The digitalization of the economy
In most industries, digitalization is leading to changes – large and small – in the value chain of multinational groups. The digitalization trend means companies are reviewing their business and operating models. Increasing demand of consumers for online purchasing is just one example of market developments driving important choices for companies with traditional and digital business models alike: what business model? what value drivers? will new technologies be introduced and for what purpose – to automate the supply chain or more fundamentally as a backbone to addressing customer demand – and where will these new technologies come from?
Outsourcing and / or acquisition may be required, in relation to technology for example. Third party development may be an appealing start and prime facie raises fewer transfer pricing issues. However, important questions need to be addressed early on, e.g. which legal entity(ies) in the group will be responsible for overseeing that third party relationship, how will these new developments fit with the broader business and tax model of the group. Over time, changes or additions made to that initial outsourcing / acquisition will also need to be tracked and remunerated. In other words, should the value of that intangible be attributed to the old, previously performed activities of the outsourced / acquired group or rather to the newly performed development functions? Or both?
In short, what will the DEMPE functions (and financial contributions) linked to these changes in the value chain look like over time?
The (post) COVID-19 crisis
The COVID-19 pandemic has brought substantial changes in the economy, and intangibles were likely not excluded. New ways of doing business and/or with different teams / legal entities may have emerged in times of limited travel.
Some may argue that it just accelerated the digitalization trend mentioned above, for example for multinationals with important retail operations who were already facing the digitalization challenge prior to the crisis.
Beyond some of the potential tax risks that may be created due to temporarily dislodged (including DEMPE-linked) employees, international remote working is becoming a new reality under review by many multinationals. Companies are having to address fundamental questions around business and tax models. Key roles connected to the value creation of intangibles will need to be analyzed carefully in this context.
Increased business restructuring and/or merger and acquisition activity may also be expected following the pandemic. When a group merges or acquires another group, it might acquire intangibles. Contributions to the value of the acquired intangibles – past and future – should be identified as early as possible and adequately remunerated. Other groups may undergo business restructurings as they seek to diversify or streamline their product / service portfolio. Important questions around the contributions to those intangibles (e.g. central? local? split?) will need to be addressed. Because these contributions tend to happen over time, a certain planning horizon needs to be anticipated for transfer pricing purposes.