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HMRC internal manual

International Manual

HM Revenue & Customs
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Transfer Pricing: Types of transactions: Intangibles: Establishing an arm's length price for valuable intangibles: Hard to Value Intangibles

The OECD Guidelines recognise that where intangibles are of uncertain valuation, as is frequently the case, tax administrations might find it difficult to establish or verify the reasonableness of projections used to value a particular intangible using an ‘income’ valuation approach (see INTM440140). There will often be an asymmetry of information between the tax administration and the MNE group regarding what information was available or was taken into account by the relevant associated enterprises in pricing any particular transaction involving intangibles. Consequently, the Guidelines detail an approach to be taken with regard to what are termed “hard to value intangibles” which enables tax administrations to consider ex post outcomes as presumptive evidence as to the reasonableness of the  projections used on an ex ante basis to determine the pricing of a transaction involving transactions between associated enterprises.


Hard to value intangibles (“H.T.V.I.”s)


The Guidelines define a ‘hard to value intangible’ as an intangible in respect of which:


  1. no reliable comparables exist, and
  2. at the time the transaction was entered into, the projections of future cash flows or income expected to be derived from the transferred intangible, or the assumptions used in valuing the intangible are highly uncertain,


Situations in which the existence of a ‘hard to value intangible’ is likely include those where:


  • the intangible is only partially developed at the time of the transfer.
  • the intangible is not expected to be exploited commercially until several years following the transaction.


  • the intangible does not itself fall within the definition of ‘hard to value intangible’ but is integral to the development or enhancement of other intangibles which does fall within that definition
  • the intangible is expected to be exploited in a manner that is novel at the time of the transfer and the absence of a track record of development or exploitation of similar intangibles makes projections highly uncertain.
  • the intangible is either used in connection with or developed under a CCA (see INTM421090)or similar arrangements.


Exemptions from the ‘hard to value intangibles’ approach


The approach will not apply where any one of the following exemptions applies:


  • the MNE group provides:


  1. details of the projections used at the time of the transaction to determine the pricing arrangements, including risk-weightings or adjustments used and how the appropriateness of these was determined; and,
  2. reliable evidence that any significant difference between the financial projections and actual outcomes is due to either (a) unforeseeable developments or events occurring after the determination of the price that could not have been anticipated by the associated enterprises at the time of the transaction; or (b) the playing out of probability of occurrence of foreseeable outcomes, and that these probabilities were not significantly overestimated or underestimated at the time of the transaction;


  • the transfer of the HTVI is covered by a bilateral or multilateral advance pricing arrangement in effect for the period in question which covers the transaction in question


  • any significant difference between the financial projections and actual outcomes does not have the effect of reducing or increasing the compensation for the HTVI by more than 20% of the compensation projected at the time of the transaction


  • a commercialisation period of five years has passed following the year in which the HTVI first generated unrelated party revenues for the transferee and in which commercialisation period any significant difference between the financial projections and actual outcomes was not greater than 20% of the projections for that period.


Approach to be taken in the case of a controlled transaction involving a hard to value intangible


Where a transaction between associated parties involves a hard to value intangible and none of the exemptions apply, *ex post *outcomes can be considered by HMRC as presumptive evidence regarding the appropriateness of the *ex ante *pricing arrangements, the reasonableness of the assumptions used in determining those arrangements and, consequently, the extent to which they comply with the arm’s length principle.

Such consideration can include the structure of the arrangements including any contingent pricing arrangements that might have been entered into at arm’s length. It might be appropriate in some cases to undertake a multi-year analysis