensive updating due to the international economic environment’s need for further clarification. These updates made it more clear how profit shall be allocated according to the guidelines, however correspondingly more complicated.
In the updated TPG Chapter 6, regarding intangibles, focus have changed. A new far-reaching definition of intangibles is introduced. Moreover, important functions regarding intangibles are specified as DEMPE, and the economic ownership is now more important than legal ownership. Furthermore, profit allocation is based on competencies and risk, and not performance. Finally, a whole new section has been added, regarding Hard-To-Value Intangibles (HTVI). These can now be taxed based on ex post results, due to the information asymmetry between taxpayer and tax administrations. This initiative conflicts with the previous arm’s length principle, because it is not consistent with the behavior of independent parties. Moreover, the implementation of the updated TPG chapters makes it possible for Danish tax authorities to make corrections using the new updated chapters in years prior to the BEPS project’s launch.
The updates to Chapter 1, regarding allocation of profit, states that compensation shall be based on actually controlled and assumed risk. Risk is divided into operating and financial risk, where operating risk is the most significant one, which allows for a greater compensation than financial risk. Updates to Chapter 1 and 6 made it necessary to correspondingly update Chapter 9. At the moment, only a discussion is draft is published. This is analyzed in this thesis to understand the new agenda from OECD.
Furthermore, this thesis discusses the practical challenges of a business restructuring involving intangibles, and it is illustrated what a Danish parent company in a multinational entity should be aware of due to the updated TPG chapters.

EducationsMSc in Auditing, (Graduate Programme) Final Thesis
Publication date2017
Number of pages127