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Definition and Identification of Intangibles Read chapter Read first chapter

2021 | OriginalPaper | Chapter

Contract Research and Development

Authors : Richard Schmidtke, Benjamin Protte, Janis Sussick

Published in: Intangibles in the World of Transfer Pricing

Publisher: Springer International Publishing

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Abstract

Outsourcing of R&D tasks to specialized legal entities within a multinational enterprise is a commonly observed practice. This chapter discusses contract R&D setups, a popular method for aligning a transfer pricing structure with intercompany R&D outsourcing. This chapter describes the core features of contract R&D structures and establishes that in a typical setup the principal entity should be in control of all value-adding strategic functions and bear all material R&D risks. However, the contract R&D service provider’s role should be limited to routine functions and it should bear only limited risks. Such a setup typically entitles the R&D principal to directly own any intangibles resulting from successful R&D activities and to capture all returns that are generated based on these intangibles. This chapter also discusses the implications of new OECD recommendations on the arm’s length profit attribution and describes commonly observed pitfalls related to contract R&D.

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Footnotes
1
See US-GAAP, FAS 2, sections 8.a and 8.b.
 
2
See US-GAAP, FAS 2.12.
 
3
See IAS 38.54 to 38.57.
 
4
See OECD (2017), Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, section 6.7.
 
5
For example, see OECD (2015), Aligning Transfer Pricing Outcomes with Value Creation, Actions 8–10, Preamble to section on Intangibles, p. 69.
 
6
Schmid (2005), Pearce (1989), Chiesa (2000).
 
7
See OECD (2017), sections 1.60–1.62, 2.61, 7.41 and for the actual delineation criteria for intercompany contract R&D transactions in particular example 16 in the “Annex to chapter VI: Examples on intangibles.”
 
8
See OECD (2017), sec. 6.35f (actual conduct); sec. 6.53–6.55 (control by principal).
 
9
Brande (2004).
 
10
See OECD (2017), sec. 6.12.
 
11
See also Stein et al. (2017).
 
12
In practice the parties might regard the financing of contract R&D activities as “project financing” rather than “corporate financing” which does imply a relatively high level of interest due to the inherent risk of R&D failures. For more details, see Schmidtke (2015), (article in German).
 
13
See Lagarden (2013).
 
14
Wilmanns and Renz (2013), p. 265.
 
15
EU Joint Transfer Pricing Forum (2010).
 
Literature
Brande. (2004). Use of Intra-Group Agreements. International Transfer Pricing Journal, 11(3), 123–127.
Chiesa, V. (2000). Global R&D Project Management and Organization—A Taxonomy. Journal of Product Innovation Management, 17(5), 341–359.CrossRef
EU Joint Transfer Pricing Forum. (2010). Guidelines on Low Value Adding Intra-group Services, Brussels, February 04.
Lagarden, M. (2013). Intangibles in a Transfer Pricing Context: Where Does the Road Lead? International Transfer Pricing Journal, 21(5), 331–346.
OECD. (2015). Aligning Transfer Pricing Outcomes with Value Creation (Actions 8–10). Paris: OECD/G20 Base Erosion and Profit Shifting Project, OECD Publishing.
OECD. (2017). Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations. Paris: OECD Publishing.
Pearce, R. D. (1989). Internationalization of Research and Development by Multinational Enterprises. Springer.
Schmid, A. R. (2005). Tax Treatment of Services: Does the Value of Patents and Technical Know-How Prevail over the Value of Marketing Efforts? International Transfer Pricing Journal, 12(1), 16–19.
Schmidtke, R. (2015). Maßnahme 8 des BEPS-Aktionsplans—Der Fremdvergleichsgrundsatz und BEPS. iStR, 4, 120–125.
Stein, S., Schwarz, C., & Holinski, N. (2017). Funktionales Eigentum und Wertschöpfungsbeitragsanalysen: Steuerliche Erfolgsermittlung bei immateriellen Werten mithilfe betriebswirtschaftlicher Konzepte. DStR, 2, 118–125.
Wilmanns, J., & Renz, M. (2013). Internationale Verrechnungspreise—Handbuch für Praktiker (265 ff). Wiley
Metadata
Title
Contract Research and Development
Authors
Richard Schmidtke
Benjamin Protte
Janis Sussick
Copyright Year
2021
Publisher
Springer International Publishing
Book
Intangibles in the World of Transfer Pricing

Print ISBN: 978-3-319-73331-9

Electronic ISBN: 978-3-319-73332-6

Copyright Year: 2021

DOI
https://doi.org/10.1007/978-3-319-73332-6_11