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Transfer Pricing Forum: December 2017

Transfer Pricing Forum: December 2017

Transfer Pricing Forum: December 2017

Services or Intangible Property

1. If a senior manager or management team is relocated into or out of your jurisdiction, does your country have a view about whether the transfer is purely a services transfer, or includes an intangible asset such as goodwill (or even workforce in place); or of an intangible such as profit potential?

In cases where the transfer of a senior manager or management team could potentially be treated as a transfer of IP, the most difficult questions which would arise are:

  • How to identify the intangible (i.e., whether valuable experience is transferred, whether the team itself and its internal way of cooperation brings value, whether the team has developed some process know-how, knows trade secrets, brings valuable ideas, etc.)?
  • How to value the intangible?


The valuation is closely linked to the ability to identify the object (i.e., IP). In practice, it is a quite difficult exercise as these types of IP are not recorded on the balance sheet of a taxpayer (i.e., off-balance sheet IPs).

In addition to the accounting and legal definition of an intangible, OECD Guidelines provide a definition of intangibles for transfer pricing purposes as: ‘‘. . .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.’’

Based on this definition, in deciding whether a company has transferred an intangible asset or provided services by transferring management employees, it is important to analyze:

  1. whether the company has lost control over the identified asset or assets due to the contemplated transfer;
  2. whether the company can still use the asset or assets in its commercial activities; and
  3. whether the company would have expected a compensation if a transfer was performed to an independent counterparty.


An important point also to consider is that Chapter VI of the OECD Guidelines does not explicitly con-sider workforce in place as an intangible, because the ownership requirement cannot be met with respect to employees.

Generally, a transfer of a senior manager or management team does not itself constitute a transfer of an intangible. However, it can be the case when, for in-stance, a management and main operational team of a Belgian enterprise – which has been working together for many years and managed to develop a valuable process, and acquire know-how or other IP – is moving to a newly established foreign entity. This could mean that the core business activity has been transferred in its totality to another entity. It can be clearly seen by comparing the pre-transfer and post-transfer potential and ability to generate a cash flow by the newly established entity.

In fact, the classification of a management relocation transaction does not have a unified approach from the Belgian tax authorities. Analysis is done on a case-by-case basis, examining the circumstances of each particular case to see if any intangibles have been transferred. Note that there has been a tendency for Belgian tax authorities to pay closer attention to all transactions which lead to a shift of profits to foreign jurisdictions.


2. What factors would be considered to determine how to characterize this transfer? In particular, might it make a difference whether it is a single person or a group of managers?

There are indeed some factors which would be useful to consider when deciding whether the transfer of senior manager or management team has resulted in transfer of IP. We would advise to consider the following:


Consideration of whether an employee has been transferred to the payroll of another entity, is the most straight-forward exercise we would advise to start the analysis with. Where employees stay legally bound and controlled by their initial employer, the risk of having a transfer of an IP might be lower.

Contractual arrangements

It is important to clearly distinguish whether the transfer of personnel is based on secondment arrangements, permanent transfer arrangements or supply of services. Legally binding agreements and the wording used therein will have a material effect on the classification of the nature of transfer, as well as on types of financial settlements between the entity sending and the one accepting employee(s). For instance, under a secondment arrangement employees of company ‘‘A’’ are temporarily transferred to entity ‘‘B’’ to perform their functions remaining on the payroll of company ‘‘A’’. From a transfer pricing perspective, it is accepted that for the period of secondment, all costs incurred by company ‘‘A’’ with respect to activities of a secondee are recharged at cost / at cost plus a mark-up to company ‘‘B’’. These transactions are more linked to the supply of services, rather than to transfer of IP, as company ‘‘A’’ still keeps control over the asset and can expect future benefits from its exploitation.

Reporting lines

It is also useful to investigate how the reporting lines will change as a result of a transfer. If company ‘‘A’’ has transferred a senior manager or a management team to company ‘‘B’’ and this management maintains accountable and reportable to company ‘‘A’’, one would argue that neither control, nor expectation of future benefits were lost by company ‘‘A’’ and, there-fore, there was no transfer of IP.

