New OECD Guidance on Hard-to-value Intangibles, Profit Split Method

On June 21, 2018, the OECD released two reports setting out key guidance on the application of the approach to hard-to-value intangibles, and on the application of the transactional profit split method, as part of its work on base erosion and profit shifting (BEPS) project.

Hard-to-value Intangibles

The first report contains guidance for tax administration on the application of the approach to hard-to-value intangibles (HTVI). The guidance is aimed at reaching a common understanding and practice among tax administrations on how to apply adjustments resulting from the application of this approach, the OECD said.

The new guidance should improve consistency and reduce the risk of economic double taxation by providing the principles that should underlie the application of the HTVI approach, the OECD said. The guidance also includes a number of examples to clarify the application of the HTVI approach in different scenarios and addresses the interaction between the HTVI approach and the access to the mutual agreement procedure under the applicable tax treaty. This guidance has been formally incorporated into the Transfer Pricing Guidelines as an annex to Chapter VI.

Profit Split Method

The second report contains revised guidance on the profit split method, developed as part of Action 10 of the BEPS project. This guidance has been formally incorporated into the Transfer Pricing Guidelines, replacing the previous text on the transactional profit split method in Chapter II.

The revised guidance retains the basic premise that the profit split method should be applied where it is found to be the most appropriate method to the case at hand, but it significantly expands the guidance available to help determine when that may be the case. It also contains more guidance on how to apply the method, as well as numerous examples.

See: Guidance for Tax Administrations on the Application of the Approach to Hard-to-value Intangibles and Revised Guidance on the Application of the Transactional Profit Split Method