Transfer pricing of intangible assets in the US, the OECD and Australia: Are profit-split methodologies the way forward?

In the 21st century, the number one international tax issue of interest to multinational enterprises (MNEs) is undoubtedly transfer pricing. The reason for this is that as global trade increases, so too does the uncertainty of the tax treatment of inter-affiliate transactions across national boundaries and the spectre of double taxation. The Australian Deputy Commissioner of Taxation has outlined the concept of transfer pricing as follows: 'Broadly, transfer pricing relates to the setting of prices by multinationals for the goods and services that they supply to related parties. It also covers the structuring of transactions and financial relationships, and how innovation happens and is rewarded.'

The OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (the OECD Guidelines) make it clear that the concept of transfer pricing should not be confused with that of tax fraud, or of tax avoidance, even though transfer pricing transactions may be utilised for such purposes. A number of international tax specialists have also stressed that incorrect references to transfer pricing as 'income-shifting' obfuscate a clear analysis.

A paper prepared by the United Nations Secretariat in 2001 has described transfer pricing as 'probably the most important tax issue in the world'. Referring to the fact that over 60 percent of international trade is carried out within MNEs, the paper also refers to the impact which intangible property has had on this trade. Both US and Australian tax practitioners have acknowledged that some of the most difficult transfer pricing issues have always been in the area of intangible property. The tax treatment of intangible assets therefore warrants particular attention in the transfer pricing context.