Transfer pricing of intangible assets: problems of law enforcement

Abstract

The paper analyzes the use of intangible assets to shift profits to jurisdictions that apply low income tax rates. The possibility of using standard methods of transfer pricing for valuation of intangible assets was studied. It has been established that it is very difficult to evaluate intangible assets based on the principle of an arm’s length, and in many cases it is impossible. It has been proven that the best estimate of intangible assets is the fair market value, which is determined by the increase in profit, provided by the use of the corresponding intangible asset. The introduction of taxation based on the source principle is the best alternative to transfer pricing methods, and does not require the valuation of intangible assets. The tax service must control the total income of the payer and its proper taxation according to the source principle. The payment of royalties must be made from the profit after its taxation in the country of the source of income, which excludes taxation in the country where the intangible asset is registered. The place of taxation of the paid royalty amount is determined by the resident status of the recipient. Payments to residents are taxed in the country of source, and the remainder is subject to repatriation to the non-resident. The meaning of the "resident" concept in relation to physical and legal entities has been clarified and criteria for their unambiguous identification have been introduced. The only criterion for determining the resident status of a natural person is his/her citizenship. Effective tax incentives are proposed for disclosure of non-resident asset owners, which allows taxation of the worldwide income of state residents. The introduction of taxation based on the principle of source automatically excludes the possibility of double taxation and provides for the cancellation of all tax agreements that do not meet the proposed criteria for the identification of physical and legal entity-residents. It is extremely important for Ukraine to cancel agreements with Cyprus, the Netherlands, Luxembourg and the British Virgin Islands