Interacción de las Reglas de Precios de Transferencia y las Disposiciones CFC

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Elements of the structure

- Transfer of IP under a cost-sharing arrangement

The essential element of this tax-planning structure is that the buy-in payment made for acquiring the rights in the IP transferred under a cost-sharing agreement may not be arm’ s length. MNE groups are capable of transferring the IP within the group at a non-arm’ s length price, as the ap- plication of the arm’ s length principle with regard to the IP can be very challenging due to the lack of comparable uncontrolled transactions. A non-arm’ s length transfer price would allow the other associated enterprise (i.e. the

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- S. Simontacchi & K. van Raad, Materials on TP and EU Tax Law, 14th edition (International Tax Center Leiden 2014), vol. 2, at 2408, para. 8.38.

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enterprise paying the lower price than it should have paid if the enterprises were independent) to realize extraordi- nary returns. Consequently, if this structure is properly implemented, it would enable the MNE groups to accu- mulate a considerable amount of profit in a low-tax juris- diction and therefore, retain that profit untaxed or lowly taxed before the repatriation to shareholders.

The fact that MNE groups manipulate tax bases and seek to minimize the taxes payable is also mentioned in the document, “Present Law and Background Related to Pos- sible Income Shifting and Transfer Pricing”, prepared by the Staff of the Joint Committee on Taxation of the US Congress (“the Document” or “the Joint Committee Docu- ment”). The Joint Committee Document states that the IP rights may be centralized in a low-tax jurisdiction or in a country where the local entity can receive a favourable advance pricing agreement.9 According to the Document, such relocations of IP could lead to a reduction of the US tax base.10 Moreover, it states that one way to transfer the IP to a low-tax jurisdiction could be to make a buy-in payment for the rights to the existing IP, and to agree to share the future development costs (i.e. to enter into a cost- sharing agreement).11 According to the Joint Committee Document, another way to transfer the IP could be the licensing of the rights to make and sell the products outside

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- US: Staff of the Joint Committee on Taxation (SJCT), Present Law and Background Related to Possible Income Shifting and Transfer Pricing (JCX- 37-10) (2010), at 9, available at www.jct.gov.

- SJCT, supra n. 9, at 10.

- Id.

368 INTERNATIONAL TRANSFER PRICING JOURNAL SEPTEMBER/OCTOBER 2016 © IBFD[pic 8]

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the United States.12 Further, the Document provides that regardless of the manner in which the buy-in payment is made, it should equal the net present value of the trans- ferred IP rights.13 The Document also provides that if the buy-in payment is not arm’ s length, the foreign associated enterprise (usually tax resident in a low-tax jurisdiction) will benefit from the IP transfer.14

The difficulty in applying the arm’ s length principle to high profit potential IP is recognized by many countries, including the United States. According to the Joint Com- mittee Document, as a consequence of this difficulty, Con- gress amended section 482 of the Internal Revenue Code in 1986 by adding the commensurate-with-income prin- ciple.15 The Document implies that this amendment was required due to severe transfer pricing problems regard- ing the valuation of high profit potential IP.16 According to the Document:

the commensurate with income principle was intended to address these problems by shifting the focus of transfer pricing analysis to the income actually derived from exploitation of the transferred intangible, and away from the identification of questionably com- parable third party transactions.17

Moreover, the Document states that, by this amendment, Congress wanted IP valuation to be based on the profits actually realized, and to make appropriate adjustments in the case of substantial differences.18 Therefore, by intro- ducing the commensurate-with-income principle, Con- gress attempted to end transfer pricing manipulations regarding transfers of high profit potential IP.

According to the Joint Committee Document, the view of the Internal Revenue Service (IRS) differs from that of several commentators who consider the commensurate- with-income approach to be applied on an ex-post basis and, consequently, to be inconsistent with the arm’ s length principle.19 Moreover, the Document states that the IRS considers the commensurate-with-income standard as a clarification of the existing arm’ s length principle, and that the former standard is applied on an ex-ante basis.20 The Document continues that, according to the IRS, the commensurate-with-income principle would indicate the amount of profit that the taxpayer should have reasonably anticipated at the time of the transfer of the IP under the controlled transaction.21

Another country taking into consideration the specifici- ties of the IP is Germany. Germany carried out a corpo- rate income tax reform in 2007.22 That reform introduced

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Interaction of Transfer Pricing Rules and CFC Provisions

a standard that resembles the US commensurate-with- income principle. The particular provision was incorpo- rated in section 1, paragraph 3, sentence 11 of the Foreign Tax Code (Aussensteuergesetz). Eigelshoven and Stember23 state that it is not clear whether the legislation applies only to the transfers of intangible property or to transfers of functions as well.24 Cauwenbergh and Lucas Mas provide the following unofficial translation of the German provi- sion:

[I]f in cases of 5th and 9th sentences essential intangible assets and advantages are object of the business dealing and the actual profits development differs substantially from the profit develop- ment that was the basis for the estimation of the transfer prices, it has to be assumed disputable that at the time when the deal was concluded uncertainties concerning the price agreements existed and unrelated parties would have agreed on an appropri- ate adjustment provision.25

Therefore,