I’d like to share an approach for creating an overview of transactions involving intangibles, and see whether you have any ideas for improving it. (When we did this with our ICA Healthcheck tool we received a lot of interesting suggestions, which we applied to create an improved version, so if you haven’t tried it out yet then please do.)
It’s a table that we use when analysing forward-looking TP policies involving intangibles, to make sure that they are robust and that they make sense in the round. Although it’s very high level – because we’re usually looking at a bundle of different asset types, functions and risks – it’s still a lot more detailed than the analysis that we usually find in TP policies.
There are some aspects of DEMPE analysis which may be overlooked, and the key purpose of the table is to avoid this. In particular:
- Performance of DEMPE functions is not the same as control of DEMPE functions, and those aspects may need to be compensated separately
- Assumption of risk is not the same as control of risk, and those aspects need to be considered separately
You may wonder about the two columns headed ‘Reward’. One aspect of ‘reward’ as regards intangibles is the financial ‘deal’, such as a profit split arrangement. Another is the ownership of improvements in intangibles which are generated in the course of the arrangement. This is a key commercial consideration in arrangements between unconnected parties. So it must, by definition, also be a key consideration in applying the arm’s length principle.
I’ll be very interested to hear your thoughts. Do you think this kind of table is useful? How would you improve it?
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