What are intangibles?

  

WHAT ARE INTANGIBLES?

Article – August 2017 | RoyaltyRange

Anna Siarheichyk, Manager
Anna Siarheichyk, Manager

In its simplest form, an ‘intangible’ is something that belongs to a company but is not a physical or financial asset – e.g. intellectual property or organizational know-how. Whenever a company’s intangible assets are used for commercial purposes by another party, a royalty rate has to be paid – a fixed value or a percentage (depending on the license agreement) of the revenue gained through their use. For such transactions, companies need to carry out thorough transfer pricing analyses for the estimation of royalty rates or valuation of intangibles, ensuring that their pricing for related-party transactions is comparable to what it would be if the same transaction were to be made by two or more unrelated parties.

Anna Siarheichyk, Manager
Anna Siarheichyk, Manager

The OECD’s definition of ‘intangibles’

Understanding the exact definition of ‘intangibles’ is important for being able to conduct an effective transfer pricing benchmarking study or ensure a reliable valuation of intangibles. The Organisation for Economic Co-operation and Development (OECD) has provided clear definitions for the term. On October 5th 2015, it published the final report on the ‘Transfer Pricing Aspects of Intangibles’ – titled ‘Aligning Transfer Pricing Outcomes with Value Creation’ – under Action 8 of its Base Erosion and Profit Shifting (BEPS) initiative. The report says the term ‘intangible’ “is intended to address something which is not a physical asset or a 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” (Paragraph 6.6 of Section A).

Identifying intangibles

Action 8 indicates a number of different items that can be characterized as intangibles for transfer pricing. These include: patents; know-how and trade secrets; trademarks, trade names and brands; rights under contracts and government licenses; and goodwill and ongoing concern value. Action 8 also specifies items that cannot be called intangibles when it comes to transfer pricing, such as market-specific qualities (like local purchasing power), group synergies and assembled workforces. The OECD highlights the importance of being specific when it comes to identifying intangibles for transfer pricing. It also says analyses should take into account things like the ways intangibles add value to transactions and interact with other intangible and tangible assets – helping to ensure accurate valuation.

Here at RoyaltyRange, our royalty rate database fully complies with the recommendations of the final Action 8 report under the OECD BEPS initiative. We help organizations access reliable comparables data so that they can value intangibles fairly. To find out more about our database, or the role of intangibles in transfer pricing, contact us at RoyaltyRange today.

Anna Siarheichyk, Manager

 

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