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HMRC internal manual

International Manual

Transfer pricing: Types of transactions: intangibles: what are intangibles?

What are intangibles for transfer pricing purposes?

It is more straightforward to grasp the concept of transactions involving physical, or tangible, goods. If a house constructed by a property development company would be sold by estate agents to the public at £500,000 then it is easy to spot that this is the arm’s length price, and the sale of the house is the provision and the underlying transaction.


Business is not just concerned with the sale of tangible goods, however. The sale or exploitation of intangibles is equally important.


Questions regarding intangibles are perhaps the most complex in transfer pricing. The OECD Transfer Pricing Guidelines recognise this complexity by having a whole chapter on intangibles - ‘Special Considerations for Intangibles’ (Chapter VI).


From a transfer pricing point of view, Paragraph 6.6 of the of the OECD Transfer Pricing Guidelines defines an intangible as something which is not a physical or financial asset, which is capable of being owned or controlled for use in commercial activities, and whose use or transfer would be compensated had it occurred in a transaction between independent parties in comparable circumstances.


A “financial asset” is not an intangible for transfer pricing purposes and is defined by a footnote to Paragraph 6.6 as “__any asset that is cash, an equity instrument, a contractual right or obligation to receive cash or another financial asset or to exchange financial assets or liabilities, or a derivative. Examples include bonds, bank deposits, stocks, shares, forward contracts, futures contracts, and swaps”.


For example a biotech company may discover a chemical compound that potentially could cure the common cold. The biotech company patents the compound but does not have the infrastructure or the finance to properly develop it and market any resulting drug. Instead it grants a licence in respect of the patent to a large pharmaceutical multinational enterprise to develop and market the compound in exchange for a lump sum and royalties on the eventual sale of the drug. This is something that could happen between independent parties and for which payment would clearly have to and would be made by the licensee.


By contrast, a company owns know-how relating to the manufacture of personal home computers. The know-how is relatively old, and has been superseded by newer technology and associated patents have expired. In fact the technology to manufacture the PCs is now well known and easy to acquire. The company grants an affiliate a licence to manufacture the PCs, which are then sold by other associated companies. The manufacturer, if independent, would not enter into a licence arrangement in respect of the know-how, as it could obtain it for free elsewhere (and hence would not pay anything to use it).


Arguments as to whether certain provisions would have been put in place between independent persons are considered in more detail in INTM440150.


There are (at least) four vital, somewhat interrelated questions to ask when considering transactions involving intangible property in the context of transfer pricing.


  • Is there actually any intangible property needing to be considered?
  • If there is, who owns it?
  • If there is, would it be worth anything at arm’s length?
  • If so, what would an independent pay to use it? (Or what would an independent charge for somebody else to use it?)


All answers to these questions will always be a matter of fact and degree.


Are there actually any intangibles that needs to be considered?


Intangible property protected by some sort of legal framework demonstrably exists. Consider critically claims that other intangibles exist merely because some activity has been going on. For instance, the mere fact that a distribution company has been selling a range of goods does not mean that a marketing intangible automatically exists. The existence and ownership of a registered trade mark or trade name will be clear cut but the existence and ownership of claimed marketing intangibles such as access to market may be less so. Carefully consider assertions that operations in a particular market create an intangible merely because of factors peculiar to that market. For example, the intrinsic, potential size of a market does not mean that a company operating in that market owns a valuable marketing intangible. See INTM440140 for further discussion about establishing the arm’s length price of an intangible.


Who owns the intangible?


It is necessary to consider both ultimate legal ownership (for example, in whose name title to a patent or other intellectual property is registered) and subsidiary rights (for example, a licence or other agreement entered into by the ultimate legal ownership of intellectual property permitting another party to use that property under specified conditions).


Would the intangible have any value at arm’s length?


Always consider the facts carefully to decide whether a third party would pay or charge for the intangible. Valuing intangibles can be difficult, and is complicated by issues such as exploitation over a period rather than outright sale, relative values of different types of intangibles, and who created and owns the intangible.


Even if it could be shown that an intangible does exist, be aware of the zero option - it may not be worth anything.


Establishing the arm’s length price for transactions involving intangibles is considered in more detail at INTM440140.


Review the facts to ascertain whether an intangible is actually being used. A company may be paying to use one trade mark but actually using something different. It is possible that prices for goods being sold already include a charge for intangibles.


What would be paid at arm’s length for the intangible?


The price struck for intangibles between independent enterprises will reflect their relative bargaining positions which will be affected by their individual perspectives and the options realistically available to each of them. See also INTM440120.