A Tale of Two Technologies: Transfer Pricing of Intangibles In the Digital Economy

BY PAT BRESLIN, BATES WHITE ECONOMIC CONSULTING P erhaps it is neither the best of times nor the worst of times, but tension is building between multinational companies and tax authorities residing in various capitals around the world, particularly where tax and technology issues intersect. From Paris to London, from Bombay to Beijing, and from Tokyo to Washington, D.C., there is intense scrutiny on fiscal concerns amid rapid globalization and technological advances. Collectively, these trends are having dramatic effects on economic activities and relationships. In the international tax context, these economic trends are neither a background nor a mere ‘‘sign of the times.’’ They actually pose a direct challenge to the existing international tax regime, rules, and regulations, and they increasingly put multinational companies and tax authorities in conflict. Witness, for example, the U.S. Internal Revenue Service claims recently made public against Amazon.com, alleging that the major e-commerce company misreported $2.2 billion of taxable income outside of the United States, primarily in a lower tax jurisdiction, Luxembourg. There are considerable numbers of similar tax controversies at various procedural stages, if not yet filed in U.S. Tax Court, while similar cases are heard in other courts around the world. This article will focus on economic analysis of technology adoption and how technology and other intangible property is priced outside the controlled context of intercompany transactions—that is, at arm’s length. Intangibles valuation issues central to much of this tax controversy will be addressed, in direct reference to relevant global efforts spearheaded through the OECD’s draft revised transfer pricing guidelines on such issues. In particular, economic models applied in other relevant contexts will be considered, including those involving technology related to digital and mobile commerce. Such contexts include analyses applied with respect to ‘‘fair, reasonable and nondiscriminatory’’ (FRAND) royalty obligations required under standardsetting guidelines in those industries, as well as in intellectual property case law contexts. The author has concluded that there is general consistency in terms of both