Importance of intangible assets in multinationals
Intangibles are considered the main driver of value creation and an important source of sustainable competitive advantage for most multinationals; technological transformation and the digital revolution have accelerated this phenomenon, allowing intangibles to play a key role in profit generation.
However, their immaterial nature presents significant challenges in terms of valuation and location, which can generate considerable tax risks.
Challenges in the valuation of intangibles
Valuing an intangible asset is complex due to its unique nature and the lack of direct comparables, requiring specialized methods and detailed analysis. An inaccurate valuation can lead to discrepancies with the tax authorities and adjustments in transfer pricing, impacting the company’s tax burden.
Management of intangible assets and associated risks
The location of an intangible asset within the corporate structure is a strategic decision that can have significant tax implications. Since intangibles generate significant income, tax authorities may question how this income and the associated costs are allocated, especially if they consider that the structure was designed to benefit from more favorable tax regimes. To avoid transfer pricing adjustments and tax disputes, it is essential that the allocation of intangibles reflects the economic substance and the DEMPE functions (Development, Enhancement, Maintenance, Protection and Exploitation) within the corporate group.
Evolution of the international regulatory environment
In recent years, international organizations such as the OECD have intensified their efforts to combat the erosion of tax bases and profit shifting. This has resulted in the implementation of measures such as the BEPS Action Plan, which seeks to ensure that profits are taxed where real economic activities are carried out and value is created.
Recommendations for multinational companies
To mitigate the tax risks associated with intangible assets, multinational companies are advised to:
- Thorough documentation: Maintain detailed records that support the ownership, valuation and location of intangible assets.
- Periodic reviews: Regularly evaluate transfer pricing policies and ensure that they are aligned with market practices and current regulations.
- Application of the DEMPE approach: Address the tax impacts of intangibles by focusing on the functions of Development, Enhancement, Maintenance, Protection and Exploitation (DEMPE).
- Specialized advice: Have experts in international taxation who can provide guidance on best practices and regulatory changes.
Conclusion
Intangible assets are fundamental for the creation of value and sustainable competitive advantage in multinationals. However, their unique nature and the absence of direct comparables in the market complicate their proper valuation. This complexity can lead to disputes with tax authorities and adjustments in transfer pricing, affecting the company’s tax burden. Therefore, they must support their cost and expense allocations with solid documentation that proves the distribution criteria used. These measures will help to guarantee compliance with tax regulations and minimize risks associated with the management of intangible assets.
Source: Corrs