Meaning
Tax guidelines for multinational enterprises establish rules to assign the profits from intangible assets to the jurisdictions where the value is created. The oecd dempe framework requires that transfer pricing analyses focus on the development, enhancement, maintenance, protection and exploitation of intangible property. This approach prevents companies from allocating intellectual property profits to low tax jurisdictions where no operational activities occur.
Operational Audit
Tax authorities use the oecd dempe framework to identify which entities actually perform the primary functions and control the associated risks. The analysis looks past legal ownership to determine which affiliate employs the personnel responsible for managing the brand or technology. This ensures that taxable income aligns with substance.
Transfer Pricing
Pricing of internal transactions must reflect the contributions identified by the functional analysis. If a subsidiary legally owns a patent but does not participate in the development or maintenance, it is entitled only to a return under the oecd dempe framework. The residual profits must be allocated to the affiliates that execute the high value functions.
This allocation methodology prevents disputes during multilateral audits by tax offices.
Documentation Strategy
Multinational groups must record their operational activities to support their transfer pricing. This documentation must prove that the entities receiving the profits are the ones directing the development and protection strategies.
