On 23 May 2017 the OECD issued a public discussion draft entitled Implementation Guidance on Hard-to-Value Intangibles. The draft is issued under Action 8 of the project on base erosion and profit shifting (BEPS) and invites comments on the guidance by 30 June 2017.
The recommendations of the final report on BEPS action 8 included provisions on the treatment of hard to value intangibles (HTVI). The provisions aimed to protect tax administrations from any negative effect resulting from information asymmetry at the time of the transaction in intangibles by allowing the tax administration to consider ex post outcomes as presumptive evidence of the appropriateness of ex ante pricing arrangements.
Under the recommended rules the taxpayer was given the possibility to demonstrate the reliability of the information supplied in support of the transfer pricing at the time of the transaction, and there were also a number of exemptions where the approach would not be applicable.
The discussion draft issued by the OECD relates to the practical implementation of these rules and sets out the principles with examples of how the rules would apply in real life situations.
The guidance states that it would not be correct for the tax administration to revise its valuation of the transaction only on the basis of the actual income or cash flows received without also considering the probability, when the transaction took place, of those outcomes being achieved.
The draft also notes that the time elapsing between the transaction and the emergence of the ex post outcomes may not tie in very well with tax audit cycles or administrative or statutory time periods, especially where the intangibles have a long incubation period and so income is not earned until a long time after the transaction in intangibles has taken place. Tax administrations should therefore be identifying transfers of intangibles that are potentially HTVI and evaluating the assumptions made by the taxpayer in its transfer pricing, in addition to looking for information on developments leading to ex post outcomes that may not correspond to those assumptions.
This should be done even where the outcomes take place in periods after the years under audit. By identifying transfers of HTVI at an early stage and acting on the presumptive evidence the tax administration can avoid any difficulties with statutory time limits for audit and reassessment. However countries could also consider introducing a statutory requirement for taxpayers to notify them of a transfer or licence of an intangible that falls within the definition of an HTVI.
The application of the OECD approach to HTVI follows certain principles:
- Where the HTVI approach is applicable the tax administration can take into account ex post outcomes as presumptive evidence of the appropriateness of the ex anti pricing arrangements.
- The ex post outcomes are used in determining the correct valuation of the transaction but the tax administration cannot just base the valuation on the actual income or cash flow without also considering the probability of achieving that income at the time of the transaction.
- The revised valuation can be assessed to tax after taking into account contingent payments and price adjustment clauses.
- The audit practices of the tax administration should ensure that presumptive evidence based on ex post outcomes is acted upon as soon as possible.
After setting out examples of the application of the above principles the draft also notes the importance of the application of the mutual agreement procedure to resolve cases of double taxation resulting from the application of the approach to HTVI.