In this article, discussing a series of transfer pricing
(TP) economic and regulatory technical challenges and solutions
for global multinationals, Managing Director Yves Hervé
and Associate Director Philip de Homont focus on the use of
DEMPE analysis to identify economic ownership and substantiate
comparable uncontrolled price (CUP) studies.
In TP audits around the world, tax authorities are starting
to use the development, enhancement, maintenance, protection,
and exploitation of intangibles (DEMPE) concept that was
recently established by the OECD. In particular, tax
authorities stipulate that local entities in their geographies
have conducted DEMPE functions for intangibles that they
license from group companies and that, therefore, the royalty
should be lowered – or disregarded entirely.
This development requires a new approach by taxpayers, both
for setting their IP remuneration and for TP documentation and
tax audit situations. One challenge is that, while DEMPE is
becoming ubiquitous, the definition offered by the OECD is very
NERA has established a procedure to address the open points
of the DEMPE analysis. Our method follows a combination of
qualitative economic reporting that shows how these functions
are exercised, and quantitative analysis of the relative
importance of these functions. Over the past year, NERA has
performed several DEMPE studies in tax audits and for TP
studies, and applied the results to calculate profit splits or
defend benchmarking studies of comparable licence agreements.
In all cases, it was key to analyse the economic underpinning
of the concrete DEMPE functions in order to see the overall
value creation contribution.
In the first case, we were asked to defend a CUP analysis
for a trademark licence agreement between a licensor in the US
and a licensee in Mexico. For the audit period, which predated
the new OECD guidelines, the Mexican tax authorities challenged
the CUP studies and demanded a DEMPE analysis.
NERA analysed the facts and could show that the US company
developed the brand originally and performed strategic
management to enhance the brand (e.g. periodical rebranding
activities and concepts for new online distribution channels).
It also provided guidance for local marketing activities (e.g.
branding material) and centrally registered the trademarks. On
the other hand, the local licensor performed local marketing
activities and exploited the brand value to generate sales.
In the next step, the insights of the DEMPE analysis were
used to test if this contribution split is similar to contracts
between unrelated third parties (i.e. we reviewed the functions
and responsibilities assigned in third-party contracts). Many
brand licensing contracts demand the licensee to perform
certain marketing activities under the strategic guidance of
the licensor. NERA demonstrated that the selected CUP
benchmarks were comparable in the functional split between
licensor and licensee.
In a second project, NERA performed a DEMPE study to support
a profit split analysis and measure contributions of two
entities to the joint creation of valuable technologies.
A multinational group had acquired an Austrian company, and
soon started to use both the umbrella brand of the group and
the company's previous name. In the next TP audit, tax
authorities started to question the brand royalty, stipulating
that the value was primarily due to the local brand and that
the international umbrella brand was essentially worthless.
NERA proceeded to undertake an interview-based survey of
internal experts. Qualitatively, it was possible to establish
the various forms of contributions to the respective brands,
such as platform intangibles, trade fair exhibitions, and
rebranding initiatives. More importantly, following a rigorous
selection of interviewees, we collected a substantial number of
responses. The analysis showed that the value was indeed
derived from the combination of umbrella and local brands; the
market-facing experts could identify the contribution of the
umbrella brand in detail.
This allowed the establishment of a profit split methodology
based on the relative contribution to the intangibles, and
ultimately showed that the trademark royalty for the umbrella
brand was arm's length.
Yves Hervé (email@example.com) and
Philip de Homont (firstname.lastname@example.org)
NERA Economic Consulting
Tel: +49 69 710 447 502 and +49 69 710 447 508