OECD BEPS Action #8 - Thoughts on the Guidance on Transfer Pricing Aspect of Intangibles

When it comes to an interpretation of a certain treaty provision, Article 31 of the Vienna Convention on the Interpretation of Treaty dictates that such interpretation should give the provision its ordinary meaning. 'Ordinary meaning' could be understood as commonly accepted meaning by the general public. What has always been puzzling to me is how one should resolve a situation where two parties debate on the exact meaning of a treaty provision or terminology, and those parties are coming from completely different cultural backgrounds and where that which is plain and ordinary to one party could be completely absurd to the other. 

Before OECD announced and thereby finalized its  4-year long project on the Guidance on Transfer Pricing Aspect of Intangibles (the "OECD Guidance"), people had a fairly clear sense of the term 'intangible', or more precisely, 'intangible asset,' since nearly every OECD member state had its own legal or accounting definition of whatever constitutes "intangible." Not all such definition were perfect, but at least both taxpayers and tax authorities knew exactly what was being said and meant. So at least in everyone's mind, there was a sense of what was an ordinary meaning for 'intangible.'

Now, let's look at OECD's new 'ordinary meaning' of (para. 6.6, OECD Report) (or, at least what OECD wants everyone to accept as given):

“The word 'intangible' is intended to address something which is not a physical asset or a financial asset, which is capable of being owned or controlled for use in commercial activities, and whose use or transfer would be compensated had it occurred in a transaction between independent parties in comparable circumstances. Rather than focusing on accounting or legal definitions, the thrust of a transfer pricing analysis in a case involving intangibles should be the determination of the conditions that would be agreed upon between independent parties for a comparable transaction.“

Two interesting observations can be made about the definition:

• Jail-breaking: as mentioned in the above definition, the focus has been deliberately shifted from the accounting and legal hemisphere - which constituted the ordinary meaning (or convention) all this time -  to the arm's length hemisphere where all kinds of fictitious claims may be attempted.
• Bond-severing: Breaking away from the legal or accounting context would sever bonds that existed between intangibles and the context/manners in which those intangibles were traditionally exploited. For instance, it was impossible to separate the notion of control from that of ownership, especially when the latter is protected by the law. Most countries with civil law systems have specific laws and regulations in place both establishing and protecting basic property ownership, and the notion of control is usually inseparable from property ownership. The new definition, however, implies that such laws/regulations may be overridden when applying the arm's length principle, which is another way of saying that a mere fiction may override a fully binding and effective legal structure under certain circumstances  

Even if we can forgive these two points, what does this definition point to in the end? What is the point of referring to 'something' when intangibles could be easily identified had it not for this arbitrary definition?

Is this an enlightenment to the true semantics of "intangibles"? Perhaps. Is the meaning ordinary?  Well, nobody can say for sure. But one thing has become quite obvious: the multinationals will now have tons of work to do, especially when they have IP (intangible property) holding structures with the ownership of IP and the value-creation functions separated. They may also have to look out for any human activities with profit potential which might be targeted as a constructive source of income by the non-reluctant tax authorities.