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Let’s kill the ‘economic owner’

Intercompany Agreements

22 September 2023

The limited uses – and much greater disadvantages – of the term 'economic owner'

I’ll start by making it very clear that in the headline of this post I’m talking figuratively, and purely for the purposes of transfer pricing. I hope that goes without saying...

The term ‘economic owner’ may in some limited cases be a useful shorthand, in the context of intangible assets held by multinational groups. At a stretch, you could possibly say that it fits with the concept of DEMPE analysis under the OECD TP Guidelines. But it doesn’t really.

The term ‘economic owner’ is not actually used in the OECD TPG. And DEMPE analysis as prescribed in the TPG does not say that intangibles are regarded as being owned by the entities which carry out DEMPE functions.

The OECD TPG actually says that entities should be compensated on an arm’s length basis for functions performed, assets used, and risks assumed or managed. That’s very different. Because an entity may receive compensation without being an owner (or a holder of rights).

Problems arise when the term ‘economic ownership’ or ‘economic owner’ is masking sloppy thinking. Because the likely result is TP documentation that describes a controlled transaction which doesn’t actually exist, and which is therefore impossible to manage in legal and operational reality.

The aim should always be to design a TP arrangement in which four things are aligned: commercial substance, legal substance, operational practice and economic analysis. Any material failure in that alignment is going to lead to problems in the future.

That’s why the starting point for TP analysis of intangibles is always to identify the intangibles involved (which must be something which is capable of being owned or controlled) and the associated risks and contractual/legal rights.

To my mind, the concept of ‘economic ownership’ is nothing but a hindrance in this endeavour. What’s your view?

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Article by
Paul Sutton
LCN Legal Co-Founder

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