Transfer Pricing Treatment of Transactions with Hard-to-Value Intangibles: Is BEPS Action 8 Based on the Arm’s Length Principle?

Abstract: This master’s thesis analyses BEPS Action 8 recommendations in relation to transactions with hard-to-value intangibles. OECD has developed them with a view to ensure that transfer pricing outcomes of transactions with hard-to-value intangibles are aligned with value creation. The author discusses whether the proposed measure is in line with the arm’s length principle – the internationally recognized foundation of transfer pricing. This discussion lays the ground for answering the next question: does the new measure lead to a risk of economic double taxation? The analysis starts with an introduction into the concepts of the ‘arm’s length principle’ and ‘intangibles’. The author exposes intrinsic flaws of the arm’s length principle and issues which intangibles bring into the transfer pricing. BEPS Action 8 recommendations allow tax administrations to rely on information obtained ex post when assessing transfer prices set for transactions involving hard-to-value intangibles. The author concludes that this approach may deviate from the arm’s length principle. As a result, associated enterprises transacting in relation to hard-to-value intangibles may face a risk of economic double taxation. The present analysis proves to be unsuccessful in finding a balance between the application of the arm’s length principle and the use of ex post outcomes by tax administrations. Even though OECD admits a problem in applying the arm’s length principle to transactions with intangibles, it fails to take a forward-looking view. Rather, it unsuccessfully attempts to squeeze emerging issues into the long-standing framework premised on the arm’s length principle. The discussion around hard-to-value intangibles shows that going beyond the existing standards may be an appropriate solution. Implementing the latter, however, would require revision of the majority of the world’s tax treaties.