Intangibles and internal financing represent the most complex areas of transfer pricing due to the difficulty in valuing intellectual property and assessing risk.
Intangible Assets and the DEMPE Functions
Historically, MNEs assigned the legal ownership of patents and trademarks to paper companies in tax havens, routing all royalty profits there. Modern transfer pricing rules counter this by looking past legal ownership to the DEMPE functions:
  • Development of the intangible.
  • Enhancement of the intangible over time.
  • Maintenance of the quality and legality.
  • Protection of the intellectual property.
  • Exploitation of the asset in the market.
    Profits from intangibles must be allocated to the subsidiaries that physically perform the DEMPE activities, not just the entity holding the legal registration paper.

Intra-Group Financial Transactions
When a foreign parent company provides a loan to a domestic subsidiary, the transaction must meet market standards:
  • The Interest Rate: Must reflect an arm’s length rate based on the credit risk profile of the subsidiary, loan currency, duration, and market benchmarks.
  • Thin Capitalization / Interest Deductions: Many tax laws limit interest deductions if a subsidiary is excessively debt-heavy compared to its equity (e.g., interest deductions capped at 30% of EBITDA under BEPS Action 4).
PreviousNext