8.1 Identifying Intangibles

  1. Intangibles are one of the most difficult and contentious issues encountered in transfer pricing practice. The different definitions of intangibles encountered under the various laws and regulations, literatures and accounting standards also complicate matters.

  2. For the purpose of transfer pricing "intangible" is intended to address something which is not a physical asset or a financial asset but is capable of being owned or controlled for use in commercial activities, whose use or transfer will be compensated had it occurred in transactions between independent parties in comparable transaction. This approach is independent of accounting or legal definitions or classification of intangibles into different categories.

  3. For accounting purpose, intangible assets are generally reflected in the balance sheet. However there are situations where intangible assets are not reflected in the balance sheet thus not recognized for accounting purposes. Expenses of research and development activities are generally capitalized, hence intangibles created are reflected in the balance sheet. However expenses of marketing activities are generally expensed off, thus marketing intangibles from such activities may not be shown in the balance sheet. Depending on the facts and circumstances of the case, the intangibles may be recognized for transfer pricing purpose even though they are not reflected in the balance sheet.

  4. Some intangibles are legally protected, while others are not. In Malaysia the provisions of the intellectual property legislations are administered and enforced by Intellectual Property Corporation of Malaysia (PHIM: Perbadanan Harta Intelek Malaysia). Intellectual property laws in Malaysia include:
    1. Trade Marks Act 1976 [Act 175];
    2. Patents Act 1983 [Act 291];
    3. Industrial Designs Act 1996 [Act 552];
    4. Copyright Act 1987 [Act 332]; and
    5. Layout Designs and Integrated Circuit Act 2000 [Act 601].

  5. The value of intangibles and their returns are often affected by the extent and availability of legal and contractual protection. However, the existence of legal protection is not a precondition for an item to be characterized as intangible for transfer pricing purpose.

  6. Thus, whether an item can be regarded as an intangible for transfer pricing purpose does not depend on its accounting or legal definition or its characterization for general tax purpose. Such definitions can be a useful reference for transfer pricing purpose but will not be the sole determinant.

  7. Some intangibles may be identified separately and transferred on a segregated basis, while others may be transferred in combination with other business assets. Regardless of whether the intangible is transferred on a segregated basis or in combination, it will still be recognized as intangible for transfer pricing purpose.

  1. Distinctions are sometimes made between trade intangibles and marketing intangibles, between "soft" intangibles and "hard" intangibles, between routine and non-routine intangibles, and between other classes and categories of intangibles. However, the determination of arm's length prices does not depend on these categorizations. Among items considered as intangible include commercial IP such as patents, know-how, designs and models that are used for the production of goods or provision of a service, and marketing intangibles.

  2. Marketing intangibles, is a special type of commercial intangibles, which includes trademarks, trade names, marketing strategies, customer lists, customer relationships, and proprietary market and customer data that is used or aids in marketing and selling goods or services to customers; essentially assets that will help market the products. It aids in commercial exploitation of the product or service and has important promotional value for the product/services concerned.

  3. Government licenses and contractual right under certain circumstances, which grant companies special privileges or exclusivity, are intangibles for transfer pricing purpose. Examples include:

  4. Other government contracts such as contracts for supply including contract to supply pharmaceutical products to government hospitals or contracts to provide consulting/technical services are also considered as intangibles for transfer pricing purposes.
  5. Grant of license/ concessions/ contracts must be distinguished from company registration which is a requirement for doing business and does not grant the company any special privileges. Rights under a contract or agreement, for example contract with a key customer or with a supplier which supplies a major raw material are intangibles for the purpose of transfer pricing.

  6. Exclusive rights in intangibles are generally transferred by means of a license agreement. These exclusive rights in intangibles are themselves intangibles for the purpose of transfer pricing. For example, the grant of exclusive rights for the licensee to operate in a certain geographic region. These exclusive rights in intangibles are themselves intangibles for the purpose of transfer pricing.
  7. It should be emphasized that generic references to items such as marketing intangible or trade intangibles do not relieve taxpayers or tax administrations from their obligation in a transfer pricing analysis to identify the relevant intangible specifically nor does the use of those terms suggest that a different approach should be applied in determining arm's length conditions for a transaction.

  8. Goodwill and on-going value generally refers to a number of different notions. For transfer pricing purpose, the transfer of something of value, whether it is a goodwill or not, from one associated person to another may be taken into consideration and appropriately compensated to the extent of how independent person carrying out comparable transactions is remunerated.

The guidance on the concept of intangibles and remuneration for the use or transfer of intangibles provided in this chapter is specifically for the purpose of transfer pricing and is relevant for Section 140A and Transfer Pricing Rules.