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Recharacterization of Transactions Based on Assumptions Rather Than Actual Transactions When Applying the DEMPE Approach
Observations of the Polish Fertilizer Case
Tax authorities are increasingly scrutinizing transfer pricing and other tax arrangements relating to the transfer of intellectual property within MNEs because of the difficulties in determining the value contribution of intangible assets and the high value (in terms of profits) frequently ascribed to these assets. The 2017 OECD Transfer Pricing Guidelines (OECD TPG) established the DEMPE idea as a tool for tax authorities to eventually recharacterize transactions. The decision of the Provincial Administrative Court of Poland in April discloses tax authorities’ result-driven interpretation of DEMPE analysis and recharacterizations of transactions involving intangibles.
1. Background
“Fertilizer Licence SA” (in the following: A) transferred its trademarks to B in 2013, previously financed the transfer through a cash contribution, and then, following the transfer, paid royalties in exchange for the ability to use the assets.
The tax authorities claim that situations in which one entity transfers assets to another entity, finances the transfer, and then makes payments to access those assets do not correspond with the terms that unrelated parties would arrange. To acquire such license fee...