Digitalization and intangibles

Transfer pricing set-up that incorporates the impact of digitalization

Digitalization means that local presence for companies is no longer required to extract value from local markets. The resulting centralization has triggered unilateral tax measures and proposed changes of the international corporate income tax system by the OECD. At the same time, global companies are forced by large global trends to become more decentralized players as well, having presence and intangibles in local markets.

All these trends are impacting companies’ value chains, transfer pricing models, and allocation of taxable income. How will you design a transfer pricing setup fit for value creation within your company?

Digitalization changes business

Digitalization within Industry 4.0 has changed the way companies develop, produce, and market their products, but also how they target and serve their customers. New advanced technologies and data analytics affect the way businesses are structured, as well as how they manage their offerings and strategies. A product offering can become a service offering, being scalable without additional marginal costs.

Tax counter measures

Thanks to powerful new intangibles, local presence is no longer required to extract value from local markets, which, according to governments, results in an unbalanced allocation of taxing rights. This technology-driven “extreme” centralization, the so-called scale without mass, has triggered tax counter measures such as unilaterally initiated digital service taxes in order to (re)distribute taxing rights to the respective local markets.

OECD proposed changes

In addition, to prevent a spider web of unilateral measures, the Organisation for Economic Co-operation and Development (OECD) has released two consultation documents to propose changes to the international corporate income tax system, achieve an increase in local taxation rights, and ensure a minimal taxation on all income. These tax countermeasures are on top of the current transfer pricing rules.

Global trends

Besides these digital and tax developments, the global forces of trade wars, protectionism, calls for (data) regulation, and localized customer preferences are forcing companies to change strategies, becoming more global but also more decentralized players. As a result, there is a shift from global to local presence, and possibly more non-routine (marketing) intangibles in the local markets.

Start talking about value creation

The perfect storm of digitalization, tax measures, and global trends is directly impacting companies’ value chains, related transfer pricing models, and allocation of taxable income. Therefore, it is now key to start talking about value creation within a company and to design a transfer pricing setup fit for purpose.

How can PwC help?

We can:

perform a value chain analysis of the business to identify and document the intangibles as part of the transfer pricing methodology from a value contribution perspective.
help design a transfer pricing setup.
use professional insight to explain exactly what the OECD proposed changes mean for the tax organization and quantify the potential impact of the OECD’s proposals.
assist with interactions with internal stakeholders (e.g. the C-suite).