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Transfer pricing

TRANSFER PRICING

RoyaltyRange royalty rate database is a preferred source of comparable data for European transfer pricing practitioners.

Transactions involving intangibles often require complex transfer pricing analysis and following recent developments in transfer pricing legislation of many European countries and the OECD this analysis has become increasingly difficult. The OECD has been working to develop guidance on transfer pricing of intangibles for several years, but recently this has assumed greater attention and importance as a result of BEPS (Base Erosion and Profit Shifting) initiative.

OECD Transfer Pricing Guidelines and the Guidance on Transfer Pricing Aspects of Intangibles (Action 8 of the BEPS initiative) emphasise the importance of finding the most reliable comparables. This is especially relevant for European transfer pricing purposes due to the limited number of potentially comparable agreements available for the analysis.

Territory

A common challenge that arises when conducting European transfer pricing analysis is finding a sufficient number of potentially comparable agreements which cover Europe as a licensed teritorry.

Due to specific regulations of European countries and the OECD, territory may be a significant comparability factor and agreements covering territories other than Europe may not be sufficiently comparable for European analysis purposes.

Where comparable transactions in the local market can be identified, those local market comparables will provide the most reliable indication of arm's length remuneration for intangibles.

RoyaltyRange database only contains agreements which specifically cover Europe (certain European countries) as a licensed territory or cover Europe in a wider worldwide context.

Comparability

Transfer pricing practitioners often need to manually analyse tens or hundreds of potentially comparable agreements just to find a few agreements relevant for transfer pricing analysis.

The Guidance on Transfer Pricing Aspects of Intangibles (Action 8 of the BEPS initiative) expands the list of factors that should be taken into account in a comparability analysis and all these factors are analysed in RoyaltyRange database, including exclusivity, extent and duration of legal protection, geographic scope, useful life, stage of development, rights to enhancements, revisions and updates, and expectations of future benefits.

RoyaltyRange database analyses each agreement for more than 50 standardised comparability factors which are presented in easy to use form. The information is accurate, detailed and does not require further manual analysis of the agreements.

Licensing period

One of the most important comparability factors is the licensing period of the agreement. Although older agreements may be technically comparable, not all agreements may be suitable for transfer pricing analysis due to market maturity, cycle, practice differences, and other factors. As an example, IT licence agreements dating back to the 1990s featuring 20–30% royalty rates may have the comparable licence object, royalty base, etc., but nonetheless be non-comparable.

RoyaltyRange database contains only the most recent licence agreements.

The role of functions and risks

The Guidance on Transfer Pricing Aspects of Intangibles (Action 8 of the BEPS initiative) maintains focus on which entities are undertaking or controlling functions and risks related to development, enhancement, maintenance and protection of intangibles (DEMPE). Particular significance is attached to the design and control of research and marketing programmes, management and control of budgets, control over strategic decisions regarding intangible development programmes, decisions regarding defense and protection of intangibles, and ongoing quality control.

Guidance on Transfer Pricing Aspects of Intangibles (Action 8 of the BEPS initiative) clarifies that companies of a group performing important functions, controlling economically significant risks and contributing assets, as determined through the accurate delineation of the actual transaction, will be entitled to an appropriate return reflecting the value of their contributions. In other words, each member of the multinational enterprise group should receive‎ arm’s length compensation for the functions it performs.

Uncontrolled transactions

Following one of the main principles in transfer pricing, only comparable transactions between unrelated parties should be taken into account.

Agreements in the database were typically concluded between unrelated parties.

Compatibility

In European transfer pricing analyses of various transactions, European-specific NACE codes are typically used. For the analysis of intangible transactions the codes are usually converted to SIC codes.

RoyaltyRange database was specifically designed to allow for searches using not only US SIC codes, but also European-specific NACE codes. Such options may provide greater consistency with other benchmarking searches.

The OECD Guidance on Transfer Pricing Aspects of Intangibles (Section D.2.4. paragraph 6.130 of the final Action 8 report) states that it is important to assess whether publicly available data drawn from commercial databases and proprietary compilations are sufficiently detailed to permit an evaluation of the specific features of intangibles that may be important in conducting a comparability analysis. In some circumstances where reliable uncontrolled transactions cannot be identified, a transactional profit split method may be utilised to determine an arm's length allocation of profits for the sale of goods or the provision of services involving the use of intangibles.

RoyaltyRange database was specifically designed to address the above-mentioned issues and facilitate European transfer pricing studies. RoyaltyRange database provides easy-to-use, reliable and detailed data on the most recent uncontrolled transactions covering Europe. The data is fully compliant with the OECD regulations and will facilitate any complex transfer pricing analysis of intangibles.