The creation and use of intangible property in multinational enterprise groups are becoming increasingly significant in Australia. Issues relating to the creation and use of intangible property have been discussed in a number of the ATO transfer pricing rulings (for example, in paragraphs 235 and 324 of TR 94/14, paragraphs 5.39 to 5.44 of TR 98/11, and TR2011/1).
TR 97/20 notes at paragraph 2.23:
However, the general principles and guidelines in relation to tangible property concerning comparability and the selection of the most appropriate method are also applicable to intangible property.
The Organisation for Economic Co-operation and Development (OECD) has addressed a range of special considerations for intangible property in chapter VI of its 2010 Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (hereafter referred to as the OECD Transfer Pricing Guidelines). TR 97/20 notes at paragraph 1.13:
When applying Division 13 and the Associated Enterprises Articles of Australia's DTAs, the ATO follows as closely as practicable the OECD guidelines on transfer pricing methodologies for the application of the Associated Enterprises Article of the OECD Model, being the considered view of many tax administrations with extensive experience on transfer pricing.
A related issue frequently encountered in Australia is an Australian subsidiary of an offshore parent incurring marketing expenditure to develop a brand in this country. In this guide, we provide a series of examples to illustrate the ATO view on the principles for determining an appropriate reward for marketing activities performed by an enterprise in relation to a marketing intangible that it does not own.
The examples are based on the guidance in paragraphs 6.36 to 6.39 of the OECD Transfer Pricing Guidelines, headed 'Marketing activities undertaken by enterprises not owning trademarks or tradenames'. In light of this guidance, the key matters that determine our approach to such situations are:
- the contractual arrangements between the trade name owner and marketer, in particular the duration of the agreement, the nature of the rights obtained by the marketer in respect of the trade name, and who bears the costs and risks of the marketing activities
- whether the level of marketing activities performed by the marketer exceeds that performed by comparable independent enterprises
- the extent to which the marketing activities would be expected to benefit the owner of the trade name and/or the marketer
- whether the marketer is properly compensated for its marketing activities by a normal return on those activities or should share in an additional return on the trade name.
Our approach to different situations is illustrated in the examples in this guide.
The overriding consideration governing our approach is the application of the arm's length principle to the particular facts and circumstances by considering what would have been agreed between independent enterprises dealing at arm's length in similar circumstances.
The examples contain a number of assumptions, in an attempt to address some of the key features of each situation. In the complex reality of modern business, we recognise that some or all of these assumptions will not hold in all situations and that in reality the situations are likely to be more complex. Nor do the examples cover every situation that is likely to occur.
Last Modified: Friday, 19 October 2012