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August 29, 2018

The Guidance for Tax Administrations on the Application of the Approach to Hard-to-Value-Intangibles was approved by the Inclusive Framework on BEPS on 4 June 2018; this report, which now comprises an appendix to Chapter 6 of the OECD Transfer Pricing guidelines: Special Considerations for Intangibles, was published on 21 June 2018 and the guidance comes into effect immediately. In this latest edition of Tax Advisor Update, Deyan Mollov takes a timely look at what the new guidance entails.

What is a Hard-to Value Intangible (HTVI)?

HTVI covers intangibles or rights in intangibles for which, at the time of their transfer between associated enterprises:

  1. no reliable comparable transactions exist; and,
  2. at the time the transfer of the HTVI (the transaction) was entered into, the projections of future cash flows or income expected to be derived from the transferred intangible, or the assumptions used in valuing the intangible are highly uncertain, making it difficult to predict the future performance of the intangible at the time of the transfer.

Why is this guidance deemed necessary?

The purpose of the HTVI approach is to protect tax administrations from being disadvantaged by information asymmetry (i.e., their reliance on information provided by the taxpayer that they cannot independently verify) by ensuring that tax administration can consider ex-post outcomes as evidence about the appropriateness of the ex-ante pricing arrangements. It is noted that, in parallel, the taxpayer will have the possibility to rebut the administrations approach by demonstrating the reliability of the information supporting the pricing methodology adopted at the time of the controlled transaction. Accordingly, this guidance aims at reaching a common understanding among tax administrations and taxpayers on how to apply adjustments resulting from the application of the HTVI approach.


The guidance covers three major areas:

  1. The principles that underlie the application of the HTVI approach by tax administrations;
  2. A few examples clarifying the application of the HTVI approach in various scenarios;
  3. Interaction between the HTVI approach and the access to Mutual Agreement Procedures (MAP) under the applicable tax treaties.

Ex-post evidence should not be used without the consideration of whether the factors affecting the ex-post result could have been reasonably considered at the time of the controlled transaction between the related parties.

When an HTVI is transferred in circumstances where it is necessary to apply the arm’s length standard, both the transferee and the transferor are expected to have prepared a robust valuation, based on experience and expertise specific for the asset / industry / sector / expected synergies, etc. available at the time of the transaction. The issue for the tax authorities is that they would not necessarily have the experience and information in order to be able to understand and objectively evaluate the assumptions, information and conclusions of the analyses since this information will be solely provided by the taxpayer.

Tax administrations are required to identify and act upon HTVI as early as possible. Any application of the HTVI approach by a particular administration should be performed in a manner to promote tax certainty for taxpayers and to avoid double taxation resulting from a primary adjustment (which considers only that particular jurisdiction’s local laws and regulations).

Pricing adjustments

In applying the HTVI approach, tax administrations may introduce appropriate adjustments, including adjustments which completely alter the pricing mechanism from the original ex ante pricing applied by the taxpayer, to the extent that (i) such pricing is in line with what would happen between independent companies in similar circumstances and (ii) such pricing mechanisms take into consideration the valuation uncertainty at the time of the controlled transaction.

The application of the HTVI approach should be underpinned by the following principles:

  1. Where HTVI approach applies, tax administrations can consider ex-post outcomes as evidence about the reasonableness of the assumptions of ex-ante pricing;
  2. Ex post outcomes inform the determination of the valuation that would have been made at the time of the transaction; however, it would be incorrect to base the valuation on the actual income or cash flows without taking into account whether the associated enterprises could or should reasonably have known and considered the information related to the probability of achieving such outcome;
  3. Where a revised valuation shows that the intangible was transferred at an undervalue or overvalue compared to the arms length price, the revised price of the transferred asset may be assessed to tax, taking into account any applicable pricing adjustments and/or contingency payments;
  4. Tax administrations should apply audit practices to ensure that presumptive evidence based on ex-post outcomes is identified and acted upon as early as possible.

Exemptions from the HTVI approach

There are a number of exemptions where the HTVI approach does not apply. These are as follows:

(1) Situations where the taxpayer provides:

  1. Details of the ex-ante projections used at the time of the transfer to determine the pricing arrangements, including how risks were accounted for in calculations to determine the price (e.g., probability-weighted), and the appropriateness of its consideration of reasonably foreseeable events and other risks, and the probability of occurrence; and,
  2. Reliable evidence that any significant difference between the financial projections and actual outcomes is due to:

a) unforeseeable developments or events occurring after the determination of the price that could not have been anticipated by the associated enterprises at the time of the transaction; or

b) the playing out of probability of occurrence of foreseeable outcomes, and that these probabilities were not significantly overestimated or underestimated at the time of the transaction (guidance on what “significantly” means is provided in (3) below).

(2) Where the transfer of the HTVI is covered by a bilateral or multilateral advance pricing arrangement in effect for the period in question between the countries of the transferee and the transferor.

(3) Cases where a significant difference between the financial projections and actual outcomes mentioned in 1.2 above does not have the effect of reducing or increasing the compensation for the HTVI by more than 20 percent of the compensation determined at the time of the transaction.

(4) When a commercialisation period of five years has passed following the year in which the HTVI first generated unrelated party revenues for the transferee and in which commercialisation period any significant difference between the financial projections and actual outcomes mentioned in 1.2 above was not greater than 20 percent of the projections for that period.

The exemptions listed above, including the measurement of materiality and time periods, will be reviewed by 2020 in light of further experience.

Key takeaways

The new guidance on HTVI presents tax administrations with a disproportionately powerful tool to review and restate transactions with the benefit of hindsight, and without seemingly giving full consideration of the risks of the tested arrangement, in a manner contemporaneous to the tested transaction.

In a similar fashion, the examples provided in the guidance do not present scenarios which demonstrate what an unbiased assessment from tax authorities on the outcomes from the pricing of HTVI would be, and how ex-ante probabilities may be adjusted based on ex-post evidence.

The way forward for taxpayers is therefore to prepare detailed analyses and extensive documentation to be able to demonstrate what the underlying contemporaneous assumptions, risks, and inputs were and how these were weighted when arriving at a final transfer value. Wherever possible, taxpayers may consider valuations where it will be more likely than not that any predictable change in the value of the transferred asset would still keep the valuation in the 20 percent safe harbour range.

Finally, the guidance encourages taxpayers to use the APA program to agree on HTVI values. Within the context of an APA, many tax authorities will lose the possibility for a one-sided adjustment as any change to the taxable result from the tested transaction would automatically require the buy-in of the other administration.

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