Transfer pricing associated with intellectual property presents some of the most challenging international tax issues faced by companies in a multinational group.
Transfer pricing issues are complicated by the intangible nature of IP - IP is highly mobile and easily transferred from one country to another, unlike other assets such as factories which are significantly more difficult to move.
The use of IP as a means of relocating profit from one tax jurisdiction to another is well recognised by most revenue authorities and the OECD. The Australian Taxation Office noted recently a 95% increase in royalty payments made by Australian companies to international related parties in the past 10 years, compared with only 49% growth in payments made to Australian companies by international related parties. It identified the transfer of IP out of Australia and associated royalty/licensing payments as the single biggest risk to Australia’s tax base.
The ATO has immense powers to make adjustments to a company’s taxable income if they believe the Australian transfer pricing guidelines have not been met. The Diverted Profits Tax was recently introduced to combat transfer pricing and sits alongside the Multinational Anti-Avoidance Law, the reconstruction provisions of the Australian transfer pricing legislation, the country-by-country reporting guidelines as well as Part IVA.
In this environment it is vital that companies ensure they are able to withstand the scrutiny of tax authorities and demonstrate that IP transfers are made at ‘arm’s length’.