THE LEGAL ISSUES ON TRANSFER PRICING OF ROYALTIES
Date Issued
2007
Date
2007
Author(s)
Huang, Yu-yun
DOI
zh-TW
Abstract
ABSTRACT
In the 21st Century, the cross-border flows of intangible property has ballooned. The transfer pricing of royalties, the compensation for the right to utilize intangible property, has therefore become a major inter- national taxation issue.This thesis highlights the current problems from the general, transfer pricing adjustments, to the details, ownership and cost sharing arrangements, and also makes comparative analyses of OECD, US, German and Taiwanese regulations.
Chapter 1 introduces the motive, issues and framework of this thesis. Chapter 2 provides a brief introduction and an overview of the legal issues relevant to transfer pricing. According to Art. 15 of the Constitution, the people’s freedom to run a business is protected in the right to work and the right to own property. People are free to determine the manufacture, transaction and disposition of the goods produced by their business. On the other hand, Art. 19 of the Constitution provides that people shall have the duty to pay tax, and Art. 7 of the Constitution states the equity principle. The tax bureau hence has the authority to adjust the prices agreed upon by two enterprises only in the case of tax avoidance or tax evasion. The Income Tax Act Art. 43-1, transfer pricing adjustments, is a special provision for anti- avoidance, we therefore shall bear in mind that transfer pricing adjustments must be initiated only when in transactions which meet the elements of tax avoidance.
Moreover, transfer pricing regulations have given rise to several ambiguities. For example, TP Reg. §22 requires affiliated enterprises to submit transfer pricing reports and other documentation. However, the Income Tax Act does not require any particular co-operation obligation from affiliated enterprises. Regarding the burden of proof, the taxpayers’ obligation is limited to proving the facts. In contrast to this, the commentary of TP Reg. §33 states that taxpayers shall provide TP reports in order to prove the prices are at arm’s length. The wording „in order to prove“ is somehow erroneous, as this burden lies with the tax agency.
Another question arises as to where in the range adjustments should be made when the prices set by companies are outside the range. TP Reg. §6 II requires that adjustments should be made to the mid-point of the range. However, the mid-point is not the most advantageous for the taxpayers. These adjustments would violate the principle of adequate and proportional interference under Art. 23 of the Constitution.
Chapter 3 examines the determination of legal and economic owner- ship of intangible assets. US laws concerning determinative issues have developed in abundance. Lessons might be taken from the changes of the US Treasury Regulations and the cases. So far, Taiwan lacks the regulations dealing with this issue. However, we have the economic substance principle pursuant to the Grand Justices Interpretations. Chapter 3 illustrates the legal basis of the economic substance principle and how it applies to the ownership disputes.
Chapter 4 discusses substitution for royalties allocation and cost sharing arrangements. Cost sharing arrangements may avoid disputes over allocation of royalties and may be exempt from withholding tax . Nevertheless, the OECD and tax authorities have strict requirements for taxpayers who would like to use cost sharing arrangements. A table comparing OECD, US and German regulations is provided in order to help readers to get a full picture of these regulations and deal with this thorny issue.
In addition, the Xilinx case and the US regulations of 2003 gave rise to criticisms regarding the relationship between stock-based compensation in a cost sharing arrangement and arm’s length. Furthermore, in Taiwan, the cost for a cost sharing arrangement between multinational enterprises is still subject to a withholding tax. The issue needs more attention and regulations that enterprises can follow should be established.
Chapter 5 focuses on transfer pricing methods of intangibles which are vital to the transfer pricing adjustments of royalties. Through review of the various regulations, we are aware that the application of the arm’s length principle to transactions involving intangible aessts is full of uncertainty, which may violate the certainty principle as stated in Art. 5 of the Administrative Procedure Act. Possible solutions might be building forced procedure laws and strengthening the taxpayers position in tax procedure.
Chapter 6 summarizes and highlights the main criticisms and recommendations made in the previous chapters.
Subjects
移轉訂價,無形資產,所有權歸屬
transfer pricing, intangibles, ownership
Type
thesis
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