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Transfer Pricing for CFOs/ Tax Heads (Learning Byte 05)

What's the'Hard' in 'Hard to Value Intangibles'?

Intangibles by definition are unique and hard to benchmark. This begs the question why OECD has coined the phrase "Hard to Value Intangible' (HTVI) -since aren't all Intangibles difficult to Value?

HTVI are set apart from other Intangibles by certain characteristics making valuation more challenging:

•The intangible is only partially developed at the time of the transfer

•It is not expected to be exploited commercially until several years following the transaction

•It is expected to be exploited in a novel manner, making reliable projections from past developments unavailable

•It is transferred to an associated enterprise for a lump sum payment (there more difficult to benchmark)

•It is used in connection with, or developed under, a cost contribution arrangement or similar arrangements

It is integral to the development of other hard-to-value intangibles

Key point is non availability of past record of performance for building forecaste or projections. OECD recommends that subject to safeguards actual results could be referredtoforjudgingHTVIvaluation.

Judging intangible valuation based on hindsight has its inherent dangers and puts taxpayer on a slippery ground. Hence, the need of tremendous caution while valuing HTVIs.

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