Transfer Pricing of Intangibles and the Effect of OECD’ Pillar 1on the Income Distribution in Multinational Danish Corporations

Elsa Steinhólm & Henrik Djursgård

Student thesis: Master thesis


This thesis examines the rules for transfer pricing (TP) of intangibles and analyses the expected impact of OECD’s Pillar One (Pillar 1) on the remuneration of intangibles in Danish multinational corporations. Using an integrated legal and economic analysis, it first examines the current rules and challenges in using the arm’s length principle, then the aim and impact of Pillar 1 on the remuneration of intangibles.
The aim of Pillar one is to solve the tax challenges arising from the digital economy. This thesis concludes that Pillar 1 does not change the rules for treatment of related party transactions with intangibles in general. It does however change the use of the arm’s length principle with formula allocation of profits to market jurisdictions and a fixed profit level for baseline distribution and marketing activities. A case study developed for this purpose illustrates the remuneration of intangibles under the current use of the arm’s length principle and the changes in the remuneration when implementing Pillar 1.
This thesis finds that the current rules are based on the legal and financial ownership of the intangible regarding contribution, control and the assumption of risk related to the DEMPE-functions. The arm’s length price is determined by a 6-step analysis where both parties’ realistic alternatives must be considered. In order to avoid the tax authorities’ use of ex post results for hard-to-value-intangibles, measures such as milestone payments or price adjustment clauses can be used actively by the Danish multinational corporations. Furthermore, the thesis presents a method of identifying all relevant intangibles and related transactions within a corporation, that address the challenges and is in accordance with the arm’s length principle.
Pillar 1 has a dual aim: The taxation of businesses with automated digital services and consumer faced business activities, through an Amount A, and the simplification of the TP-rules in relation to baseline distribution and marketing activities, through Amounts B and C.
Amount A creates a new taxation right where a portion of the deemed residual profit is distributed to the market jurisdictions. This is not in line with the arm’s length principle as it targets revenue from unrelated parties. Amount A will decrease the residual profit and the remuneration of intangibles. The expected impact of Amount A on the remuneration of intangibles is largely dependent on whether calculations will be based on separate business lines or on the consolidated corporation; whether or not deficits in one business line can be subtracted from the residual profit of another. The analysis shows that 10 Danish corporations are expected to be within the scope of Amount A.
Amount B sets a fixed remuneration of baseline distribution and marketing activities. This will impact the remuneration of intangibles as it changes the level of routine profit to be allocated. The difference between fixed and current profit levels will determine the impact. The case study illustrates that Amount B has the potential to account for the largest impact from Pillar 1 on the remuneration of intangibles. The purpose of Amount C is to remunerate all non-baseline distribution and marketing activities, following the general use of the arm’s length principles for TP with intangibles. The case study, however, shows that if the change in definitions from routine to baseline activities affects the remuneration of an activity, the introduction of Amount C can have an impact on routine profits.
The work on Pillar 1 is ongoing and the final form is yet to be decided upon by the OECD membership countries.

EducationsMSc in Auditing, (Graduate Programme) Final Thesis
Publication date2020
Number of pages126