OECD proposes to allow hindsight in evaluating transfer pricing of intangibles

Tax administrators would be allowed to use hindsight to evaluate the appropriateness of transfer-pricing decisions made by companies in transactions involving hard-to-value intangible assets under an approach proposed by the Organisation for Economic Co-operation and Development (OECD) on Thursday.

The OECD’s discussion draft looks at the issue of arm’s-length pricing of intangible assets when the valuation of those assets is uncertain at the time of the transaction. It also explores special considerations for hard-to-value intangibles.

The discussion draft was released under Action 8 of the OECD’s Action Plan on Base Erosion and Profit Shifting (BEPS), which requires the OECD to develop an approach to hard-to-value intangibles. It is difficult for tax administrations to verify the arm’s-length pricing of certain intangible assets and therefore to verify the reliability of the information taxpayers submit when defending their transfer-pricing arrangements. These intangibles can be hard to value because no sufficiently reliable comparable sales exist and there is a lack of reliable projections of future cash flows or income expected to be derived from the transferred intangible.

The discussion draft proposes an approach to determining the arm’s-length pricing arrangements, including any contingent pricing arrangements, that would have been made between independent enterprises at the time of the transaction. Under this proposed approach, tax administrators would be able to look to after-the-fact evidence of the actual financial outcomes of the transaction to determine the appropriateness of the pricing arrangement. However, to use this approach, the tax administrator will be required to determine “that such evidence is necessary to be taken into account when and in so far as there is no other information to assess the reliability of the information on which ex ante pricing has been based.”

Under current OECD guidelines, the use of hindsight is prohibited when evaluating transfer-pricing arrangements (OECD Transfer Pricing Guidelines ¶2.130).

The draft says that this hindsight approach should be used “only in situations where the difference between ex post outcomes and ex ante projections is significant, and where such a difference is due to developments or events that were or should have been foreseeable at the time of the transaction.” And it lays out situations where the approach must not be used, including where the taxpayer provides full details of its before-the-transaction projections used to determine the transfer price.

While the approach is to be used only where there is a significant difference between the projections and the actual outcomes of a transaction, the draft does not define “significant difference.”

The OECD invites comments on whether “significant difference” should be defined, as well as on the approach in general. Comments should be submitted to the OECD by June 18th.

Alistair Nevius ( is CGMA Magazine’s editor-in-chief, tax.