The Organization for Economic Cooperation and Development (OECD) recently released new transfer pricing guidelines, with stricter rules attributing profits from intellectual property that will require some multinationals to shift employees and operations to satisfy requirements.
To avoid running afoul of the guidelines, companies will have to shift operations to jurisdictions in which they do not already have an adequate presence if they want to continue to benefit from holding intangibles there, said Henry Birnkrant, head of Alston & Bird’s Tax Practice.
“Naked ownership isn’t going to work,” said Birnkrant. “Multinationals will need to move quickly to match the people and functions with the profits attributable to the IP.”
The guidance also says a “cash box entity” or a member of the group that is rich in capital but does not control the risks or perform other functions would not receive returns equal to those received by an investor that does perform important functions and controls risks.
Birnkrant said the concept that an entity has no ability to control its risks should just get a risk-free return strikes him as an overreach on the part of the OECD.
“To say that it’s a risk-free return is in essence saying there’s no substance to the transaction,” he said.
“Think about what your country-by country reporting will look like,” Birnkrant continued. “If it’s going to look as if it’s inconsistent with the guidance on intangibles, look at shifting some functions.”