Intellectual Property Commercialization & Cross-Border Transfer Pricing: Challenges for Applying an Arm’s Length Principle to Intellectual Property related Transactions by Multinationals and Possible Solutions - Insights from China, Australia, and Germany

Publication Type:
Journal Article
Currents: International Trade Law Journal, 2019, XXIII pp. 3 - 26
Issue Date:
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In the current globalized and knowledge-based economy, intellectual property (IP) and intangible assets (IA) abound throughout the business world, and touch nearly all aspects of a company, from product development to human capital, and staff functions to line operations. In 1975, tangible assets represented 83 per cent of the value of the Standard & Poor 500, and intangible assets only 17 per cent. But, in 2015, intangible assets represented 87 per cent of value and tangible assets only 13 per cent. IP has become the major value driver in the global value chains of Multinational Enterprises (MNEs). Correspondingly, given its impact of on business profit allocations between affiliates within a MNE group, IP is also the ‘most controversial transfer pricing issue’ in current tax legislation and tax audit practice. This article examines the major challenges of implementing the existing international tax laws to IP related cross-border transfer pricing activities by MNEs, particularly the applications of Arm’s Length Principle to IP related transactions. By drawing on insights from the recent development of transfer pricing laws in China, Germany, and Australia, and their legal responses to the G20/OECD’s Base Erosion and Profit Shifting (BEPS) Action Plan and the OECD Transfer Pricing Guidelines, it provides some useful suggestions for countries’ to reform their existing laws to address the IP-related transfer pricing challenges brought by MNEs. It contends, when conducting law transplants, each country needs to fully understand both advantages and potential problems of Transfer Pricing laws in other countries, and needs to conduct law reform in a critical, creative and practical way. It is imperative to ensure that the law reform fits in the special economic and social circumstances of individual countries
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