When it comes to determining the value of intangibles, there are three broad churches, the market approach, which looks at comparable intangible assets being sold, the cost approach, which examines how long it would take and how much it would cost if a company were to recreate the intangible, and the income approach, favoured by the OECD, which looks at the royalty income a company gains from possessing the asset.
“It’s a reasonable business person’s approach,” said Keith Reams, global and US transfer pricing leader for clients and markets at Deloitte.
The panel noted that while transfer pricing methods go by different names, such as the comparable uncontrolled transactions and profit split, they broadly correspond to financial valuation methods for intangibles.
“It’s more of less the same, just named something different,” said Jutta Menninger, a partner at PwC in Germany.
Transfer pricing and financial valuation methods share a strong alignment in concepts and calculation.
However the panel noted that financial valuation methods may not distinguish between the legal entities relevant to transfer pricing. They also may not focus on whether the transfer prices that influence the revenues, costs and profit are demonstrably arm’s length.
The panel also pointed out that financial valuation methods may not distinguish between the jurisdictions in which deductions are taken, a key factor in the transfer pricing of intangibles which can incur development expenses.
“We’re still discussing whether we need new transfer pricing methods for intangibles, but they’re widely accepted in practice,” said Michelle Levac, chair of OECD Working Party 6.
Moderating the session, Holly Glenn, principal economist at Baker & McKenzie in the US, pointed out that while transfer pricing and financial valuation methods are essentially the same discipline, “the financial valuation world has much richer literature with lots of practical examples which are very helpful”.
Glenn said that there is not as much literature on the transfer pricing side, despite the overlap, and argued that providing practical examples would be a good lesson for the OECD to take from the panel.
