Transfer Pricing the Technology

• Author: Muris Dujsic & Tony Anderson
• Pages: 373-399

373

Chapter 15

Transfer Pricing the Technology

muris dujsic & tony anderson*

A. INTRODUCTION

Technology can be def‌ined broadly for the purposes of this article, from

categories of items, such as computer software and computer hardware, to

more specif‌ic items, such as the points of presence of wholesale telecom-

munications companies in foreign countries. While t he items that may

be def‌ined as technology may have differing c haracteristics, the concepts

underlying the treatment of each of t hese types of tec hnology for the pur-

poses of transfer pricing are similar. For this reason, throughout this article

we have used the term technology in a generic manner.

Technology through the med ium of transfer pricing provides consider-

able opportunities for a multinational company (MNC) to manage its cash

f‌lows and global effective tax rates. Transfer pricing refers to the pricing of

the sale of goods, transfer of intangible property, and provision of services

between entities within a multinational organization.

Transfer pricing allows for opportunities that can be accessed without

the need to shift the physical infrastructure of a company; all that is re-

quired is good planning skills and a knowledge of transfer pricing pr in-

ciples. While the upside from a well-managed transfer pricing policy can be

favourable, the downside can be damaging. Large transfer pricing adjust-

ments from local tax authorities, such as the billion-dollar tax assessment

* The authors would li ke to thank Jonathon McCart hy for his assistance in the prepa ration of

this art icle.

374 muris dujsic & tony anderson

recently handed to GlaxoSmithKline by the United States Internal Revenue

Service (the IRS);1 transfer pricing penalties; interest; and large revenue

streams trapped in high-tax jurisdictions, which reduce the c ash f‌low and

raise the global effective ta x rate of the MNC, are not uncommon.

Technology, in the context of transfer pr icing, does not refer to the

mechanics of an operation, t he physical output of a process, or a single

product; rather it refers to the thought, research, and development that have

gone into developing that operation, process, or product. The output of this

thought, research, and development can be def‌ined i n many ways, but is

commonly referred to as the “intangible property”2 of a company.

This chapter will provide t he reader with an overview of the transfer

pricing of intangible propert y as it relates to tec hnology. It will chart the

opportunities and threats to an MNC from transfer pricing and the prin-

ciples that such a company should be aware of in setting its transfer pricing

policy. To do this, the chapter will focus on the following three overarching

issues:

Identif‌ication and ownership — when does intangible property ex ist? •

And, who owns the intangible property?

Development strategies — how can intangible property be st rategic-•

ally developed?

Pricing issues — how can inta ngible property be priced in certain •

transactions?

The disc ussion in this chapter wil l be based on the Canadian tra nsfer

pricing guidelines, and legislation and guidelines published by the Organi-

sation for Economic Co-operation and Development (OECD) entitled Trans -

fer Pr icing Guidelines for Multinational Enterpr ises and Tax Administrations

(OECD Guidelines).3 The OECD Guidelines have been used by a large num-

ber of tax jurisdictions around the world, including Canada, as the basis for

their transfer pricing legislation and gu idelines.4

1 T his was an assessment made by the IRS to Gla xoSmithKline Holdings ( Americas) Inc. for

the years (cumu latively) 1989 to 2000.

2 The terms “inta ngible asset” and “intan gible property” are used i nterchangeably through-The terms “int angible asset” and “inta ngible property” are u sed interchangeably throug h-

out this chapter.

3 These g uidelines, initial ly published in July 1995 [OECD Guidelines], were an up date to the

OECD Report, Transfer Pr icing and Multinati onal Enterpris es (Paris: OECD, 1979).

4 For an example of other countr ies’ reliance on the OECD Guidelines, se e the Australian

Income Tax Assess ment Act 1936, s. 136AD.