Assessing the implication of Revised Transfer Pricing Regulations on Intangibles

Intangible assets are crucial for businesses, serving as key differentiators that drive revenue, manage costs, or achieve both objectives. Businesses often make substantial investments in developing, enhancing, maintaining, and protecting unique and valuable intangibles to gain a competitive edge. For instance, technology companies invest in Research & Development (R&D) for breakthrough technologies, while consumer markets businesses focus on advertising and brand promotions.

When entities engage in intangibles transactions with related parties, determining appropriate compensation for the intangible asset becomes imperative. However, assessing these transactions is challenging due to the nature of intangibles—non-physical assets that are difficult to identify, determine ownership, and value accurately. As a result, intangibles transactions pose a high-risk exposure to taxpayers in Transfer Pricing (TP).

The revised TP Regulations offer guidance on analyzing intangibles transactions, addressing their value and treatment. This article explores this guidance, discusses its implications, suggests ways to mitigate TP risks, and proposes changes to the TP Regulations to reduce the risk of double taxation and enhance the ease of doing business in Nigeria.

Defining Intangibles: While the revised TP Regulations do not explicitly define intangibles, the OECD Transfer Pricing Guidelines provide a comprehensive definition. According to paragraph 6.6 of the OECD Guidelines, intangibles are “something which is not a physical asset or a financial asset, capable of being owned or controlled for use in commercial activities, and whose use or transfer would be compensated if it occurred in a transaction between independent parties in comparable circumstances.”

To qualify as an intangible, an asset must meet specific criteria, such as being a non-physical or financial asset, capable of ownership or control for commercial use, and subject to compensation in a transaction between independent parties under comparable circumstances.

The OECD Guidelines further categorize intangibles into marketing and trade intangibles. Marketing intangibles pertain to activities that facilitate the commercial exploitation of a product or service, with significant promotional value. Examples include trademarks, trade names, customer lists, and customer relationships.

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