Most contemporary developments in transfer pricing relate to intangibles. Appropriately coping with increasingly highly integrated value chains constitutes another driving force. This article examines the application of the arm’s length principle in the context of a related-party transaction characterized by integrated collaboration among decentralized business units and the joint utilization and development of intangibles. While the underlying theoretical transfer pricing concepts will be touched upon, we aim to present a case-based application of the arm’s length principle. The pragmatic approach presented in this article aims to support practitioners navigating the tradeoff between finding arm’s length solutions for increasingly complex, digitized organizations and effectively utilizing available internal data for transfer pricing purposes.
While the OECD recently started tinkering with formulary apportionment approaches for marketing intangibles in the context of the Pillar 1 reforms, day-to-day transfer pricing remains focused on applying transfer prices that are commensurate with the arm’s length principles. As such, Chapter VI of the OECD Transfer Pricing Guidelines of 2017 remains perhaps the most important source of reference for practitioners when it comes to intangibles. The same applies to Chapter VIII when it comes to cost contribution arrangements (CCAs). For this article, it is deemed sufficient to limit the references to Chapter VI and Chapter VIII of the OECD guidelines.
The OECD guidelines were updated in January 2022 (as this article was prepared), but the concepts discussed herein remain valid, and thus, the references were sustained.