Importance of Intangible Assets in Multinationals
Intangibles are the principal driver of value creation and a major source of sustainable competitive advantage for most multinationals; technological transformation and the digital revolution have accelerated this phenomenon, allowing intangibles to play a key role in profit generation.
Conversely, their intangible nature has significant challenges regarding valuation and location, which can generate considerable tax risks.
Challenges in Appraising Intangibles
Appraising an intangible asset is complex due to its unique nature and lack of direct comparables, which require specialized methods and detailed analysis. Inaccurate appraisal can lead to discrepancies with tax authorities and Transfer Pricing adjustments, affecting the company’s tax burden.
Management of Intangible Assets and Related Risks
The location of an intangible asset within the corporate structure is a strategic decision with potentially significant tax implications. Since intangibles generate considerable income, tax authorities may question the allocation of this income and the related costs, particularly if they consider the structure was designed to benefit from tax havens. The allocation of intangibles must reflect the economic substance and DEMPE (Development, Enhancement, Maintenance, Protection, and Exploitation) functions within the corporate group to avoid Transfer Pricing adjustments and tax disputes.
Evolution of the International Regulatory Environment
In recent years, international bodies, such as the OECD, have intensified their efforts against tax base erosion and profit shifting, which resulted in implementing measures, such as the BEPS Action Plan, which intends to ensure the taxation of profits where real economic activities take place and value is created.
Recommendations for Multinational Enterprises
In order to mitigate the tax risks related to intangible assets, multinational companies should have:
Comprehensive documentation: Maintain detailed records supporting ownership, appraisal, and location of intangible assets.
Periodic reviews: Regularly evaluate Transfer Pricing policies and ensure alignment with current market practices and regulations.
Application of the DEMPE approach: Address the tax effects of intangibles by focusing on the Development, Enhancement, Maintenance, Protection, and Exploitation (DEMPE) functions.
Expert advice: Have international tax experts who can guide you on best practices and regulatory amendments.
Conclusion
Intangible assets are critical to value creation and sustainable competitive advantage in multinationals. Conversely, their unique nature and the absence of direct comparables in the marketplace hinder their proper valuation. This complexity can lead to disputes with tax authorities and Transfer Pricing adjustments, affecting the company’s tax burden. Therefore, they should support their cost and expense allocations with solid documentation to substantiate the allocation criteria used. These measures will help ensure compliance with tax regulations and reduce risks associated with intangible asset management.
