How to Identify: Tax/Transfer Pricing

From a tax or transfer pricing perspective, the identification of intangibles is a critical step in determining ownership, and in turn, determining which party is eligible to receive income from that IP.  Intangibles can either be remunerated, i.e. royalty payments, or used free of charge by other group companies (often in good faith).  In case of free of charge access to the intangible, no agreement will be in place, which makes it difficult to determine the existence of such intangible assets.  

Procedures used by tax and transfer pricing specialists to identify intangibles include:

• Interviews with relevant officers involved with the development or usage of IP.  For example, the responsible person for research & development in a multinational will be able to provide indications of protected/unprotected patents or not yet finalized R&D projects, which may ultimately result in a registered patent.
• An industry analysis investigating relevant industry IP could provide details about existing IP within the multinational, particularly in cases where it has not been registered, protected, or capitalized in the balance sheet.
• A functional analysis can identify IP according to its functional characteristics (protectable or not, published or not, registered or not, willingness from customer to pay IP premium or not, multiyear positive contribution of cash flow of multinational).