Transfer Pricing Challenges Concerning Business Restructuring with an Intra-company Transfer of Hard-to-Value Intangibles

Anders Kanstrup Kjærulf & Andreas Wilson Kean

Student thesis: Master thesis


This thesis examines which challenges a multinational group faces when applying OECD’s updated Transfer Pricing Guidelines (TPG) from 2017. The updated TPG is based on the base erosion and profit shifting (BEPS) project, which was completed in 2015 when OECD released their final report. The present thesis will focus on chapter 1, the updated chapter 2 about Transactional Profit Split Method from 2018, chapters 6 and 9 in TPG, and OECD’s final report about hard to value intangibles from 2018. This thesis will use a self-developed case to guide how a multinational group should apply TPG, when the multinational group faces a business restructuring with an intra-company transfer of intangibles. In this thesis reaches the conclusion that the BEPSproject and initiatives made by tax authorities have made it easier for tax authorities to see how multinational groups plan their group structure and tax affairs. When a multinational group has to define a transaction, they have to be aware that a company in a multinational group can only assume the risk if it has the financial capacity and competencies to make a decision regarding the risk. The multinational groups should make a comparability analysis for applying the arm’s length principle by trying to find comparable transactions between independent companies. In this thesis, it is concluded that when a multinational group has intracompany transactions, also when it includes intangibles, the profit shall not be given to the legal owner of the intangible. It shall be given to the companies in the group, which carry out DEMPE-functions using the assets and assumed risk in relation to the transaction. The profit which is made in the transaction shall be shared between the companies which create value for the transaction. OECD’s report from 2018 about hard to value intangibles gives guidelines on how a multinational group should find and deal with hard to value intangibles, reducing the asymmetry between multinational groups and tax authorities. Now the tax authorities have the opportunity to make income adjustments based on ex-post conditions, which may result in double taxation and a mutual agreement procedure. When a multinational group makes a business restructuring, also when it involves intangibles, the group will have to apply the separate entity approach and check that the restructuring is at arm’s length from the perspective of all companies which are affected by the restructuring. Then a potential profit is transferred in the restructuring. As a result of business restructuring, a compensation to the company in the group which transfers the economic profit potential will have to be made, which transfers the economic profit potential. OECD’s updated TPG chapter 2 about the Transactional Profit Split Method gives indicators about when the method is most likely to be used, which is when more than one company have unique and valuable contributions to the controlled transaction. Since a lot is based on subjective opinions, this may result in double taxation. The end of the thesis is a self-developed case study, which examines how a multinational group should handle a business restructuring with an intra-company transfer of DEMPEfunctions from a company (Space-Tech A/S) in Denmark to a company (ST F&U Ltd.) in Ireland by using TPG chapters 1,2, 6 and 9. This case study indicates which challenges a multinational group experience and tries to show how to deal with these.

EducationsMSc in Auditing, (Graduate Programme) Final Thesis
Publication date2019
Number of pages122