Transfer pricing can be a relevant area of law for data-driven business models of multinational enterprises (MNEs) or their data management function in general.
'Transfer pricing' is the set of rules that governs the allocation of business profits generated by an MNE group to its individual member entities involved in a certain business activity. This allocation then governs each jurisdiction’s right to tax its portion of the profits under its tax laws.
Transfer pricing as a risk
Some regulators have seen transfer pricing as an aggressive tax planning tool, aiming to shift profit to low-tax jurisdictions and thereby reducing a MNE’s overall tax burden. Indeed, there are currently well-known big cases around this issue in the press.
However, for most MNEs, transfer pricing can pose a potentially significant business risk: uncertainties in transfer pricing (and there are many of them) may lead to the same profit being taxed in more than one jurisdiction. Such double (or multiple) taxation can severely hit after-tax profits, in particular if margins are slim. Therefore, security in transfer pricing is paramount for virtually every MNE when introducing and structuring a new product line.
Transfer pricing disputes
Unfortunately, advance pricing arrangements with tax authorities are not available everywhere or, where available, are often subject to enhanced scrutiny (sometimes even under EU state aid laws). If no pre-agreement is found with tax authorities, often high-volume tax disputes may arise between the states involved, battling for 'their' piece of the overall tax cake.
Many jurisdictions (in particular in emerging markets) still do not provide for an effective dispute resolution mechanism in such bilateral transfer pricing matters, so there is a risk that a dispute may remain unresolved, leaving the burden of double taxation with the taxpaying MNE.
What the OECD is doing
In most countries, transfer pricing is governed in practice by a body of soft law: the OECD's transfer pricing guidelines (OECD TPGs).
These aim to substantiate the arm’s-length principle and were amended on 23 May 2016 to incorporate the main findings of the OECD’s 2015 BEPS (base erosion and profit shifting) reports. Core areas of these reports were, among others, intangibles (or IP in general) and the digital economy. The amended OECD TPGs have a broad understanding of intangibles, which will also cover data (and their use) in many cases.
The aim of the OECD TPG is to align transfer-pricing outcomes with value creation. Accordingly, also for data-driven business models, an analysis of the value chain will be the starting point of any transfer-pricing analysis.
For data-driven business models, this can be a difficult exercise: the valuation of personal data and even more of anonymous or machine data is complex and highly context-dependent.
Also the analysis of the value chain (eg from the collection, organisation and processing of raw data to the sale/licensing of a final data product to a customer) can be a challenge.
However, it is necessary in order to allocate the overall profit to the various value contributors appropriately (eg through arm’s-length sales prices in a buy/sell situation or licence fees in a royalty model).