Impact on functional profile

One of the most important parts of the analysis would be an investigation of changes in functional profile of both entities upon the transfer of personnel. If, for instance, transfer of the management team can lead to cease of the entire activity in company ‘‘A’’ (that can be the case in consulting business), shifting it to company ‘‘B’’, with high level of probability we can speak about transfer of IP. Let’s imagine a consulting group of companies with offices in Brussels and in London. Brussels office specializes in tax, legal, audit and real estate consulting, while the office in London is involved in technical, environmental, and management consulting. All consulting areas are operationally independent from each other, have their own management, their own customer lists and a recognized branded name. The group decides to move the management team of real estate consultancy department from Belgium to the United Kingdom. The functional profile of both entities as well as their potential to generate cash flow will change significantly upon the transfer. In this case, it is more likely that the Belgian tax authorities will claim that there was a shift of profits resulted from transfer of valuable IP for which Belgian tax-payer needs to be compensated.

Benefit to the recipient company

This stage of analysis is pretty similar to the ‘‘Impact on functional profile’’ stage. However, we would focus more on the technological knowledge which can be transferred with a senior manager or team of managers. Close attention should be paid to whether the recipient entity has already been acquiring such technical knowledge before the transfer itself, or whether this is brand new knowledge to the entity.

Industry specifics

Finally, it is useful to consider some industry specifics. For instance, in the highly automated manufacturing industry, the move of a management team might have a less significant change in the operational process of the entity. Moreover, its potential to generate profits would less likely be affected. On the other hand, in personality driven and creative industries (e.g., R&D, consulting, IT, artists activities etc.), a move of only one key employee can lead to a significant change.

As to the question on the relocation of a senior manager or group of managers, we believe that there is no a direct correlation between the number of employees transferred and the classification of transaction. Impact on the functional profile and the potential to generate cash flow is much more important in this case.


3. What difference might the duties of the management team make? (For example, suppose this was a sales person or team, as opposed to a management team? Or an R&D group?)

Certainly, a difference exists between the transfer of senior management level employees and execution team members. The more advanced character of work done and decisions taken by an employee, the greater value he / she brings to a company. Moreover, senior management has the ability to affect the cash flows of a company, for instance, they may have close business relationships with clients. Another point which bares importance is the ability and cost for an entity to replace the transferred employee with another specialist. One would argue that if person can easily be replaced without a qualitative loss to a company’s business, then there was no valuable IP transferred with the transfer of employee.

In the case of an R&D working group transfer, it is not just the matter of the actual transfer of employees that is of importance, but rather the instrument that has the ability to develop IP. In independent comparable circumstances a company would be willing and will be entitled for compensation for the transfer of an IP creating instrument.

Valuing the Item Transferred

Are there any local tax or valuations rules or conventions on such valuations? How would the Hard-To-Value Intangibles concepts apply?

There are no local tax and valuation rules in Belgium, except for those generally accepted in the OECD framework. Belgian transfer pricing audit department, as well as Belgian ruling commission accept applicability of commonly used valuation techniques (i.e., discount cash flows (DCF) analysis, Multiples analysis and/or CUP analysis).

In a case where the transfer of management is considered to be a transfer of an intangible, one should analyze whether it can be considered to be a Hard-To-Value intangible or not. Belgian tax authorities will attempt to claim it was a Hard-To-Value if the intangible transferred proves to be successful after transfer. However, we make reference to the OECD Guidelines as to the definition of a Hard-To-Value intangible.

Supporting the Company Position

What features does a transfer pricing policy need in order to use it to support a calculation of this value reliably (given that the management team provides current services but may also be involved in important intangible asset DEMPE decisions)?

One of the most important features of each transfer pricing policy is clarity and detail in describing facts and evaluating circumstances surrounding the transaction. We recommend ensuring an upfront, high-standard and ongoing documentation of DEMPE functions.

Apart from the preparation of transfer pricing documentation reports, it will also be important to ensure consistency in the way the transfer of management functions is being presented in the Master File and Local File Forms.

It is also recommendable to describe in board meeting notes which persons have been transferred, why they have been transferred, who is benefiting from the transfer and who made the decision.


Dirk Van Stappen, Yves de Groote and Kateryna Maksiutina

Original Source: Bloomberg Tax


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